Dennis Purcell, founder of Aisling Capital and former managing director of the Life Sciences Investment Banking Group at Chase H&Q, sits down with Neil discuss where biotech has been and what's ahead for the sector.

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Full Transcript

Danny Levine (Producer)

We've got a great start to the new year with Dennis Purcell for listeners, not familiar with Dennis, who is he?

Neil Littman (Host)
I am incredibly excited to welcome Dennis to the show. Dennis is the founder of Aisling capital, which is a prominent biotech healthcare focused venture fund. Previously, he served as a senior managing partner. He was also a managing director of life sciences, investment banking at Hambrecht and Quist before they were acquired by JP Morgan. Dennis has a a, a long history in the industry, both from helping companies raising capital to being a time investor in biotech. I'm really excited to kick off the year to gain Dennis's perspective of what he seen throughout his career as the industry has evolved and changed.

Danny Levine (Producer)
He's had great visibility into the growth of the biotech industry, going back to his days at Hambrick and Quist and the start of what is now the JP Morgan healthcare conference. He's at Aisling capital. Where does Aisling capital fit into the world today?

Neil Littman (Host)
Yeah, I mean, Aisling is, is very active focused on, biotech investments. I think their sweet spot is it at least when they started their sweet spot was later stage investments. So, I think, you can go to the Asian capital website and look at that portfolio and we'll get into the details now, but, they have a, a, top tier portfolio of companies. I, I think their differentiation when Dennis started the firm was a focus on later stage. I think that's where he really saw a gap in the market. I think, Aisling was really built on that and, they've expanded dramatically since then, but really excited to get Dennis's perspective on what he's excited about today.

Danny Levine (Producer)
Although later stage by today's measure can be faced to.

Neil Littman (Host)
True.

Danny Levine (Producer)
Where we're sitting down to talk with Dennis after what's been a great year for biotech fundraising, but a turbulent one for biotech stocks. Now the industry gets ready for JP Morgan. What's the backdrop for today's conversation. How does that set the stage?

Neil Littman (Host)
Yeah, well, I think in many ways the JP Morgan healthcare conference do usually it takes place in the second week of January. I think in many ways it is a way to kick off the new year. And, a lot of companies, a lot of investors are, are, they're usually in person this year, it's going to be virtual, but it's a great way just to meet with, with your old friends colleagues and get the year, start out on a positive note. So, using JP Morgan as a, as the backdrop for what we're talking about today is I, I really wanted to get Dennis's perspective, not just really on how the conference has evolved, but really how the industry has evolved since his early days, really being one of the founders of the original conference and what he's seen as an investor during, his decades long career investing in this space.

Neil Littman (Host)
I think we'll get into the cyclical nature of biotech. There, I think companies raised over $86 billion last year, which beat 2020 to record, which was a record year by over 30%. The industry as a whole is a washing capital. There was $28 billion of venture funding raised by healthcare companies. Again, I mean a dramatic record, I think 2020 there was about 17 billion. We're seeing a large amount of capital flowing into the space. We're seeing the landscape shift, meaning the types of investors that are participating in biotech and early stage biotech has dramatically changed from, a handful or dozen, specialist firms to a lot of generalists firms, to a lot of family offices to hedge funds. All of these folks are moving more upstream, chasing earlier stage deals, moving into the private market. I think Dennis, while we're really interesting perspective of, what that means for the companies and what that means for investors at the end of the day and how that may impact returns going forward.

Danny Levine (Producer)
Well, if you're all ready,

Neil Littman (Host)
I'm ready. Let's do it. Hi Dennis. I'd like to extend a warm welcome and say a big, thank you for joining me on the show today.

Danny Levine (Producer)
Thanks Neil.

Dennis Purcell (Guest)
Thanks for having me,

Neil Littman (Host)
As I was thinking about how to tee up the episode today, I realized that you and I have known each other for about a decade. Now, if you can believe that. I really just want to start off by saying that I've always viewed you as a thought leader in the space and in many ways a trailblazer. I'm really excited to dive into what you've seen over your career and working closely with and investing in biotech companies, first during your time as a life sciences investment banker. Of course, as the founder of Ashland capital and since it's quickly approaching next week. In fact, I also want touch on the annual JP Morgan healthcare conference. Since I know you played an intimate role in starting the conference many years ago, when you left banking at hampered Unquist. With all of that said today, I'm excited to do a deep dive and talk about the business of investing in novel science and biotech companies.

Neil Littman (Host)
As Bruce Booth said recently, in one of his blogs, we've now entered the 46th straight quarter of biotech activity. New equity issuance for biotech in 2021 has broken records for the amount of capital raised, even talking 2020, which was a record year. There were 78 biotechs and went public in 2020. I think there were over 90, they went public in 2021, but the industry always, it hasn't always been that way. It hasn't always been a washing capital. Dennis, I want to turn to you and start with a little history of the biotech industry. I'd love to go back in time and understand the early days of biotech and how you've seen the industry evolve over time to where it is today.

Dennis Purcell (Guest)
Great, thanks neon. I think the JP Morgan conference has kind of grown since when we started it way back in the late eighties, but I think that the introductory general introduction to biotech really started, I think, with the initial public offering of Genentech back in the 1980. I remember I remember this because nobody knew what a biotech company was, let alone going public with a money losing biotech company, let alone with a company that nobody knew how to pronounce his name properly. People on TV were kind of scratching their heads like what's going on here. Stock opens it 15 within two hours, it's at 80. Back then, that was just unheard of that. Something like this would happen. All of a sudden biotech kind of sprung onto the scene and it started to capture some people's imagination. We had, after that people started to really start companies and Genentech could do it and Genentech could go public as a money losing proposition company, and it looked like it was able to generate a lot of capital.

Dennis Purcell (Guest)
A lot of people decided to try to start their and their own companies. They started kind of picking a few real low hanging fruit, like human growth, hormone replacement therapy, if you will growth hormone and things like that. What we had was a whole spate of companies that started throughout the eighties and a very small list, if you will, of dedicated VC funds like Kleiner, Perkins, and Mayfield, and you had a couple of, and you just had a couple of dedicated, big mutual funds. People like fidelity and Wellington are still around today, but it was pretty much a, an insiders if you will. And then in the nut. The boom in the stock market in the early nineties enabled a lot of these companies to start in the eighties to go public. All of a sudden we saw one company after another go public in the early nineties, late eighties, early nineties, and these were money losing companies.

Dennis Purcell (Guest)
They had exciting science. People had made a fortune on Genentech. All of a sudden we had a number of these public company, public biotech companies. I would say the general public still didn't know what biotech was. It was still pretty dominated by specialists and people that knew what was going on. And, some of the companies were real and grew up to be what they are today. The Goliaths of the world sell jeans and the like others people have long forgotten and, criticized as some of the companies that were started in what public were more like science projects rather than then companies. Nonetheless, all of a sudden there was an industry. People started to cover the industry, cover these companies. We didn't know, nobody knew how to value them because you generally, you things in a price earning spaces, which wasn't possible here are priced at revenue basis or something like that wasn't possible.

Dennis Purcell (Guest)
We're trying to learn how to value these types of companies. We got to a point where the metric for the industry was that, or the saying in the industry was you had a choice or Merck's market value by was higher than the market value of the entire biotech industry, through most of the, for a long period up until the last few years actually. And, and the question everybody asked was, do you want an industry? Today, we have one in modern it, and that there is a greater market value than that's changed kind of on its head. And, and as we've evolved here over the 2000 tens and teens in the white, the science has really gotten incredible now more than the public knows more than investors know that whether it's immuno-oncology or gene therapy or gene editing and in the last 10 years or so, we started to see a broad thing, maybe 15 broadening the base of investors yeah.

Dennis Purcell (Guest)
To include more. I'm a generalist. As these investors kind of chain names, courted the industry more and more companies were able to get funded. I may take the numbers further since 2015, we had over almost 330 new IPO's. You attacking is that in the investing community, you used to have people just did early stage investing people who they stage investing people invested in IPO. I mentioned people invested in public markets, hedge funds today. Everybody's kind of doing everything. You see VCs, the public market, people investing private companies and the like, and now we have, almost 700 public and one of the issues clogging the hero board, difficulty with talent. We're hard to find people and it's not the capital, it's not the sinus. What I hear from all these boards is that, and companies is that they're really hard to find talent with all the new companies that are out there.

Dennis Purcell (Guest)
The type of talent we need today is somewhat different than it was five or 10 years ago. It used to be that in this industry, we've got the science and you got through the FDA, you got approval. And that was the goal. That was the goal line. That was the win. You could go onto the next thing today, just getting approval of the drug. Isn't even isn't enough, the role of the payer and the, like we've never thought of very much in the history of the industry. Now the role of the payers becoming much more important. We even have to ask ourselves really early on, will that will somebody pay for these drugs? So it's evolved. It's evolved from that IPO Genentech that went through the roof in the first couple hours of trading all the way to where we are today with me, five, 6,000 companies out there, and 700 companies and know capital coming in from all put into the industry,

Neil Littman (Host)
Dennis, there's, there's so much to dive into in what you just said. And I couldn't agree more. I think, the days of just getting approval for your product are long gone, right. Approval is one step along the continuum. And obviously reimbursement is critical. I wanna, I do wanna dive into a very specific point that you made earlier, which was, the number of biotechs that have gone public, that you've seen over your career and try to differentiate between an investible company and a science project. What lessons have you learned, or what themes have you seen during your career to try to differentiate what looks like a science project from what looks like an investible and potentially could be successful company?

Dennis Purcell (Guest)
Yeah, sure. One of the ways people would define companies in the past and it's kind of concerning to converge today was you're either platform, company and platform companies were in Vogue because they were, they had their own platform that could spit out products, multiple products off the same platform. Sometimes investors really liked those platform types of companies, because they could spin out a lot of different products. On the other hand of product companies were ones that were just working on products and what we found, and we don't find it as much anymore. What we found kind of, as were evolving in the industry, which there were a lot of companies that just started that were based one product, they, it was a all or nothing. If the drug failed, the company was going to go out of business and drug work, we kept ongoing and it was intolerable risk actually, when we go back and when you go back and think about, it was an towel risk for the industry, we used to be when one company Fe hard to believe today, I guess, but it used to be that when one company failed, the entire industry would go down.

Dennis Purcell (Guest)
If one company succeeded, the entire industry stocks would go up. These companies that have had one product bets that were binary yes or no were ones that really shouldn't be in the public markets, because I don't want to say it was like gambling, but it was binary. Those are the ones that you wanted to kind of stay away from because with clinical trials of product development, who knows that's a risky, risky, risky business.

Neil Littman (Host)
Yeah. It's, it's amazing how much the industry has evolved in even a relatively short time. I mean, I, I remember when I started my investment banking career and that was what 2004, most of our clients at that time were those single asset binary type biotech companies that had, one lead candidate and they were putting everything into that lead candidate. It was a roll the dice and you see that less and less today, although those are certainly still out there. I think that's also a, a nice segue into how things have changed in terms of the nature of the type of company that is able to go public these days. I think, I remember not that long ago companies had to have candidates in clinical trials to be able to garner interest from public market investors. It seems like today that companies can go public pretty easily without even having a candidate in the clinic.

Neil Littman (Host)
I think in fact, over the past, probably two years, majority of IPOs were preclinical or phase one, and I think that's drastically different than a decade ago. I'd love your thoughts on just the investor demand out there for these earlier stage companies.

Dennis Purcell (Guest)
Sure. When we first started taking companies public, there were certain boxes that you checked, did you have a good VC? Did you have a good board? Did you have a corporate partner? It was Merck or Pfizer or Bristol or somebody at partner that validated the science. They, that was one way that investors could really figure out whether there was some validity to the company or not to go at it, to kind of add onto what you said, Neil. The last couple of years, and I find this a little staggering, almost 95% of the companies that went public almost 95% were phase two or earlier. And you're absolutely right. The majority were preclinical. So, and if you look at the valuations today and we do have, this industry is a boom and bust industry, and we've had the wind at our back for a long time last year, tough year, but the last number of years have been pretty good.

Dennis Purcell (Guest)
You look at these IPO's and they have started their correction already, but kind of priced to perfection. When you start pricing preclinical assets that are valuing them at four or $500 million, you're paying for perfection, you're paying for tomorrow's perfection today and hope the company will grow into it. The three, $400 million, which would be used to pay for a blockbuster drug that just got approved today, you're paying it for a couple of mouse studies. There's going to be it's to be an interesting time coming up when all these companies, these, that w as you noted the companies, number of companies going public in the last couple of years made promises to investors about when they were going to enter the clinic, how it was going to do in the clinic, all that kind of stuff they're going to have to deliver on those promises.

Dennis Purcell (Guest)
We'll see what happens because they're not going to be the, as we know it never goes according to plan. Right now it's a Willy nilly kind of going public. I think that's ended as we speak here at the beginning of January, there hadn't been a couple of new public offerings, so maybe it'll continue for a bit longer, but the market in general has really started to correct on the, some of these companies. I think the median price of a IPO's over the last 18 months, or so is down about 20, 25%. There has been a correction, but there has been really no discerning ability of, who can and who can't go public. How can, and quite frankly, how can there be when you're dealing with preclinical data? I mean, some ways that's the realm of the venture capital community.

Neil Littman (Host)
Yeah, absolutely. The other stat that I recently saw was that the median time from founding to IPO has gone from 10 years, roughly 20. I think it took 10 years from founding IPO in 2020 to only four years from founding in 2021, which again is astounding. And, Dennis, that speaks to what we're just talking about, the demand for earlier stage companies in the public markets. I guess, this is there's two parts of this question. Number one, has the fundamental science advance that much. That the fundamental driver of more interest in the space? Or is it pure speculation or is it more of a macro theme that there's a greater number of investors out there, as you mentioned before, investors are seeking outflow by looking earlier, and that it's just, a fundamental macro question of seeking alpha and trying to generate yield. They're, they're taking on more risk and the biotech industry and many of these companies are the beneficiary of that.

Dennis Purcell (Guest)
Yeah, yeah. Yeah. Just to add to what you were saying before, you have to that 10, which is really astounding 10 years to four years in terms of going public in that same timeframe, the valuations have gone up three times more back then. Not only are you getting to the market sooner, you're getting to the market a whole lot with a whole lot bigger valuation. So it is interesting like that. I think that, I think that certainly the science for sure is moving at an incredible pace. And, you don't look much past the vaccine world for that, but I think it's driven by a host of factors that have kind of come together over the last few years. On the one hand, you have all these new generalist investors that have come in family offices, for example, there's a huge family office world out there.

Dennis Purcell (Guest)
There's going to be the biggest intergenerational transfer of wealth ever in the history of our country in the next 25 years. All of these offices have been set up and given that biotech is now more mainstream, they want to be in biotech, but they don't really know how to be in by attack. They're they're doing it based upon, their next door neighbor heard something from a friend who's a doctor, blah, blah. And, and so you guys, you got them coming in somewhat indiscriminately, and then you have a group of people that just play momentum. For awhile there, it was a pretty easy game. It particularly feeling like a crossover investor, but any investor, if you just bought the IPO's for awhile, they were just all going up. You didn't really have to do anything you just bought on the IPO and the stocks would trade up.

Dennis Purcell (Guest)
So, they'll, they'll stay in the game as long as the momentum's there and that family offices will stay in the game and we'll see whether they have the stomach to stay in the game. Once we have started having down rounds or additional financing and things like that hasn't hit yet. We'll see what happens there? I think you, I think in the last couple of years, we also have like lack of alternatives now, where else do you go? The stock market was at an all time high interest rates at all time, low, everybody's looking for something. I think we generated some of those types and I think we generated quite frankly, a whole bunch of FOMO types. When you see what the has done in the last year and a half, I think that people are all looking for the next one. So some of those people have joined.

Dennis Purcell (Guest)
So, so I think a mix of the generalists and the momentum people and the lack of alternatives and looking for the next Moderna, et cetera, have all kinds of convenience come at the same time to really make the market do pretty well up until this year. This year that the XBI was way down relative to the S and P and the like, and in fact, as an investor in a number of these hedge funds, interestingly, the spread of returns of ones that I am aware of go from plus 35% for the year to minus 35% for the year. These are these and these are the specialist.

Neil Littman (Host)
Yeah. And that's your point? I think the XBI was down about 30% last year. So, so no question of a rough year for biotech overall, I do want to dive into this notion of the changing landscape that you've mentioned, because I think it has evolved pretty dramatically from seeing, more of the generalist funds come into the biotech world, the family offices participating in both the public and private markets for that matter. I mean, we've seen an increasing frequency, certainly in the private markets of these, make arounds that are a hundred plus million dollar series a rounds. Sometimes multiples of that, everyone is, is chasing yield to some extent taking on more risks. How do you, how do you see the changing landscape affecting potential future returns?

Dennis Purcell (Guest)
Yeah, I mean, when we talk about things being priced to perfection and they've runs that we've had, I mean, the math just follows the returns. If you looked at a, just to do quick math, some of these preclinical companies are trading upwards of a billion dollars or phase one companies. If you gave them a 30 multiple, that music made $30 million in net income, roughly, and that would imply that they had $150 million of sales today. In other words, if today I had 150 million in sales, I are 30 million on that, give me a 30, multiple 33 million. I pick the multiple, more civilian dollars. That means I have $150 million of sales today, and yet I'm getting that. And yet I'm getting valued. What I'm still, five or seven years away from approval. I have clinical risk of regulatory risk, and yet how many drugs actually get to 150 minutes out?

Dennis Purcell (Guest)
The returns are going to be, it's going to be very, selective. And, it's, the math just is tough. If you look around deals, just put it in perspective in terms of even capital needs. If you look around Kendall square and you count the number of biotech companies, which is doable, you just count the number of companies. You say that they're both working on, or they're all working on two products, which I think is conservative. I mean, most companies we see have, five, six products that they're working on in various stages of development. You say, take all this companies in Kendall square, just Kendall square, three block radius, take all those companies, just say the work on two products. Let's say that all these companies are two thirds, more efficient than everybody else. They can, they can develop these drugs at one 30 o'clock. So, relatively conservative to count that count the number of companies.

Dennis Purcell (Guest)
We know that number of products being worked on to that's pretty low. I mean, that's light and you can do it at one third, the cross multiply that out the need. Those three in Luxembourg and the square is $1 trillion. That's, and that, and I don't think any of that mean, and that's a pretty conservative. You look at that and you see all these new companies and you see what the need is. It's going to be interesting because we started so many companies, so many products, and now let's move it out of Kendall square and let's move it to San Francisco or let's move it to gene therapy or let's move it to anti-infectives or let's move it to wherever the amount of money that we're going to need, or it's going to be required is really kind of something. There's, there has to be a calling out process because it's just too, too much, but I just, for the heck of it, one day did that analysis at Kendall square.

Dennis Purcell (Guest)
I kind of, my jaw dropped back, did the math because of you're being priced at like, you should be at doing a hundred, $200 million today, and you're not even a clinic they're giving you credit for do have doing a hundred, 200 a minute hours of sales somewhere I'm there, but I'm going to say, I, but I do think the money's going to keep coming. I mean, one of the big supporters of the industry over the years has been the endowments and the pension. And, at the beginning, these pension funds and endowments only invested in a couple of percent of their endowment in alternative investments like private equity or timber or oil and gas or venture capital. Yale's endowment started to put lots of money into alternative investments. They really had, outshone the best performer over number of years. These pension funds are in trouble right now.

Dennis Purcell (Guest)
I mean, they're not generating the returns that they need for their obligations to pay their own retirees. Instead of like three or 4% allocation to private equity, or I should say alternative investments, they've kind of upped it to 15 or 20%. They're going to be a main, they're big, they're huge. They're going to be in this industry and I think they're going to be in it to stay. You also have, companies that are starting to do their own venture funds. It seems like every big company now has their own venture fund or at most, every university has their own venture fund. So the capital seems to be there. What, what it means for the future returns, given where we're priced today. That's a question I think we probably are just a little too much price toward perfection right now.

Neil Littman (Host)
Dennis, I think you bring up a bunch of great points and I, I have mixed feelings about this because one hand, the more capital flowing into the biotech space means more money for R and D more capital going to develop potentially life-saving treatment. I think that's a net positive probably overall for humanity and society, but as an investor, I think to your point, it does make me nervous. Valuations are very full right now with not a little on the bubbly side. I think that there is definitely some caution there from the investor point of view, I, I do want to talk about one other aspect of how the financing landscape has evolved. That is the the growing activity around SPACs or special purpose acquisition companies. Dennis, given your background, I mean, SPACs are nothing new. They've been around for a long time now, and they've made a resurgence over probably the past two or three years.

Neil Littman (Host)
How do you view SPACs and how do you see them playing a longer term role in the biotech industry?

Dennis Purcell (Guest)
Sure. They made, they made quite a splash earlier this, and if the number served me right last year, there was about 600 specs done and about 20% of them, or so were healthcare specs. That's 120. How many of those are the life sciences specialize? I'm not sure, but some sub portion of that. There are a lot of specs that are on file. There's another 300 facts that are waiting to price their own spec. I think there's a debate here about whether this is going to be another source of capital for the industry or whether this is going to be just a flash in the pan. And, and people are kind of passionate both ways here. I think that. If you talk to capital markets, people, some of the banks like the bank of America or Leerink or places like that fund the industry, they would argue that they're going to be permanent sources of capital they're legitimate ways to raise capital.

Dennis Purcell (Guest)
There lots of good things about them, you're there faster, you don't have less negotiation, things like that. The caveat on the plus side of them is that generally when these spec deals are done, they're done with pipes attached. You bring in other investors when you do the merger with the acquired company. One of the questions is will the pipe market continue or not? Because, well, will they continue to play with the pipes? The, the flip side of the antique, flash in the pan group would say that, and I, I have some sympathy for this that it's hard enough to get recognized in the community because there's so many companies. At least if you go public through a regular IPO, you have three or four banks. There's some, there's some people out there that investors can call and say, Hey, what's going on with the company?

Dennis Purcell (Guest)
Things like that. When you do a spec, you're really doing it without any quote unquote institutional ownership. One of the things I hear over and over again is how hard it is to get people's attention, investors, attention. I talked, when I talked to investors and them, we see it ourselves, to the job, to know all the companies out there, but what the explosion of them, it's darn near impossible, let alone impossible to pick the ones who are going to win. The downside here is the spec market is one where you might be able to get public and it might be faster and it might be easier, but you may get lost in the shuffle afterwards. We'll see in life, sciences is going to be a very interesting time this year, because toward the end of the year, and particularly this time next year, January, February, March, and say, December, January, February, March, if you don't do a merger, you have to give your money back to within two years, you have to give your money back to the investors.

Dennis Purcell (Guest)
There've been very few life science specs done relative to the number that are out there. As we approach mid end of the sheet, middle of this year, and we don't see mergers being done, it'll be interesting to see what the specs are going to do because it's not cheap to set up a spec. It's not cheap to go to the sec. If you don't find a merger partner, you've got to give the money back. They're all coming due toward the end of the year, in the beginning of next year. It'll be interesting to see how this evolves over the next, six months from now, nine months from now and what happens to all these specs out there, because we certainly have, I, I think there's maybe somewhere 40 50, really life sciences oriented specs that are out there waiting to do a deal. They have to do a deal within a year or give their money back to investors.

Neil Littman (Host)
Yeah. The thing that makes me particularly nervous about just the whole structure of the spec, right? As you said, they need to return money to investors that they don't do a deal. They need to do a deal. The quality of that deal, potentially subpar, if they're having trouble finding a high quality company, right. Maybe they'd rather get something done than nothing as opposed to returning capital to investors. That whole thing makes me nervous.

Dennis Purcell (Guest)
Yep. And the only check on, excuse me. No, the only check on that is that the deal has to be approved by the spec owners. Now, the question is, are the spec owners qualified to evaluate these deals? Well, you, did you do your point that I guess that's what I was kind of trying to get at the urgency of getting a deal done might cost on your rationality, but it Nate, but they make it shut down because the owners of this backstage, that's crazy, we're not doing that. Just give us our money back.

Neil Littman (Host)
Yeah. As you said, it'll be interesting to see what happens in the coming months here. Well, I think this is also probably a nice segue to my next question. Cause because the whole spec phenomenon certainly makes me nervous. What keeps you up at night as an investor in this space?

Dennis Purcell (Guest)
Yeah, I guess in some ways what doesn't, but there's a few things that we all really always have to fight and kind of stay on your toes. It's, it's hard to, you have to, or at least in my mind kind of fight going again, just going with the crowd. Cause sometimes you can look really stupid in short-term when things are going really well and genomics companies are hot as hot you can get and Gina, whatever they are and sure enough, this industry is boom or bust. If you just kind of follow the crowd and follow what's hot, I think you get burned a bit. So I'm trying to fight that instinct. I'm trying to fight the instinct right now saying, Hey, anybody, any of these companies right now can go public, even if they're preclinical, because that's not going to last. I can't look at trying to invest in companies and kind of flip them.

Dennis Purcell (Guest)
When you say four years, they probably come to us when they're already two or three years in. I can't, I'm trying to fight the impulse to say our exit is going to be an IPO. I'm also trying to fight the impulse of doing relative analysis. So, my competitor a is trading at 700 million. Why am I only trading at 200? I must be a steal or I'm way undervalued. I, more than once a of seen and been burned by that kind of thinking, company a and B are my competitors and they're trading at three times where I am, I have to be really undervalued, excuse me. I, I guess it's a worn cliche, but I, I'm more, I go on to the more, I believe that it's kind of management management for us for, if you look at companies that succeed, they have management teams behind them that have really adapted to being able to pivot when they needed to pivot nothing ever goes in a straight line.

Dennis Purcell (Guest)
I think I mentioned earlier before, one of the things I'm hearing is that the challenge of finding talent. So, where's the talent coming from is also something I think about a lot.

Neil Littman (Host)
Yeah. All, all good points. I guess the flip side of that question is w are there certain trends or certain technologies that you're particularly excited about these?

Dennis Purcell (Guest)
Well, I think one of the things as an industry, we have to think about here is that then the last half a decade cancer and rare diseases have really been in Vogue for good reason. I mean, they can get the reimbursement isn't as bad road to approval is not bad. If you look at the pipelines of big farmers and you look at what's been approved by the FDA and what a lot of biotechs are working on, we're working on, narrow and narrow indications with smaller and smaller populations and primarily cancer and rare diseases. One of the things that I'm thinking about is how do we make a broader impact on the society and stuff like, who's doing chronic diseases right now, and where are we headed with mental health? The New York times, a couple of weeks ago above the full story, a hundred thousand people died of overdose last year, w where are we going with all this, where we look into depression, statistics coming out of COVID and things like that.

Dennis Purcell (Guest)
I'm excited about areas that the industry has not yet quite been able to crack it because they're difficult, it's difficult, but it's needed. I mean, I'm going to think over 60, 80% after age 60, 80% of people have at least one chronic disease and 60% have three chronic diseases or something. I mean, that's a big cost to society. I think part of our responsibility as an industry is also to help get, try to get our hands around healthcare costs in general, we're fighting the battle on pricing, but in general, we have to be developing new therapies for things that are important to society, not withstanding what we're developing is awesome for the diseases that have been developed for.

Neil Littman (Host)
Yeah, Dennis, I mean, there's actually two threads that I want to pull on there. I do want to start with the chronic disease, because I think as most of us know, I mean, particularly in the U S we suffer from an epidemic of chronic disease, but globally as well. So how do you think about there? There are certainly, there are pharmaceutical interventions for chronic diseases. There's also been a new wave, and this is probably a little outside of your area of expertise, but, digital therapeutics, digital health, right. Different ways to try to intervene, to help people make healthier lifestyle choices through diet, through exercise, not necessarily through a pharmaceutical intervention, but through a long lasting behavioral modification. Do you think there's anything to that or do you think, or are you really more focused on the pharmaceutical intervention approach?

Dennis Purcell (Guest)
I, I, I think there's really something to that and I'm spending more and more time on the digital tech side of things. When you look at some of the things that are being developed on that side of the ledger, they seem to be working. You look at Paris are now that industry and not pharmaceutical interventions is in its infancy and just probably too many of those companies. We've got to figure out where that's all going, but I think it's certainly a lot more than just pharmaceutical interventions. Therefore, I think there's going to be a coming conversion of kind of digital healthcare along with the traditional pharmaceutical part of healthcare that we're really just seeing the part beginning of, and we're not talking to each other yet, but I think we're going to have to start to talk to each other, the third, the other area that we're, we spend most of our money.

Dennis Purcell (Guest)
I think it's going to become a really big area is the whole field of longevity. I mean, the cost of the last couple of years of life for us, it's just staggering. And, most scientists would argue credibly. I think that, no reason that we shouldn't be even living past a hundred pretty easily, we generally, we live to 80 or our life expectancy's 80. And, we spend so much time kind of thinking about our age span. The last 10 years is all in decline. I have two chronic diseases today. I have three, then I have four, then I have cancer. Then it's just a downhill battle. If we can start thinking more about like health span and how do you stay healthier, longer? How can you be 80 and still act like you're 50 in terms of exercise and mind and stuff like that. I see Neil convergence of, of, digital health tech and these apps and things like that.

Dennis Purcell (Guest)
That's going to get combined with pharmaceuticals in these areas, particularly in mental health.

Neil Littman (Host)
Yeah. And th Dennis, I couldn't agree more. Just one quick data point, just from the Beiber's portfolios, we've made an investment in a company called blue Mesa health, which is a digital therapeutic targeting the diabetic and pre-diabetic population. They actually had talking about, how those types of companies work with traditional pharma companies. They had a global partnership with mark KGA and the, the German mark Nate had rolled this out in conjunction with Mark's insulin drug. The idea was that it was a way for Merck to help build a relationship with diabetics, or even prediabetics before they became full blown diabetics. So, that seemed to be a very fruitful partnership. I think we're going to see more and more of those types of opportunities, but blue Mesa was subsequently acquired by Virgin health. I'm sorry, Virgin pulse. So, companies like Virgin are making a big play in that the digital health space as well.

Neil Littman (Host)
I think it's really interesting this convergence that you just mentioned, I, I do want to go back and pull on this one other thread from a prior answer that you gave in this is price controls. It's a hot button topic. These days in the political arena. There there's a lot of, proposals winding their way through Congress at this point. It's maybe perhaps the only issue where there's bipartisan support as an investor in this space. I mean, how do you view these propose price controls? Are they, are they concerned for you?

Dennis Purcell (Guest)
I think there are, I think the, yeah, they're definitely a concern and they have been a concern. I think that we haven't done a good enough job to kind of capture correctly the value that we're delivering by these therapeutics. I think that's, what's going through the Congress right now is something that the industry can live with. I mean, anything that kinda gets generic has the stuff that we're doing. It's bad ought to be put the rest. I mean, we already get generics on the market as fast as we can. And, 85 or 90% of all prescriptions are generics. We shouldn't be playing all these games to keep, keep generics from getting the market to market, anything to do with pricing that keeps copays low. We ought to be some more, we ought to be supporting. I think it's being pro, which being proposed right now, I think is reasonable.

Dennis Purcell (Guest)
The industry can live with it, but it's, it's it's initiatives been around that we just certainly haven't gotten, we're just easy punching bags. We just haven't really kind of been able to tell the story effectively. I don't think,

Neil Littman (Host)
Yeah, I, I think that's certainly true. My concern Dennis, for the price controls is, if your limit the price that companies are able to charge for some of these, particularly novel, drugs and therapies, does that limit the upside potential for investors? Right. I mean, particularly, in the venture game, right. We know this is operates by the power laws and, you need that outside home run to make up for all the losers. We artificially limiting the upside of that one potential home run. Obviously that has a depressing effect on the NPV, but analysis and all those things. My concern is that it could potentially limit the interest from investors because the upside is, is being tapped, I guess, we'll, we'll see how that plays out, but that is.

Dennis Purcell (Guest)
Yeah. Yeah. Being part of bio, we sent a letter that was signed by, I think about like five, 600 people, Neil making that exact point saying, you're cutting off the nose to spite the face of this happened. Therefore that's where that, and therefore we didn't, even though people wanted to do reference pricing and letting the pricing right out of the box and all that kind of stuff, it didn't happen. I think the industry did a decent job of convincing lawmakers that what you suggested might just well happen if they live it, if precious controls are put in place right out of the box. For the time, no, you can never be, you can never get complacent about this stuff, but right now things are looking okay.

Neil Littman (Host)
Yeah. Well, that's great.

Dennis Purcell (Guest)
But yours is the issue. Yours is the issue. And, and by the way, I mean, one of the things we haven't explained to people well, is that yeah, these costs more out of the box and they're going to be one 10th, the cost for the, till the end of the world, once they go generic and w we're having trouble kind of explaining that to people that, once it goes generic, these things are going to get cheap for till the end of time. We just need to have the, recoup the investment to make a decent return, so don't cut off the innovation, just, didn't worry about what's going to happen down the road.

Neil Littman (Host)
Yeah. Dennis, and I think that's a hugely important point. I know a peer called tenancy from RA capital is has beating the drum about this and wrote a really great book, the great American drug deal, talking about the biotech social contract. I think, to your point, I think we've, as an industry, we've done a lousy job of explaining a lot of these things, but I think now now's the time. Certainly. Let me, I think, I'd like to pivot here and, and talk about the JP Morgan conference. Cause that is coming up, it has moved virtual this year. I'd love to, obviously from when you started the conference has grown exponentially. I think many of us in the industry view it as a great way to kick off the year, meet with colleagues that, we meet with annually or bump into people you haven't seen for many years and certainly gonna miss the in-person events.

Neil Littman (Host)
We'd love your perspective on the JP Morgan conference, how it's evolved, it's utility these days.

Dennis Purcell (Guest)
Yeah. When it's come a bit of a way, since when we started, we started, as I mentioned, Reuters, or a few kind of dedicated investors, there aren't that many companies and the investors had to travel around to see each company individually. We didn't have the technologies that we have today, or the companies have to go see each investor individually. We wanted to go and, just have a little conference where you could get a whole bunch of work done in a short period of time. The, we thought that January was a good time to start it because it was the beginning of the year, the weather in San Francisco wasn't bad. W it cost us rent at the time rent, we had to rent two rooms and the conference was about three quarters of a day. We had maybe 40 or 50 people there. It kinda went kind of went from there.

Dennis Purcell (Guest)
If people liked it, the investors liked it. Nobody paid any attention to it then, but each year kind of more and more companies wanted to just talk at it for some reason. More and more specialists candidates in the market. So it kind of got bigger. We had to rent a third room and, et cetera. I know early nineties or something, it became one, we started to make big announcements at the conference. Monday the conference was when you made the big announcement and it became kind of a ritual guessing what was going to be announced, what big deal, what big merger, what was going to happen at the conference? It started to get more and more attention. This was, showing my age of it's called the hamburger and quiz conference back then the HBCU conference. This was when I was back into my banking days. And, the banks have competed against us, then started to take suite at other hotels to meet with the companies are not companies that were there and tried to steal our clients and all that stuff.

Dennis Purcell (Guest)
Believe it or not, the hotels didn't charge much at back at the time they didn't raise rates or anything like that. It was easy to do. We ended up having to then move it to two days in three days. When we did that, there was nothing to do much at night. A lot of companies or law firms or any, not just different companies started these cocktail parties stuff. That's of the whole cocktail party thing started when the conference became more than one day. Now all of a sudden, it's probably 30, 40, 70, different cocktail parties she can go to at any time. That became something everybody wanted to go to because it's beginning of the year. You could see people you hadn't seen for awhile. And, and things like that. JP Morgan acquired us nearly two thousands. JP Morgan had a, different client list than we did at Hambrecht and Quist.

Dennis Purcell (Guest)
We were doing the early stage IPO's and the kind of up and coming companies, JP Morgan's client base, or the big guys, the Pfizers and the express scripts and Bristol-Myers, and the like, and so the tone of it changed but by this time it had started to be, it just had started to become a zoo and it prices started to go, it kind of out of control. We really started having, they started to have to limit really people that could go into the conference at the Western because of security or fire concerns and stuff like that. Consequently, the companies that were at, and the companies were presenting were not the traditional companies that we had in which were the, hopefully the next Moderner or the next Genentech or something like that. They were more of the kind of big clients of JP Morgan. What happened is that we had all these other satellite conferences started like the biotech showcase and the digital showcase and a China showcase and all that kind of stuff.

Dennis Purcell (Guest)
All that meant was going to get more crowded and it did get more crowded and it got more expensive into like, and then even before COVID the trumps started beating saying, is it really worthwhile to go here? It's just, it's just, you can't move your shoulder to shoulder. Is this really efficient for us? Particularly when the hotels and everybody else around union square around the city were charging rates that were just untenable for, people to go to. There started to be of a backlash saying I'm not going to go this year, this year. The last couple years, it didn't matter because now that's going to be virtual. It will be interesting to see whether this continue. If we get back to normal next year, whether this continues to be a, a must go to conference or not. I, I don't think any more that people play that game of who's going to announce what, on Monday, there's already been some companies before the conference has started here that have announced pre-announced earnings and things like that.

Dennis Purcell (Guest)
We'll wait, we'll see. On Monday, whether there's any big deals or like that are announced and, and with technology, the way it is today, do you really need to be there in person? You know, we'll see. Back in the early days when I said there was only a few investors in companies, it was, I think there's three phone booths in Western St. Francis and people would, investors would hear companies present. There would be a lineup at the telephone booth where they would call in and either buy or sell stock and, and there'd be 10 or 12 deep. They would always be complaining like it off the line and stuff like that. That's how people acted on the information that the companies were telling them in real-time. You had to use the telephone at the Western end. There weren't enough of them, for sure.

Neil Littman (Host)
It's amazing how, not just the conference, but I mean, just life in general has evolved since that time. Right now you pull your cell phone or send a text and that's all you have.

Dennis Purcell (Guest)
Yes.

Neil Littman (Host)
Amazing. How, not just the conference, but I mean, just life in general has evolved since that time. Right now you pull out your cell phone or send a text and that's all you.

Dennis Purcell (Guest)
Have to do.

Neil Littman (Host)
Yeah.

Neil Littman (Host)
Well, I think, I certainly will miss this face to face gatherings, but I think to your point, with the technology we have these days, these sorts of large in-person gatherings are not necessarily must have. I'm certainly excited to see how, how the conference shapes up. Dennis, I think we could probably talk for another two days about all these topics but I do want to be cognizant of your time. And, and so I think with that, I would just like to say a huge, thank you for joining me on the show today. Thanks for a really wide ranging and wonderful discussion.

Dennis Purcell (Guest)
Thank Neil. Thanks for having me. I really enjoyed it.

Danny Levine (Producer)
Well then what did you think? I thought.

Neil Littman (Host)
That was a, a wonderful wide-ranging conversation. I think Dennis provided some really valuable perspective on, going back to the early days of the biotech industry and, Genentech going public in the eighties and how that kicked off the whole industry and really the nature of, what it means to be a biotech company, fraught ranging from basically a science project to a company that has, maybe a more credible or mature management team. You've heard Dennis talk about, management team management team, and then, no surprise there. I, I think, you heard them comment on the boom and bust nature of the industry. While there have been fundamental advances in the science, I think there's no argument there. I think, as you heard him say there, valuations are or fulsome at this point. And, and I do want to correct a comment that I made during the podcast. The XBI was not all 30% was, but was off 21% last year.

Neil Littman (Host)
So still a pretty bad year. Not as, not as bad as I had initially thought though. So, it was a tough year for biotech. You heard Dennis talk about the boom and bust nature of the industry. We'll see where we land at the present moment.

Danny Levine (Producer)
What surprised you most about what he had to say?

Neil Littman (Host)
Yeah, I mean, I, I, I think we talked about a lot, th the specs I think, were interesting to get his perspective on. So, I mean, just the sheer number of SPACs out there is the kind of mind boggling at this point. So, you heard him talk about the capital market perspective that these things are here to stay. They've been around for a long time, I mean, multiple decades. So they're nothing new. They come in and out of fashion as far as I know. There's certainly been a resurgence, you heard Dennis talk about, there is an urgency to getting a deal done, right? The clock is ticking on these things, and yeah, investors have approval power to approve deals, but I have limited confidence that a lot of investors in these specs have any wherewithal to properly diligence, a investment in a biotech company, particularly some of these novel companies that we're seeing today that are overlaying, AI or machine learning as part of their drug discovery engine and process.

Neil Littman (Host)
So, my concern is these things are going to end in a disastrous fashion. Not all of them, some of them will be highly successful of course, but, retail investors, and then mom and pop may end up holding the bag on some of these things. My concern is that, that may put a damper on things, but as you heard Dennis say, the clock is ticking. We'll, we'll see what happens over the coming months on a lot of these things. The, the other point that I actually found surprising as well, we w we talked about price controls. You heard Dennis talk about the letter that bio sent to Congress basically outlining some of the concerns about price controls could limit innovation and investment in the industry. Actually it sounded like Dennis was okay with a lot of, some of the proposals that were w w were working their way through Congress at the moment they weren't that draconian limiting copays.

Neil Littman (Host)
I, I obviously, I think that is a net positive, definitely need to limit copays. So, it didn't sound like some of what is being proposed right now wouldn't necessarily be that bad for an industry. I actually, I did find that surprising,

Danny Levine (Producer)
You had asked about speculation verse innovation is drivers of activity. You also talked about the inevitable coming-out process. What do you think that might look like?

Neil Littman (Host)
I think it might not look very pretty at the end of the day. I mean, you heard Dennis talk about, the significant valuations are accruing to preclinical stage companies. If you're looking at it on a multiples basis, these companies should be generating, $150 million of revenue today. And, they're maybe preclinical and nowhere towards even FDA approval, let alone having a BIA commercial product on the market. The calling out process, I think, is going to be a reality check in terms of how some of these companies are valued and what they're valued on, comedies are always valued on forward earnings and on growth and on, progress. I, I think there is certainly a lot of enthusiasm for some of the fundamental advancements in the underlying science. And I think that's warranted, right? Some of the novel gene therapies and cell therapies, for example, some of it, some of the movement towards more precision based medicine, you heard Dennis talk about, there's been a big focus, obviously in the industry within rare diseases and oncology and, and defining smaller and smaller patient populations.

Neil Littman (Host)
What does that, how does that all translate toward how these companies are being valued right there, there seems to be some perhaps irrational exuberance for the, the level of valuations. These companies are garnering. Now that don't connect to the, the, the underlying fundamentals, even though the science is exciting.

Danny Levine (Producer)
At the same time, there's still plenty of capital available for these companies as an investor. How do you think about issues like froth and sustainability of an investment and ultimately your ability to achieve an exit?

Neil Littman (Host)
Yeah. I mean, these are all really important points. And, my biggest concern is, the more capital that's flowing into an industry that can often predict, let's say, not as outsize returns, or it could certainly dampen future returns, right? All, all the money sorta chasing the same things. That means you're investing at higher valuations, right? At some point, the rubber going to meet the road and there's not going to be all of these, massive excess to support these high valuations, where investors are, entering their investments or their cost basis. So, we'll see how things play out. That there's certainly a lot of interest. As you heard us talk about from family offices, from hedge funds, from folks that traditionally don't invest in the private markets, or haven't touched early stage biotech that are doing it on a regular basis today. So again, I have mixed feelings.

Neil Littman (Host)
I think it's a net positive Mike, cause it means more R and D dollars to develop potentially life-saving treatments, but from an investment perspective, it feels bubbly. So that does cause me some concern.

Danny Levine (Producer)
Well until next time.

Neil Littman (Host)
Thanks, Danny.

Danny Levine (Producer)
Thanks for listening.

Danny Levine (Producer)
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Danny Levine (Producer)
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