The Life Sciences Report: As a venture capitalist, your investments are the feedstock of the initial public offering (IPO) markets, and you must constantly think about getting your private equity holdings ready to go public or be acquired. How has this process changed over the past two years?
Dennis Purcell: Things have changed substantially. On the regulatory front, the Jumpstart Our Business Startups (JOBS) Act has been a big driver in terms of making it easier for companies to go public because they can file anonymously with the Securities and Exchange Commission (SEC). Everything worked well last year in the sense that companies attempting to go public were better funded because they were able to test the waters ahead of time.
For the better part of a decade the science was doing well, but Wall Street hadn't caught on yet. Prior to that, there had been a lot of disappointments, and selloffs on approvals. Then Wall Street started to catch on to what was happening in biotech. Now we've seen some really good product launches, and that is feeding into a robust market. We've also added the generalist investor to the sector. The generalists got into some IPOs and did quite well.
Those things coming into play at once—on the regulatory front, with the JOBS Act and the SEC, as well as the underlying fundamentals—made for a very good year. IPOs were up an average of almost 50%.
TLSR: Let me ask you about the generalist investors. Biotech has enjoyed very sophisticated sponsorship over the past five years, even when the stocks weren't doing so well. These new investors might not understand the science and the technology platforms. Does it worry you to see these "last-in" investors get involved?
DP: Certainly. The generalist investor has a very hard time understanding the industry because of the complexity of the science, which only gets more complex as time moves on. The challenge is that we've seen significant highs and lows over the last 15 years in biotech. If we can smooth out those curves and continue to show scientific progress, we'll keep the generalists interested in the sector.
"If you look at the rising resistance of infections to antibiotics, we are running out of treatments in the arsenal. The infectious disease market will be a theme over the next year or two."
Historically, generalists have been somewhat fickle: Once the performance isn't there anymore, they move on to chase returns in other sectors. Now that they have had such a good run with biotech over the last year or two, and are seeing startups mature from science projects to real companies with products on the market, generalist investors don't have to understand the scientific underpinnings. They can simply look at how the drug is doing in the marketplace and what it's doing for patients.
Yes, I worry about generalist investors, but if we can flatten those extreme highs and the lows to keep generalists in the market, we should see a sustained period of success in the industry.
TLSR: Capital has to go someplace, and people do look for higher returns. When biotech companies mature, with products on the market, investors seek better returns than they get by waiting for earnings every quarter. The money will necessarily filter down to companies with preclinical products, and with phase 1 molecules and 10 patients in the clinic. Could that lead to companies using this free flow of capital inefficiently?
DP: That's a key question in terms of flattening out the highs and the lows. To address that issue, I consider what I call the three Os. The first one is output. We have to prove to investors that our output is going to be better than it has been in the past. That means getting a quick answer and killing off bad projects earlier, without wasting $50 million ($50M). Upward of $500 billion ($500B) has been spent on cancer drugs that didn't go anywhere. Now that we have a lot of companies that have $50M, $100M or $200M cash in the bank, we have to be much more judicious about how we spend it.
"It's a risky business for sure, but by the time a company is ready for an IPO, so much diligence has been done that, as a small investor, you know something about the people involved."
The second O is about outcomes. We need to share data better than we have in the past. Almost half of all clinical trials never get reported. Some of the money waste not only has to do with waiting too long to kill a project, but also with making the same mistake that somebody else made in the past. We need better cooperation on sharing data about outcomes.
The third O is originality. As you trickle down into some of these companies with 10 patients in a clinical trial, we need to see more originality in business models. For instance, companies in the past year have actually secured predetermined purchase prices from big pharma companies if they hit certain milestones. They are being original.
TLSR: The specialist biotech investor has been in the market forever, and now we've seen the generalist come in to catch the wave. What about the retail investor? Are biotech IPOs suitable for retail investors?
DP: I think they are suitable for the retail investor. These investors have to take a look at the people who started the company, the company's advisors and the people on the board. As a small retail investor, you can take comfort that somebody else has done work on a company. It's a risky business for sure, but by the time a company is ready for an IPO, so much diligence has been done that, as a small investor, you know something about the people involved. I'll contrast that with a company funded by angel investors, who may not be the most sophisticated in terms of biotechnology. That's different than a company funded by a well-known venture capital firm with a couple of Nobel laureates on its board.
The final filter is the underwriters. Are they quality underwriters? Have they taken good companies public in the past? If these pieces are in place, even a small investor who may not understand the science totally can take some comfort in that experts have been involved.
TLSR: I have one more question from the retail investor's point of view. Institutional investors get the first shares coming off the shelf; these are people you and your fellow syndicate members know, and the people that fuel your IPOs. Is there a way for the retail investor to get into the IPO, or must he or she jump in at the open?
DP: Generally, 20–30% of any deal is allocated to retail. Obviously, some deals are hotter than others. For an unsophisticated or small investor, it might be better to play it in a diversified way through a well-known mutual fund, like a Fidelity fund or T. Rowe Price. Mutual funds are the biggest clients of the investment banks.
The question is how much of the hot deals a small retail investor gets. Most firms have a target in terms of how much stock they want to go to retail, institutional and international investors. They have an idea about the right mix. By and large, there's always something left for retail. It may not be everything that the retail investor wanted, but he or she can get exposure.
TLSR: When a corporate venture capitalist—say from Amgen Inc. (AMGN:NASDAQ), Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK) or Genentech/Roche Holding AG (RHHBY:OTCQX)—takes an interest in one or more of the companies in your portfolios, does that give you some sense of validation?
DP: It's not so much the corporate venture capitalist that gives us comfort. It's the corporate business development people who lend us another set of eyes. We spend a lot of time with the big pharma companies talking about their interests, what they are looking for. If someone in business development in cancer at, for instance, Merck & Co. Inc. (MRK:NYSE), is interested in our oncology company, that obviously gives us some idea that we're on the right track.
"If we can flatten the extreme highs and the lows to keep generalists in the market, we should see a sustained period of success in the industry."
Then it becomes our job to finance those companies for three or four years, get them mature, and then, hopefully, have them acquired by big pharma. There are two ways we can recognize returns: The first is through the IPO market, and the second is through acquisition.
TLSR: I believe you have a theme this year in that you believe bacterial infectious disease indications are going to be a hot market. Is that correct?
DP: Last year was the year of cancer and orphan drugs. We were pretty involved with those. But if you look at the rising resistance of infections to antibiotics, we are running out of treatments in the arsenal. So yes, the infectious disease market will be a theme over the next year or two. A number of companies coming down the pike will bring new products to market that are superior to the ones we're using and, hopefully, will overcome this resistance problem.
TLSR: The Generating Antibiotics Incentives Now (GAIN) Act has been signed into law, and there are a few physicians in the U.S. Congress right now who seem to be interested in antibiotic resistance. Do you believe Congress is paying enough attention to this problem, particularly with regard to the possibility of a resistant-bug pandemic in the future?
DP: I think the government is paying more attention to it than Wall Street is. The GAIN Act, over time, is going to be very important for the development of new anti-infectives. The question is, how difficult will the U.S. Food and Drug Administration (FDA) be in terms of approving new anti-infectives? Wall Street has not seen the potential coming out of new anti-infective agents so far, but I think Congress and the FDA see the need. We read about a difficult infection every day in the papers now.
TLSR: From Wall Street's perspective, infectious disease is typically a short-term problem, and antibiotics are short-term therapies. In fact, the better the antibiotic, the shorter duration of treatment. Isn't that a valid problem for the investor?
DP: Yes and no. Certainly, bacterial infections are not chronic lifelong issues like some viral infections, such as HIV or even hepatitis C. There are numerous anti-infectives on the market that bring in well over $1B in sales. You're right on one hand, but on the other, the prevalence of bacterial infections is so large it offsets the issue of shorter-term therapy.
TLSR: Let's go ahead and talk about some companies.
DP: On March 31 there's an advisory committee meeting for a company we have been involved with called Durata Therapeutics Inc. (DRTX:NASDAQ). A new drug application (NDA) has been filed for its product Dalvance (dalbavancin) for acute bacterial skin and skin structure infections, including methicillin-resistant Staphylococcus aureus. Its Prescription Drug User Fee Act (PDUFA) action date is May 26, 2014. Durata is a beneficiary of the GAIN Act, and Dalvance is treating gram-positive infections like Cubist Pharmaceuticals Inc.'s (CBST:NASDAQ) Cubicin (daptomycin). We now have an endpoint with Dalvance that's different in that regulators will be looking to see what the bacteria look like after 48 hours, rather than what they look like after 7 or 14 days. We shall see how the regulators like Dalvance shortly.
"Wall Street has not seen the potential coming out of new anti-infective agents so far, but I think Congress and the FDA see the need."
We are not investors in Cubist, but it has an NDA filed for tedizolid phosphate (TR-701), which was acquired with its acquisition of Trius Therapeutics last year. The PDUFA date for tedizolid is June 20, 2014. At the end of February Cubist said that the European Medicines Agency (EMA) had accepted tedizolid for review for complicated skin and soft tissue infections. We should hear back from the EMA on that during H2/15.
TLSR: What about another antibiotic developer?
DP: Cempra Inc. (CEMP:NASDAQ) is another publicly traded company, and it is in a couple of phase 3 trials with its lead compound solithromycin (CEM-101). One indication is for community-acquired bacterial pneumonia. Solithromycin is in a class of drugs called macrolides, which would replace something like a Zithromax (azithromycin; Pfizer Inc. [PFE:NYSE]) or a Biaxin (clarithromycin; Abbott Laboratories [ABT:NYSE]). Cempra refers to it as a next-generation macrolide/fluoroketolide, and it does have the potential for a broad range of infections. We're going to see the first readouts of its phase 3 SOLITAIRE-ORAL study in Q1/15. The company is also ready to start a phase 3 trial in urethritis.
Based on what happens with Durata and Cempra in the not-too-distant future, we'll see exactly how regulators are going to treat new and novel mechanism antibiotics. The need is great.
TLSR: Dennis, you also have an interest in a newly public company called Esperion Therapeutics (ESPR:NASDAQ). It has a proposed product to treat hypercholesterolemia. Could you address that?
DP: Yes. Both Durata and Esperion have drugs spun out of Pfizer, and both of these companies are in our portfolio. Esperion has a small molecule, orally bioavailable, low-density lipoprotein (LDL)-lowering drug, ETC-1002, which is in two phase 2 trials slated for completion by the end of this year; we will get results in H2/14.
We're particularly drawn to this company because the scientific leader is Roger Newton, who was the codiscoverer of Lipitor (atorvastatin). He sold Esperion to Pfizer a few years ago, and we at Aisling Capital, and other venture capitalists, have recently reacquired it. The product is intended for statin-intolerant patients, of which there are many, and we have high hopes for these trials.
TLSR: When you say the drug is intended for statin-intolerant patients, are you talking about hepatotoxicity, muscle pain, that kind of thing?
DP: Exactly. Mostly muscle pain.
TLSR: So nice meeting you, Dennis.
DP: Thank you. Nice talking to you.
Dennis Purcell has served as the senior managing director of Aisling Capital since February 2000, and is responsible for the management of the partnership. Prior to joining Aisling Capital, Purcell served as managing director of the Life Sciences Investment Banking Group at Chase H&Q (formerly Hambrecht & Quist) and was a member of the operating committee. Prior to joining H&Q, Purcell was a managing director in the healthcare group at Paine Webber Inc. Purcell has served on the boards of directors of numerous public and private companies. He is a member of the board of the Life Sciences Foundation, L.E.K. Consulting, a special advisor to Poliwogg Holdings Inc. and an external advisory board member of the NYU Office of Therapeutics Alliances. He has previously served on the boards of the Biotechnology Industry Organization, the New York Biotechnology Association, the Irvington Institute, and was a member of the Advisory Council of Harvard Medical School. In addition to being a regular speaker and commentator on the industry, Purcell has authored articles in Nature Biotechnology, Xconomy, and the Journal of Biolaw and Business. Purcell has been honored in the "Biotech Hall of Fame" by Genetic Engineering News, named to the Biotechnology All-Stars list by Forbes ASAP, and cited as one of the top 100 contributors to the biotechnology industry. Purcell received his master's degree in business administration from Harvard University, and his bachelor's degree in accounting from the University of Delaware.
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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Dennis Purcell: I own or my family own shares of the following companies mentioned in this interview: Esperion Therapeutics, Cempra Inc. and Durata Therapeutics Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Esperion Therapeutics, Cempra Inc. and Durata Therapeutics Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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