Cell And Gene Therapy: An “Outside-In” Technology Evolution

Posted in Drug discovery, External R&D, New business models, Translational research | 1 Comment

The exciting renaissance in cell and gene therapy over the past five years has yielded some of the most innovative medical advances in the industry’s pipeline today.  There are now multiple stories of patients getting “cured” of rare diseases, responding to treatment at previously unheard of rates, and dramatically improving the quality of their lives.  These recent advances in the cell and gene therapy (CGT) field are great examples of why we and many others in the industry get out of bed in the morning.

Beyond the huge potential for impact, the speed with which the CGT field moved from the fringes of the sector into the mainstream has been remarkable – and is worth reflecting on.

Let’s start with the evolution of the current “conventional” modalities in our business – the pill and the vial as the principle product.

These modalities largely evolved with what I would call an “inside-out” model of technology development. These small molecule and protein-based drugs were largely developed within the BioPharma industry. While key and foundational discoveries often came from academia, like the early recombinant monoclonal antibody patents, their translation into clinical practice has historically been the realm of industry.  The know-how and artisan skill of moving from basic discovery into formal “early development” and clinical medicine mostly emerged from industry-driven efforts.

New chemical entities, long the bread and butter of Big Pharma, were the products of fully integrated R&D and manufacturing teams, and the understanding of what made a good vs bad lead candidate emerged over time. All the expertise was largely owned and developed in-house.  Similarly, developing and manufacturing biologics like replacement proteins or recombinant antibodies at scale was largely the domain of the early integrated biotech companies, like Amgen, Genentech, Biogen, and others. The bespoke art of biomedical product fermentation and subsequent bioprocessing was advanced through in-house learning within the biotechnology industry.

Insights from those larger and emerging companies then seeded a burgeoning contract research infrastructure in the 1990s and beyond. Clinical CROs emerged to help industry with the challenges of global scale in clinical development. A plethora of drug discovery CROs formed (like AMRI, Argenta, BioFocus, ChemPartner, Evotec, WuXi, etc) by ex-Pharma industry veterans, leveraging the insights from decades in the medicinal chemistry and biologics ranks of industry.  CROs evolved to meet the demands – and soak up the extra talent – coming out of the industry.

In time, lots of these insights from the industrial translational process of making drugs found their way back into academia. The NIH began to fund dedicated drug discovery centers in academia about a decade ago, and impressive high throughput centers like those at the Broad or Scripps Institutes emerged. These efforts were largely populated by ex-industry drug discovery veterans, transporting with them the know-how and institutional knowledge from industry into these academic efforts. The same narrative could describe the advances in fully human antibodies and such – academic discoveries into phage display and transgenic mice were taken up by industry in their formative moments, put through the process of industrial discovery and early development, and then advanced into clinical studies and eventually the market. Again, academia were benefactors of the industrial translation and development insights, and hence why many labs today do far more than just basic research (by working on discovering new drugs).

With that context, it’s fascinating to observe the “inverted” evolution of the CGT field – more of an “outside-in” model of technology development.

Three specific observations can be made:

  1. Without a doubt, academics have led the charge in the CGT field as pioneers in its clinical translation. Dedicated academic investigators, typically at top tier medical centers, spent the last two decades advancing these modality and their programs into clinical testing. These efforts were largely done without significant Big BioPharma involvement or industry-sourced capital. In the CAR-T field, it was the hard work of academics like Carl June at Penn, Michel Sadelain at MSKCC, Steve Rosenberg at NCI, and many others that proved these new modalities worked in clinical testing before any conventional industrial player got significantly involved. In 2011, just after the publication of the landmark CAR-T publication showing responses in CLL, Novartis moved in aggressively. Only after academics delivered the key data, and Novartis dove in, did significant biotech and venture capital funding flow into the space with the launches of Juno, Kite, and now many others. A similar evolution existed in the gene therapy field: early clinical data from academics in leukodystrophies, ocular diseases, and blood disorders were the catalysts that brought industrial interest and capital to the CGT field. Leaders in the field include Jim Wilson of Penn, Luigi Naldini of TIGIT, and both Guangping Gao and Terry Flotte at UMass, amongst many others. These pioneering academics in these fields, and the courageous patients that participated in the studies, deserve to be recognized as real translational leaders. New gene and modified cell constructs were cycled through preclinical models and patients, and back again, until they demonstrated clinical efficacy.
  2. The industrialization of the CGT field has been catalyzed in part by Contract Service Providers that emerged in parallel to academic efforts, rather than as a byproduct of prior industry insights. Unlike conventional modalities, which seeded the mainstream CRO industry, the opposite has largely occurred here. In the virus manufacturing space, many of the CGT players don’t have in-house production; instead, they rely on multiple vendors that exist externally. For example, in the AAV, lentivirus, and retrovirus vector field, players like Eufets, Genibet, Lonza, Molmed, Novasep, Sigma Aldrich, Rimedion, Waisman, and many others exist. At least today, in the early innings of the clinical development and commercialization of the CGT field, most biotech therapeutics companies don’t make their own virus; they just provide the critical plasmids with proprietary transgenes. Another example is ex vivo cell processing; while a few players have now moved to acquire and build central processing capabilities (like Novartis), alternative cell processing systems and solutions have emerged across the US and Europe to support the growing ex vivo aspects to the industry (e.g., Apceth, PCT/Caladrius, Lonza cell therapy, Miltenyi, Wuxi AppTec, and lots of other players). Further, academic medical centers have led the way in developing their own infrastructure solutions for virus and cell manufacturing – indeed, many have not-for-profit affiliate “businesses” that run state-of-the-art GMP and cell processing activities on their premises (e.g., Minnesota’s MCT, Orsino Cell Therapy facility in Toronto, Penn’s Clinical Cell Center, and many others). This is a real contrast to the “inside-out” model of how the NCE and biologics fields emerged.
  3. Lastly, simultaneous waves of convergent technology evolution have self-reinforced the CGT field. Advances in ex vivo cell processing, evolved in part for the transplant and cord blood field, have supported the advancement of gene therapy and gene editing technologies. Gene therapy, in particular with stable integration, has enabled long-lasting cell engineering for rapidly dividing cells like CAR-Ts.  Virally-engineered and genome edited cells, like Cellectis’ recent allogeneic CAR-T, are coming together into single products. The technologies for the ex vivo expansion of selective cell populations, such as for HSCs with Novartis’ SR1 and others, or for T-cells with the DynaBeads, have helped accelerate the CGT field as a whole.  The synergy between cell transplant therapy, viral gene therapy, and gene/genome editing has created a virtuous cycle for advancing these new modalities.  Throw in the local and systemic delivery insights (from fields like RNAi and stereotactic/precision injections), and the field catches on fire even more as waves of complementary innovation reinforce each other.

It’s worth asking why the CGT field has been an outside-in development story, both to understand the differences and also ponder the future. Presumably there are lots of reasons, but one of the big ones in my opinion is that all the early attempts failed – and because they failed industry was gun shy of these disruptive technologies. Cell and gene therapies burst onto the scene in the late 1980s and 1990s, just as genetic diseases were being identified and HSC bone marrow transplants were being widely adopted. For instance, the original CAR-T constructs were described by Zelig Eshhar in a 1989 PNAS paper. Gene therapy was trumpeted as breakthrough with the NCI doing trials in the early 1990s. But a lack of profound success – the modality just wasn’t ready – and the tragic death of Jesse Gelsinger in 1999 relegated the CGT field to the fringes of industrial biomedical research. VC’s weren’t very keen on funding these companies, and Pharma wasn’t comfortable with entire business model of selling cells and viruses as products. There were certainly a few companies doing work in the space (e.g., Genetix, founded in 1990, changed its name to bluebird bio in 2010).  More than a decade of “out-of-mainstream” academic research, and slow but methodical exploration by clinicians at a few medical centers, helped advanced the field to where it was 3-5 years ago – which is when the boom really began. The academics in this field kept it alive and advanced it when industrial R&D neglected it.

This outside-in evolution for CGT has had a few big implications on the biopharma ecosystem.

First, VCs and the startup ecosystem have greatly benefited. Launching “brand new startups” on the back of early clinical data has dramatically shortened the time to clinical proof of concept, like bluebird’s (re)launch with INSERM’s data, Juno with MSK’s CD19, Kite with NCI’s version, or Spark with CHOP’s eye program.  A conventional modality will often take 3-5 years (or more) slogging through drug discovery before it generates clinical data of significance.  This has rapidly sped up the path to value inflections, as is self-evident from the significant market cap’s of CGT-based companies today. Further, the early wins in the space have created more enthusiasm in the field, allowing even CGT stories without clinical data to go public at premium valuations (e.g., Voyager and Dimension’s ~$350M IPO valuations are a good recent example). It is fair to say that the academic institutions have benefited too: Juno has paid “success payments” and issued significant equity to MSK and Hutch, Novartis has funded a lot of infrastructure at Penn, and Spark has delivered a staggering sum of equity back to CHOP.

Second, the Big BioPharma industry is largely playing catch-up here, with little in-house expertise and a strong institutional cognitive bias against cells-as-product business models.  Novartis’ CAR-T investment is at a scale matched by few in the Pharma world. Most other Pharma’s are doing all this work through collaborations rather than in-sourcing and building internal capabilities (e.g., Pfizer with Spark and Cellectis, Amgen with Kite, Celgene with Juno and bluebird, as well as many others partnerships). GSK was once a leader here, but let RegenX Bio and the Wilson AAV IP estate slip out of its fingers when gene therapy wasn’t so hot, and has only really tiptoed back in with the lentiviral partnership with TIGIT/San Raffaele in Milan.

Lastly, with value and supply chains that are vastly different than conventional pill- or vial-as-product business models, the CGT field is likely to evolve in alternative ways. Its almost certain that as CGT products begin to advance into product approvals and commercialization, companies will move to integrate more of their capabilities by bringing certain aspects to cell and gene technology in-house (e.g., cell processing), but its likely to remain a different and disruptive operating model.  Further, typically product owners reap the vast majority of the rewards in the value chain, and providers of services see little (just compare the profit margins of Big BioPharma with Big CROs).  And most conventional drug pricing and reimbursement models aren’t meant for cures, or even those with an intent to cure.  So will the operating model evolution be different going forward in the CGT field?  Almost certainly.

As the space figures out what the key value-driving differentiated capabilities are likely to be, the profits may divvy up in different ways across product distribution and marketing capabilities, vector and virus manufacturing, central or onsite cell processing, patient sample handling and GMP access, the overall provision of cell transplant services, etc…  As a crazy thought experiment, imagine a world where a big company owned and operated cell transplant centers across the country where they obtained autologous cells from patients, conducted gene modification (editing or gene therapy) and simultaneous expansion onsite, in a closed GMP-compliant system, and delivered them back to patients at their own facility – and were reimbursed via a value-based annuity stream linked to therapeutic performance from a healthcare payor for the “one-and-done” modified cell therapy. Interesting to speculate on all the various models of the future in the CGT space.

As with the outside-in evolution of the CGT field, it seems much about this space is different, including but not limited to “cells as the product” business model, and its not clear what this will look like in 2020 or 2025. Most of us believe the clinical impact of the field will be profound, but the uncertainty as to the end game of industry structure makes for great speculation and the wonderful arbitrage of early stage investing.


Psychology and Physiology of the Biotech Markets Today

Posted in Biotech financing, Exits IPOs M&As | Leave a comment

Imagine you were an investor version of Rip Van Winkle. You went to sleep in October 2012 and woke up today. You’d take a quick look at biotech and think we were in a raging bull market. A few thoughts would be running through your head:

  • Unbelievable, the NASDAQ Biotech Index is at 3400! When I went to sleep, the NBI was 1400. That’s some crazy good performance in only three years. 
  • And the new issuance market is booming! Bankers must be having a field day – nine biotech IPOs got priced in the last six weeks! This is nearly as many as we got public in all of 2012. Finally, it seems, the IPO window is wide open, and at great valuations too, almost 50% higher at median than we saw in 2012.
  • I recall one of the young companies that went public in October 2012, right before I fell asleep, was Intercept Pharma, which had a program in Phase 3 at the time of offering; It went public with a pre-money of only $175M.
  • Gilead has $25B in cash, wow! They only had $6B in 2012. And revenues?  This beast of a biotech added $20B in annual revenues over three years, tripling since 2012.  Their stock price has tripled too. 
  • Let the good times roll!

Though the numbers don’t lie, this Rip Van Winkle investor would be wrong about the sentiment of the market: it’s amazing what a few years does to expectations and investor psychology.

Over the past month, despite those impressive metrics, the sector has become the most negative it’s been since 2013, with the index off more than 25% since July, amidst pricing scandals and Valeant’s shenanigans, and almost all the recent IPOs have come in depressingly “below the range” proposed.  Industry pundits are lamenting the bloom is off the rose of biotech at every turn.  The big question is does the unhealthy psychology in the markets today match the underlying physiology of the sector?

Some of the sentiment change is warranted – public equity valuations have expanded considerably across the large to small cap spectrum since 2012, and a “correction” in some names was probably overdue.  Further, some of the concern is temporal and unlikely to be material – like the pricing bugaboo and political hot potato around the topic, which is unlikely to hurt innovative drugs in the foreseeable future.  But some of the sentiment is missing any historic context, in my opinion, especially around the IPO window.

Here are two observations on the recent IPO environment:

  • Nine IPOs in a six-week period is an off-the-charts pace historically, beaten only a handful of times in the current window and very few times in the 40-year history of biotech offerings. There are more than twenty biotech IPO’s in the public queue for an offering (their S1’s are public), and probably dozens more with confidential S1’s. While pace may slow down this fall, I expect a good number of these will get public over the next six months.
  • The valuations of these IPOs, while “below the range”, are 33% above the median IPOs of the 2013-2014 period ($302M vs $227M). How much of the under-performance is simply because of overly optimistic expectations. Companies in preclinical or Phase 1 (pre-data) are being valued richly by historic standards, between $250-400M, like Cytomix, Myokardia, and Dimension.  Hopefully their pipeline success will move them up positively from here.

But in a world with such a negative sentiment, how is it that we’ve had such a flurry of IPOs and rich-but-below-range valuations? The reason is because many of these recent offerings have really been “club IPOs”.  Most of the nine offerings had significant mezzanine rounds with bluechip crossover investors. These firms were already in the deal, and often priced the rounds to be modest step-ups over their private rounds even if they came in “below the range”.  The range was set to give a great return over the mezzanine, perhaps too optimistically, and those mezz-to-IPO step-ups have largely vanished in the recent market. Although the roadshows were as full and extensive as ones earlier this cycle, the books of many of these offerings didn’t have anywhere near the coverage (demand) of frothier periods in the past few years.

So the big crossover investors, and sometimes the venture insiders themselves, were essentially pricing their own shares in the offerings – without their involvement these IPOs wouldn’t have happened. I heard a great quote from a banker close to a few of the deals: “no one showed up” when it came time to price the deals. Those are obviously not great dynamics for going public with big first day “pops” and upsized offerings.  But by all historic measures the IPOs of the past six weeks are still very robustly valued companies. Only time will tell if they are cheap or expensive at these prices. In fact, since they and others have raised significant amounts of capital, they have the balance sheet to advance their products deeper in the clinic and weather any potential challenging or down-market that occurs in the interim.

So what’s the big driver of the negative sentiment today?  A lot of public equity investors in healthcare are in pain and have huge holes in their portfolio performance. As noted above, the NASDAQ Biotech Index is off more than 25% and that takes its toll. The big drivers of performance (or lack thereof) in the sector as a whole aren’t the small cap recent IPOs (that I like to focus on) – it’s the big biopharma companies. Think about the two big cap names with monster stock losses of late: since July, Valeant lost $60B in market valuation, and Biogen lost $22B.

To put those astronomical sums in perspective: the losses in market cap in those two companies alone are equivalent to 1.6x of all the combined market cap’s of the 2013-2015 IPO window! Imagine an event destroying more than the market value of all 135+ recently public biotech companies in less than two months. That event would shell-shock even the most resilient investor. For a portfolio, any real exposure to $VRX or $BIIB would put a huge hole in performance, especially on a relative basis. There were large numbers of generalists and hedge funds in those names and they’ve been rocked. I’ve heard from several hedge fund managers that they “gave back the year” in September – meaning they lost all their gains and aren’t unlikely to see the incentive compensation they were hoping for.

These portfolio setbacks and massive valuation losses have pushed generalist investors out of biotech, at least for the time being, as they lick their wounds.  Fortunately for biotech, other sectors don’t look very interesting (consumer, technology, energy all don’t offer a better alternative to biotech), and many are just sitting on the cash. It will take a few months if not quarters for them to rotate back into the sector. Smaller healthcare specialists are also not jumping to get into new biotech offerings. Until they have a reason to get back into the game, these generalists and the shell-shocked specialists will likely sit out of the IPO markets. From what I’ve heard, only the big name bluechip biotech investors (like Fidelity, Adage, Baker Brothers, Great Point, etc) have stayed involved in the recent crop of offerings, largely because they know the stories well from the mezz rounds.

What are the positive catalysts that could change this sentiment?

Improved post-IPO performance would certainly help: the 2015 cohort of IPOs (about 40) have, at the median, traded down 10% since their offerings. Nothing kills interest in the IPO markets faster than newly issued stocks that trade down and stay down after their offerings. We need to see some outperformance from a few breakthrough names in the group, and from the broader sector as a whole.  Big positive surprising trial news at AALSD or ASH would be a nice bolus of confidence for the markets.

Large M&A deals that recycle cash and infuse optimism into the small/mid-cap markets.  Recall the July acquisition of Receptos by Celgene for $7.3B; that spit off more cash to investors for recycling than has been raised in the last 18 months of IPO proceeds.  If we see a a few big M&A deals over the next six months where cash can get recycled, we’ll likely see more demand into emerging names and more fuel for new issuances.

A big positive would also just be the removal of the negative: getting the Valeant crisis behind us; leaving Hillary and her tweets about pricing; keeping Shkreli out of the news. And, it would be great not to be talking about tax inversions; unfortunately, I guess Pfizer might put the kibosh on the latter hope.  But, on the whole, less negativity in the news will be a big positive over the coming months.

Unfortunately, there are some potentially negative catalysts though that could prevent the resurgence of biotech.  Obviously, more scandals in our space wouldn’t help.  But lots of investors also have their eyes set on the Duchenne’s panels coming up – if they go poorly, they could cause an “FDA-is-biotech’s-bugbear” sentiment to ripple through the sector. Also, if there are surprisingly bad clinical news from AALSD or ASH, that could greatly dampen spirits, especially if it pours cold water on some of the “hot” areas like gene therapy or CAR-T immunotherapy.

All this combines to make for a very sensitive and fickle market today. Don’t say “Boo!” too loudly or you could damage the NBI. Volatility is always big in biotech (2x more so than the S&P, for instance), but it is ever heightened these days.

Fortunately, though, the fundamentals of biotech are still very much intact even amidst the market’s vicissitudes, and a few months of animal spirits in the markets don’t change this dynamic: we are witnessing a great scientific renaissance in biomedicine that is advancing new therapeutics with huge promise for patients, and huge upside for the innovators developing them. In short, biotech’s long term potential remains very positive, and future Rip Van Winkles will undoubtedly be impressed.