Investing in Biotech in 2015
Interview with Karl Zachar, Managing Director at Pillar Partners, a $300M crossover healthcare investment fund
PULSE: At a high level, I would love to get your take on some of the major trends in biotech right now. Is there any one area – genomics, immuno-oncology, etc. – that has the attention of you and the fund in particular?
KARL ZACHAR: It is a very exciting time in healthcare and biotech. Pillar Partners has two main investment theses: a) the scientific community’s increased understanding of genomics, DNA, and innate immunity (how the human body’s immune system fights disease); and (b) the dramatic improvements in the cost and throughput time of DNA sequencing. For the first time, we now have cost-effective DNA data, which is changing the way we diagnose diseases and is transforming the drug discovery paradigm.
Five years ago the cost to sequence a patient’s genome was approximately $100 million. Today, a comprehensive DNA sequencing can be done for under $1,000. As a result, we are seeing most leading US cancer centers perform DNA tests on all their cancer patients. The availability of this data allows researchers to understand the mechanism of action behind the cancer cells and develop strategies to destroy them. Currently, most advancements in genomics are cancer related, but, hopefully, we can get to a point where we are sequencing every patient with life threatening diseases.
PULSE: What most excites you about these advances in genomics?
KZ: Think about how powerful this is. For the first time, researchers have the ability to collect precise molecular data and pinpoint the cause of a patient’s disease. It’s crazy that we were diagnosing cancer patients by tumor type (breast cancer, lung cancer, brain cancer, etc). We did not know any better. Now with data, we can diagnose and treat the root cause of the disease - the patient’s specific genetic mutations. Very exciting times.
PULSE: What types of opportunities do you think this trend is creating for both biotech entrepreneurs and biotech investors? I would love to get your thoughts on what it takes to be a biotech entrepreneur in 2016.
KZ: I’m going to answer your question by describing where we see the most opportunity for entrepreneurs from our vantage point at Pillar. A few themes that we are working include:
- DNA diagnostic technology combined with the right business model can motivate doctors to incorporate this new technology into their workflow – this has tremendous potential. Cost, insurance reimbursement, and throughput time are just a few considerations that still need to be ironed out in order for wide adoption of this technology by physicians and researchers.
- Data aggregation and analysis of all this vast molecular data is equally important. We need informatics experts from other industries who can figure out how best to analyze this dense amount of data and synthesize the results so that it can be useful to clinicians at the point of care.
- On the biotech side, Pillar Partners is focused on advancements in gene therapy. Specifically, we are focused on innate immunity, gene editing, and how the process of drug discovery is changing from “discovery” to “engineering.” While oncology dominates the headlines, there is quite a bit of promise using gene therapy to treat serious and rare diseases in CNS (central nervous system), cardiovascular, obesity, and autoimmune disorders - to name a few.
Given the huge opportunity, there is a significant need for MBA entrepreneurs to jump into the biotech industry to help build sustainable business models around great science. The majority of recent breakthrough therapeutic innovations have come from small biotech companies. Large pharma companies have become too big and now recognize they do not have a culture that fosters innovation. As a consequence, Pharma has not been able to innovate as rapidly as they would like. Smaller, focused biotech companies are the ones that have been the innovators in the field. This is where smart, ambitious MBA entrepreneurs can team with scientists and researchers to create real value.
PULSE: Great. And what does this all mean for early-stage biotech investors?
KZ: For the past six years, biotech has been the top performing sector of the S&P500. Despite the recent market downturn, I remain optimistic about the future of biotech investing. It is one of the few exciting growth areas in the US economy. However, as in any rapidly changing technology market, there will be volatility, big winners and (by definition) many losers. The current biotech revolution is no different than the early years of the internet. The key to picking winners is to identify great science combined with a strong management team going after a very specific, unmet medical need.
PULSE: A follow-up to the previous question: there’s one trend in particular – the increase in orphan drugs – that I wanted to ask you about. Do you think what we’re seeing here – with 45 drugs approved by the FDA in 2015 and 41 in 2014 (the average is usually around 15) is the new normal? Are orphan drugs – drugs that target therapies for specific populations that suffer from rare diseases – the place where we will continue to see the most growth?
KZ: In 2013 the FDA initiated an expedited drug development program called “Breakthrough Therapy Designation” which launched a fast track approval process for drugs targeting orphan diseases with unmet medical needs. The increased number of drug approvals in the last two years was driven by these breakthrough orphan drug approvals which address smaller populations of very sick patients. Smaller biotech companies typically focus on breakthrough orphan indications because the FDA approval process is much less onerous – in terms of time to approval and clinical trial expense. Breakthrough drugs are getting approved with very targeted trials involving 20-30 patients over 12-18 months. This is much different from the traditional clinical trial process for mega-indications which frequently require thousands of patients over a 7-10 year time horizon.
PULSE: Got it. So is this the new normal?
KZ: Yes. In fact, there is a thoughtful argument that pretty soon all diseases will become orphan diseases. All medicine will become truly personalized medicine. The medical community is starting to understand that a diagnosis like lung cancer is really a catch-all for numerous diseases caused by a number of different genetic mutations. The same is true for autoimmune disease such as rheumatoid arthritis, dementia, and pneumonia. Each of these disease classifications will ultimately prove to be 10-15 different diseases that need to be treated very uniquely.
PULSE: Does that affect trends in reimbursement at all?
KZ: Reimbursement is a huge challenge with these new technologies. Medicare and private payers are playing catch-up on the science. Currently, very few DNA tests are covered by insurance policies – even for seriously ill patients. Additionally, most immunotherapies are being approved to be used in combination with the current standard of care (SOC) drugs. SOC drugs for rare diseases can be priced at around $100,000 per year. By combining a SOC treatment with an immunotherapy drug, you could easily double the cost of a patient’s treatment. Insurance companies are aggressively pushing back on this doubling of cost. Finally, managed care and ACOs were trying to standardize reimbursement across big disease classifications (breast cancer, cardiovascular disease, etc.). In many cases payers were negotiating capitated reimbursement models for these larger diagnoses. However, under this new, personalized medicine paradigm which is starting to tell us that every disease is in fact an orphan disease, the accountable care reimbursement models need to be adjusted – standardized payments need to be closely tailored to specific diseases.
PULSE: Fascinating. Shifting back to thinking about investment opportunities now - Investors – especially early stage investors - need to exit their investments at some point. 2015 was a huge year for Biotech IPO’s. Is the IPO the goal for most investors in early-stage biotech? Is the sale to a strategic investor something you think about?
KZ: We are in a tough market for biotech. The biotech public market is off 30% from its highs last summer, and the IPO window is effectively closed. Investors are in a “show me” mode and do not want to take long-term development risks right now.
The good news is that many biotech CEOs were savvy enough to raise cash in 2015 when the market valuations were exceptional. (The well-known adage in the biotech industry is “raise money when you can, not when you need it”.) Those companies that need to raise money in the next six months will have to rely on strategic alliances with Pharma companies or a private funding at much lower valuations.
As for possible liquidity or an exit, I think we will see another wave of IPOs and M&A activity in the next 12 months. However, investors will be much more price sensitive than we saw in 2014-2015.
PULSE: Specifically, what are a few of the key characteristics you look for before investing in a company?
KZ: Pillar invests in a wide range of science-based innovation across healthcare. We look for companies and ideas founded by smart, passionate entrepreneurs who are tackling unique problems in healthcare and medicine using disruptive technology. Pillar is attracted to original ideas to problems that were previously thought unsolvable. We partner with and fund people we trust and with whom we see ourselves developing a multi-year relationship.
PULSE: Great. Finally, I’d love to hear about your personal outlook on investing, or even working, in health care: Is biotech the place to be?
KZ: In my opinion, healthcare is one of the best sectors to get good returns for US investors and entrepreneurs. Healthcare represents 19% of US GDP and continues to grow faster than most other industries. Additionally, healthcare is a $3 trillion market that has not yet been disrupted. There are so many opportunities to make a difference while improving our healthcare system.
As far as different subsectors within healthcare, I would encourage MBA students to get exposure to a wide range of business models and companies across healthcare. I have always been drawn to disruptive data and technology models in healthcare which have the potential to cure disease and dramatically improve care delivery.
Founding Partner at Pillar Life Sciences
Karl Zachar is currently a founding partner at Pillar Life Sciences, an investment partnership focused on investing in science driven healthcare. Prior to Pillar, Mr. Zachar served as VP of Product Strategy and Business Development for athenahealth (ATHN) where he led athena’s business development, M&A, and ecosystem strategy. Previously, Karl was President of IntrinsiQ, an oncology data company. Karl also worked as a VP at Goldman Sachs. Mr. Zachar graduated from Amherst College magna cum laude and received an MBA degree from the Harvard Business School.