LOCAL BIOTECH INDUSTRY VETERANS DISCUSS THE MARKETPLACE FOR HEALTHCARE INVESTMENT

Interview Published in Philadelphia Business Journal, February 1, 2017

Dr. Scott Dessain, as founder and chief technology officer of Philadelphia-based Immunome Inc., and Scott E. Fishman, as president and CEO of Envisage in Doylestown, have experienced the joys and heartaches of launching, running and investing in biopharmaceutical startups in this region. They recently decided to team and share their career experiences and thoughts on building a better life sciences ecosystem in a new book called Preserving the Promise: Improving the Culture of Biotech Investment.

Dessain and Fishman talked to me about how they met, why they decided to write a book, and what they hope people get out of it.

How do you two know each other?

Fishman: About ten years ago, we were introduced to each other by business development guy who knew one of us [Fishman] was a potential investor and the other [Dessain] had a biotech startup that needed money. While there was mutual interest in the venture, that transaction never happened, for a variety of reasons: the ask was too high [$100,000], one of us wanted to be involved in managing the company and the other just wanted a check, the technology didn’t have a therapeutic target yet – and not incidentally the stock market had experienced the worst crash since 1929 just the day before.

Why did you two decide to write Preserving the Promise?

Dessain: About three or four years after that first meeting we were in a panel discussion at the University City Science Center, about early stage biotech and biotech investing. The common thread among the panelists was the struggle of early-stage biopharma and medtech companies to make it through the “valley of death,” why it’s so hard for companies to survive long enough to make the science work, and how early- stage companies can encourage a more productive funding response from investors and Big Pharma. Over lunch, we started to discuss the problems I had as an entrepreneur and he had as an investor.

Fishman: The question of how to get important technologies to the clinic was on the mind of every one in the room. But of course the perspectives were pretty variable: What’s worthwhile to scientists doesn’t necessarily align with what’s important to clinicians; the technologies universities would like to see commercialized aren’t necessarily the investment proposition that most interests Angel investors; and the IP that has the greatest prospective social impact may have little to do with a pharmaceutical company’s search or a particular solution to an unsolved development puzzle. These parties are all looking for a successful outcome, but there are substantive differences in their short- and long-term objectives, in the financial and other rewards that drive them, and even in the language they use to describe what they’re doing. The result is practices that from a distance look like they should be aligned, yet in reality are often at odds with each other – even though ostensibly everyone’s idea was to build a successful company and make a drug. We realized that the problem wasn’t companies failing in the marketplace, it was a dysfunctional marketplace for ideas, codified as IP and investment theses, failing the companies.

Dessain: There was frustration in the room, too, especially among those trying to start a company with inventions they had discovered. I’d had the same experience myself. As a scientist and entrepreneur, it was bad enough to realize that universities owned everything I invented, but to experience how technology transfer offices have the power to maim or kill promising technologies was, to say the least, disheartening, and it happens much more often than you would think.

Fishman: From the other side of the table, the frustration is the sheer number of pitches investors see where the business plan is fuzzy, the outcomes nebulous, and the entrepreneurs seem not to have given enough thought to what they’re going to do with my money – or even how and when I’d ever get it back. The net of all this... we came up on the spot with a plan to write all this down – and that turned into a book. Preserving the Promise isn’t intended to filter through one lens or another, but to provide a fresh look and perhaps some useful guidance to everyone in the early stage ecosystem: about how to make better investments, about surviving the valley of death, and about how to improve the chances that important clinical advances actually make it to the clinic.

Dessain: It ultimately became a mission, for both of us, because we weren’t just writing about how to make a successful company. We were explaining why there is an almost absolute breakdown between what biotech and pharma is designing and what we, as a society, actually need it to make. If we read a news report about a great scientific breakthrough for an important medical problem, we assume that a cure is on the way, but it’s simply not the case, because innovation does not equal invest-ability. There’s a reason the Ebola vaccine sat on a shelf for 10 years when it was ready for clinical testing – nobody could figure out how they would make money by investing in it. And, when companies cannot connect their innovation to commercial investment, we all lose out.

Fishman: Take Superbugs, multi-drug resistant bacteria. Last week there was a report of a woman in the United States who died of an infection that was completely resistant to all known antibiotics. We’ve got a system that generates a solution to the terrible problem of a double chin (you can see it advertised on any give night), but that hasn’t introduced an entirely new class of antibiotics for decades. We talk about this in the book: as a fundable proposition and from the perspective of Big Pharma's return on investment, antibiotics are not as good as a “lifestyle” drug. They’re also less commercially valuable, often dramatically so, than an orphan drug designed for a small population with an urgent need that can be introduced with “value-based” pricing. There’s the additional problem that some diseases – we cite pediatric brain tumors in the book – are virtually un-investable and therefore unlikely to garner significant early stage development attention. Look, we have to make this all work better if for no other reason than that those we love don’t die of solvable medical problems.

How would you describe the process of writing the book?

Dessain: The book actually started as a conversation, a series of back-and-forth essays. I was writing from my perspective as a scientist and entrepreneur, and Fishman was writing as an angel investor, entrepreneur, and professor. Sitting for hours at various Panera restaurants (free refills on coffee, free WiFi). And the topics were inspired by what we encountered in our day-to-day lives: tech transfer, due diligence, term sheets, conflicts of interest, entrepreneurial missteps, and so forth. We didn’t catalog our experiences directly, however, but used them as a jump-off point to look at biotech commercialization from different perspectives.

Fishman: I happened to be teaching an MBA global management course at the time, and one of the key insights that emerged from a Panera discussion was that Michael Porter’s Five Forces of Competitive Analysis was a productive template for looking the early stage funding. We had realized that early stage biotech companies weren’t differentiated so much on the basis of their technology, as on the quality of the investment thesis: in simple terms, this means how well they would appeal to an Angel or other early stage investor. Early on, biotech, small molecule and medical device commercialization is really just buying and selling investment products, regardless of whether the drug will cure Ebola or make your chin look better. So if the business is buying and selling and investment, then we could use classic models, like Porter’s, for understanding why most biotech companies fail.

Dessain: It has a lot to do with the excessive power of investors and universities, which from the lens of Porter is “buyer power” and “supplier power." These led to our definition of the Translation Gap, the three main obstacles to commercialization of academic technologies. At that point, the structure and scope of the book became clear – though starting out it’s fair to say we weren’t clear on how much there was to examine, or how much work it would be. We had a first draft in about a year and a half, but we pretty much did a complete rewrite starting in spring 2014. Writing the final version wasn’t much different from completing a graduate thesis, except that it lasted for two years.

Fishman: I’m pretty sure we passed, since the book made it to print with a major academic publisher. What are the two or three things you hope people take from the book?

Fishman: There are really no villains here. It’s about good people operating in silos that prevent them from seeing how their actions actually hurt the biotech commercialization. We need better awareness and better transparency to work more effectively in concert. There are things to improve throughout the biotech investment ecosystem. For example, there needs to be greater clarity about clinical, social and financial objectives, and greater understanding among all parties of what the investment community will and won’t support. It’s not just a question of the mechanics of non-dilutive vs. dilutive funding, but whether something clinically valuable that’s not fundable with private money needs a different plan. Because what we have right now, in Philadelphia, is an enormously productive research community generating lots of innovative companies that end up cannibalizing each other in a hyper-competitive funding environment.

Dessain: Exactly, and the problem is that the vast majority of biotech startups depend on Angel funding. If Angels don’t think they can make money in therapeutics, or that it takes too long and is too risky, they stop investing and the route to commercialization closes down. We really need to think about starting fewer, better companies and making sure they have the wherewithal to make it to an exit. A lot of this starts with the universities that own the technologies, so a good part of the book talks about common but unproductive technology transfer practices, and provides examples on how people are starting to fix them.

Fishman: Another problem is a lack of objective information and a mischaracterization of what everybody is calling “due diligence.” There are some really good recent efforts, but historically no one has comprehensively assessed the inputs and outcomes of this early stage investment process and it’s probability of return. It’s a bit odd: would you invest $100K in a mutual fund without reading a historical prospectus? These are just a few of the questions we address in Preserving the Promise. We don’t think we have all the answers. But as we note in the preface, we hope we’ve taken a useful step in stimulating an important and overdue discussion.

John George

Senior Reporter
Philadelphia Business Journal 

WHAT GETS FUNDED, WHAT DIES BEFORE IT GETS TO PHARMA R&D, AND WHY

February 7, 2017

Published in Life Science Leader, February 1, 2017

By Scott Fishman, CEO Envisage

Lots of people in our industry are wondering how to simultaneously bring value to patients and the organization. It’s a reasonable aspiration, but one that faces an environment emphasizing lucrative opportunities among small but desperate populations and stratospheric prices.

Informing company decisions with patient input sounds great but doesn’t shift internal priorities when it is being treated as a tool to enhance revenue instead of a fundamental driver of financial performance. We need to redirect attention from the tactical marketing tactic of patient-centricity to the foundational proposition of customer-centricity. If a business develops things that create great value, and it does so for lots of people, then it doesn’t have to fight for customers, credibility, or profits.

It’s worth taking a close look at just how the industry is going about sourcing these things of great value, and more specifically, how the products of early-stage discovery find their way into clinical and market development within pharma.

My co-author and I noted in our book, Preserving the Promise: Improving the Culture of Biotech Investing, that the primary reason something gets funded or dies in the early stages of development is the ability of the innovation to support an investment thesis that stakeholders will buy into. Whether that’s an internal or external assessment, the opportunity is going to be subjected, at some level, to a process of due diligence.

That process has everything to do with establishing and self-reinforcing the perception of a good bet and little to do with the reasons stuff usually gets invented (e.g., scientific curiosity, passion to solve a personal or societal problem, search for a clinical solution). Investment motives are complex — neither solely rational, emotional, nor financial. But because they are always underpinned by a calculation about ROI, the potential is real for important discoveries to go unrealized while shaky clinical propositions get funded.

DUE DILIGENCE IS SUBJECT TO COMMON HUMAN BIASES
Most people understand due diligence conceptually as a process of pressure testing an opportunity. That opportunity has to pass muster scientifically and in market potential. It also has to offer an attractive payout, such as an internal rate of return for an internal development opportunity or an ROI for investors.

But this apparently rational analysis masks the foibles of human decision making. I’m looking at something right now in which I have limited domain interest and am fairly equivocal about the technological prospects, but it’s got an absolute surge of interest from colleague investors because the CEO just made a lot of money for a lot of people with a high-multiple exit in a completely unrelated therapeutic domain. The impetus for investment here has relatively little to do with the intrinsic clinical value of the technology, its prospect of scientific validity, or an admittedly enormous potential market. Instead, it’s all about the ability of a particular CEO to attract money.

Despite the presumed formality of the due diligence, the diversity of opportunities and practical constraints of timing can favor intuitive attraction over hard analytics and inductive over deductive decision making. It’s not crazy that investors “bet on the jockey” and rely heavily on a leader’s prior accomplishments; experienced people are more likely to be able to adapt, know how to solve problems, and have a network of connections. But it’s still crucial to know if the horse the jockey is riding is a champion or lame.

Due diligence consistently overweights variables other than the clinical implications of new healthcare technologies, and that’s where the patient-centricity argument breaks down. Value from a human-health perspective may be entirely disconnected from value as an investment proposition. Value pricing may be a hell of an argument for funding a development program, but no amount of feinting to patients’ “interests” is going to convince them you’re on their side when you’re planning to charge the cost of their house for the therapy.

GETTING ON PHARMA’S RADAR
In the world of early-stage technologies, seed-funding decisions may happen very quickly. It’s painful to inventors but unsurprising that a “no” can be sudden and final, because there is a huge disparity in risk for founders and investors. Everything is at stake for the inventor, but considerably less is on the line for pharmaceutical business developers or angel investors whose financial stake in an early-stage company is hardly going to break the bank. As any primer on negotiation will tell you, leverage is always a function of who has more to lose, and here’s the prospect facing an early-stage company: Inventions at this point are not significantly differentiated by the nature of the technology but by the strength of their promise of financial return. They’re collateral.

Yet they need to be nurtured and sustained long enough to even appear on the pharma industry’s radar. Here’s how it goes: Tech transfer offices filter what comes out of the university based on scientific reputation and serendipitous interest from prospective investors. Business advisers or transitional CEOs get attached to the venture with a promise of equity and deferred compensation. The same companies make the same rounds to prospective investors in a region. The gatekeeping mechanism is a 15- or 20-minute presentation followed by a Q&A session and maybe due diligence by a committee impressed enough with the pitch to volunteer time. The decision to commit is often dependent on the presence of a lead or co-investor. A good impression, a relatively large target population, and apparent technical and operational skill go into the plus column. An uninspiring pitch, a lack of obvious customer need, a small target population, or a lack of backing by capable people may doom the investment.

And this is just to get to due diligence — a subjective process that examines not just the science but also the founders’ motives, competence, and ability to succeed. Ultimately, what is available for pharma to invest in, what has even a possibility of getting onto a genuine commercial development track, is the result of scientific credibility, financial cogency, whim, and serendipity. You could argue that this applies to much in life, but is that really the way we want to address human health?

WE NEED TO REDEFINE DUE DILIGENCE
I believe a redefinition of the parameters of due diligence could be helpful. Consider three traditional areas of due diligence: unmet need, size and growth of addressable market, and sustainable competitive advantage. These are crucial to an assessment of opportunity, yet the component most often missing from pitches and even fully developed business cases is solid understanding/ characterization of market opportunity.

First, what if we think about unmet need as what is good for the most number of people? Is that a poor basis for a business model just because it echoes the concept of distributive justice (fair distribution of scarce resources)? Or is it a disruptive and potentially game-changing definition? What happens if we concentrate scarce development resources on whatever rises to the top as a crucial human and societal problem, instead of what sorts to the top of a net present value (NPV) spreadsheet? Wouldn’t we potentially make even more money by doing the most good for the most people? And wouldn’t that intrinsically make a stronger and more sustainable value proposition than a multibillion dollar windfall on an overpriced drug sold to a few thousand people that is ultimately going to experience formulary refusal?

Or what about size and growth of addressable market? I’ve spent decades advising people on optimal development based on the largest and most receptive targets. But what if we recast that slightly and make our target the biggest human need in a particular category? Maybe it would make more money, maybe less in the NPV calculation. But what would be the intangible value of resurrecting the stature of pharma as the singular industry focused on making us healthier? What’s the relative value of next quarter’s dividend against being the company that provides a massive public good and mitigates instead of increases the cost of good health?

And how about sustainable competitive advantage? What’s the sustainable advantage of a nearly six-figure drug to cure hepatitis C, raced after by other similarly priced drugs that do the same thing because everyone’s chasing that gigantic margin? I’m not taking anyone to task here, just wondering what would be the worldwide financial, societal, and yes, industry public relations impact of solving a huge problem with an affordable solution.

REASSESSING PRIORITIES
A recasting of assessment priorities is a realistic proposition and could form the basis of a better business model. I’m talking about a fundamental rethink that would begin at the earliest stages of a development decision, not as some post-launch marketing strategy. It follows that assessing an opportunity by due diligence would mean accounting for a broader range of criteria, not all of which are subject to green-eye-shade analysis.

The case I’m making here includes three primary recommendations:

  • Stop trying to convince people that you’re reorganizing business priorities around something like “patient-centricity,” when you aren’t. Everyone knows business is about business, and if a number of constituencies are well served, that’s both a good thing and a driver of financial return. But it’s not a rethinking of the essential business model unless we’ve gone so completely off the rails that marketing 101 has suddenly emerged as the industry’s future.
  • If you’re going to model on what’s good for customers, then carry through with development programs that take care of lots of people instead of rationalizing astronomical pricing with discredited arguments about the cost of development. Build a model on doing well by doing good. It’s not a new concept, but it seems to be increasingly rare, despite its being just a return to pharma’s historic foundations.
  • Don’t just search for useful things coming out of the funnel of seed investment. Due diligence needs a broader perspective, one that both scans the environment for really good but really early technology — just like the historic model of internal discovery — and one that vets technologies with a more balanced template than NPV alone. The earlystage funding community doesn’t have pharma’s resources and can’t be expected to do it alone or operate with a broader perspective than ROI. If we’re going to really talk about customer-centricity, doesn’t that come down to prioritizing innovation based on merit rather than margin?

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