By Natalie Holles, CEO of Third Harmonic Bio, as part of the From The Trenches feature of LifeSciVC
Our company recently launched out of stealth with a trade media campaign in the usual outlets, which felt great until one article title included an unfortunate grammatical error.
Ouch. But well, I have to admit, true.
I started in this industry in 1999 and spent my formative years in the post-genomic wasteland that was the aughts for our industry. As I’ve told many an up-and-comer, in those days we lived hand-to-mouth on (with apologies to my blog host) expensive venture capital and encumbering pharma deals. It’s only industry veterans of a certain age who shudder with retrospective dread when they hear the term “participating preferred.”
And then came the go-go days of the longest bull market our industry has ever seen. Sure, there were a few shaky moments (Hillary tweet . . .) but we enjoyed almost a decade of unfettered growth, fueled by ready access to abundant capital in both the private and public markets. And it has been amazing – wonderfully impactful from a scientific innovation perspective. There was enough money around to take a chance on AAV-based gene therapy again – a field that had been effectively dormant from an industry perspective for almost 20 years. On balance, the impact to our industry and the benefit delivered to patients has been transformational as the money has poured in.
As an operator who has lived mostly in clinical phase companies for my entire career, I’ve learned that the greatest benefit of more capital is that it enables us to dial down the luck quotient required to be successful. Meaning, with more capital, we can run bigger studies, adequately power endpoints, take the time to enroll the right subjects, all of which increase the probability of, if not succeeding, at least producing a result that reflects truth. Less capital means a smaller sample sizes, tighter timelines, broader inclusion criteria to make sure we enroll on time – all of which may still get me to the same result, but now I’m keeping my fingers crossed that the stochastic chips fall in my favor. I’ve done it both ways in my career, and I can say with complete certainty that the former is more fun, and more satisfying. In its purest embodiment, more capital gives us every opportunity to succeed, and if we fail, we fail honestly. It doesn’t always work that way, but it works like that more of the time when the money is falling from the sky.
However, there is a sweet spot of capital accessibility, beyond which we can get in our own collective way. There is value in the evolutionary pressure that gets applied when the money is tight – more rigor is required (“What do you mean we can’t have 26 secondary endpoints?”), more scrutiny is imposed (“Are we sure we NEED to hire 8 MSLs even though we’re three years from the clinic?”), and tough decisions are the order of the day, every day (“We don’t get to go after ten targets, we only get three. Pick the best ones.”). Yes, when viewed in the positive, more runway gives us more latitude to explore, and that’s when and where the magic can happen. But, too much money can allow us to disconnect the day to day from what we as leaders are really getting paid to do – chart and execute upon the most ruthlessly efficient path to value creation for our patients, our employees, and our shareholders.
Having grown up in leaner times, I will confess to being a little unnerved by the irrational exuberance of the past few years, while fully owning the benefit that my companies have received from it. Call it the wizened paranoia of an old-timer, but eventually something always goes sideways. And like failed manufacturing batch that catches you off guard and knocks you on your heels, this correction in our markets has hit me with this weird sense of both dread and “Ah, ok, there it is” relief that somehow, yes, the world fundamentally still operates the way I’ve always known it to. And that it’s time to dig deep and get to work.
But what to do when floodwaters dwindle to a mean trickle? Like some deeply tracked muscle memory, the lessons of the first half of my career have found their way back into my biotech operating consciousness . . .
- Start at the end goal and work backwards. It is said (generally as a complaint) that we don’t develop drugs to get them approved anymore, we develop them to get them paid for. While the mechanics of who and how patient value gets adjudicated can be inefficient, esoteric, and obtuse, the requirement to demonstrate the value of our work in terms of quantifiable, real-world benefit to patients and society is a net positive – it forces us to ask the tough questions eventually. Are our outcomes measures truly meaningful? Will people take this medicine? Can we build a sustainable business? And as I’ve learned, the sooner we turn our attention to those questions in the drug development process, the steeper the curve of value creation. When we are selecting disease targets, let’s focus on finding the commercial white space – where are the largest unmet needs – rather than focusing on the most expedient path to “human POC” even if it’s in an already well-addressed or developmentally crowded area of human health. Eventually someone is going to ask the question of how we’re going to make money at this – the sooner we look that question straight in the eye and go about answering it with rigor and intellectual honesty, the better and more valuable our work will be.
- Earn your way into doing more. I’ve been privileged to work for both big idea platform companies and focused, single asset companies in both boom and bust financial cycles. In the early years of any enterprise, there is an emphasis on “vision” and it’s generally a big one, as it needs to be to generate sufficient activation energy to launch. But often big vision gets conflated with big operating plan, which requires big headcount growth, which requires big budget numbers which sooner or later, start to outpace capital formation. And then capital needs start to outpace share price, and you find yourself at the painful point of needing to raise money at an unfavorable valuation or rolling the dice and continuing with the dreaded “financing overhang.” Regardless of the scope of the company or the sentiment of the markets, I am a firm believer in starting focused – do the work, do it well, demonstrate the value, and then go a little bigger. Repeat. Two benefits to this approach in my experience: 1) the work tracks with, and not ahead of, the resources at hand and 2) Execution is best when the focus is tight. A team can only do so many things truly well at the same time. So pick your spots and crush them.
- Be nimble but make the tough calls decisively. Drug development has always felt to me like a game of micro-adjustments in response to what your data or the competitive environment are telling you. An efficient path to value creation does not mean a straight path to value creation. Being willing to pivot in response to new information has been a key element of every successful company’s execution style in my career thus far. But on the flipside, we have to be willing to put our pencils down when our best information is telling us we’re heading toward a brick wall. Not only is this important for capital efficiency, but I have found it to be the single most important determinant of employee trust in leadership. No one wants to work on a program that’s doomed to fail, nor does anyone want to work with a toxic jerk who’s viewed as “indispensable” to the organization. Making the tough calls is why leaders make the big bucks, and even more importantly, it’s why teams follow them. It’s an essential element of an organization’s success in any financing environment, but becomes even more important when the chips are down.
- “Take the hors d’oeuvres when they’re passed.” These were the wise words of an early industry mentor of mine when we were facing a tough Series C financing. Drug development is a capital inefficient business rife with risk. And yet the only way we create value for our patients and our shareholders is to keep going when the data are telling us that our work is a worthy endeavor (see Lessons 1-3 above). I’ve been a part of down rounds, down sized deals, and painfully discounted follow-ons at various points in my career. They all hurt. And yet, when I reflect upon the eventual outcome of the work those financings fueled – two approved medicines, three acquired companies – I’m of course glad we took the money when we needed it. Rarely is passing on the hors d’oeuvres this right thing to do if you’re truly onto something good. Cost of capital will ebb and flow – long-term success requires perseverance, discipline, and a willingness to take it on the chin when necessary to keep moving forward.
I always root for our industry, and of course look forward to days ahead when the capital markets rebound, and the money that is the lifeblood of innovation feels more abundant again. But there’s value to living through the lean times, we benefit from the evolutionary pressure to do more with less, to distill our work down to its most valuable elements, and to keep going, even when it’s hard. In so doing, we become collectively stronger, more efficient, and ultimately more valuable for our patients, our employees, and our shareholders.
These lessons are deeply engrained in my approach to company building. There’s admittedly a “back in MY day . . . “ vibe to them, but that’s what you get from an old CEO.