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James Peyer, formerly of Apollo Ventures and now at the larger Kronos BioVentures, has a range of interesting views on the new and growing longevity biotechnology industry. Apollo Ventures was one of the earlier longevity-focused funds to emerge from the comparatively small community of scientists, patient advocates, and investors enthusiastic to accelerate progress towards the treatment of aging as a medical condition. The presentation here was given earlier this year at the Ending Age-Related Diseases conference organized by the Life Extension Advocacy Foundation.
In the matter of creating new medical therapies, there is a huge, well known, gaping chasm between academia and industry. Neither side of the chasm is all that good at the process of transferring promising projects from proof of principle in the laboratory to clinical development in a biotechnology company. Worthy projects languish and die because of this incapacity. This is a major issue for our community now that rejuvenation research, after the SENS model of repairing the underlying damage that causes aging, has come to the point at which projects are far enough along to begin commercial development. James Peyer’s efforts represent one of the possible solutions to this challenge: a much more active venture funding community, one in which the investors do not wait around for entrepreneurs to show up at the door, but are specialists in the science themselves, capable of creating companies to carry forward promising research projects.
Hello, everyone. Many of you may know me from Apollo Ventures. Now, from a month or two ago forward, I will be affiliated with Kronos BioVentures. The switch here is not one of particular substance; we had to change an organization, I wanted to do a lot more investments, and do much bigger investments. So we went from Apollo to his grandfather Kronos, when we changed the name.
I am speaking towards the end of this event, so if I were to come up here and talk to you about the aging space or even the investment considerations, it would be a lot of repetition from other presentations today. So I wanted to do something slightly different with my time today, and it is going to be a little data-heavy, and a little bit different. We’re going to do three things, that I will call a perspective, a prospect, and an approach. I’ll cover, number one, some ways of talking about aging in this longevity biotech space, that I think a lot of us aren’t necessarily thinking about, or it isn’t the first thing that I usually hear. Then I want to talk about the present situation in biotech venture capital, particularly biopharmaceutical VCs. Then I want to talk about my favorite strategy in this space, both for biopharma VCs and for the longevity biotech space, which is VC-partnered venture building. Which is more than half of what I do – that’s my hammer that I’m striking every likely-looking nail with, and then building a VC-backed company around it.
To dive in I have just about a dozen slides which I think are interesting perspectives on the aging space. I’m going to talk here about demographic, economic, and human health problems. I’m not going to touch on social solutions, because I think we’re all here for the medical solutions. My first slide: it is important to remember that modern demographics present a new problem. This longevity issue that we’re facing is quite a new thing to come to the forefront of people’s minds. We are only now entering the fourth stage of what is called the demographic transition – as we go from a situation which is the natural state of humans, where we have very high birth rates and very high death rates. We then evolve through this population explosion that happens in stage two, towards a more stable population distribute in which birth rates and death rates are relatively low. We’re just entering that stage.
So this issue of having old people around in large numbers, dying of diseases like cancer and Alzheimer’s, and having complications like type 2 diabetes and osteoporosis, is a relatively new situation. One hundred years ago, the three leading causes of death for humanity were influenza, tuberculosis, and pneumonia. Today they are dementias, cancer, and cardiovascular diseases. This is the key thing in understanding the “why now” of the longevity space – that we are in the midst of this demographic transition.
To illustrate this a bit more, here are some projections based on the UN numbers. My favorite statistic in looking at demography is the old-age dependency ratio. This is the number of people 65 and older divided by the number of people younger than 65, the working age adults 15-64. What you can see, both in the developed world and the undeveloped world, is that these ratios are rising dramatically over this century. In 1950 we’re at about 12% in the developed world, and we’re going to be almost 50% by the end of the century. That is a huge change.
The important thing to remember here is that as we get all of these older people in our society, our society is not set up to support these people. So we come up with this economic problem, which is that, already, in the middle of this graph, the middle of this demographic shift, in the developed world we already have a crisis of underfunded pension obligations as we make commitments to people who can’t work in old age – because they are going to get sick. This right now, according to Citibank, is about $78 trillion worldwide in unfunded or underfunded pension liabilities. I think you can make a credible case that they only way to prevent this incredible number from getting even bigger, and causing even more social and economic calamity, is by making people live longer and healthier, so that they can contribute more to society, even in the late stage of the demographic transition.
Next, from a human health perspective, many of you have seen variants of this graph, but I just wanted to do it with many more diseases, showing the incredible association of aging with all of the leading causes of death. This shows a normalized occurrence rate, so every year you have a chance of getting a heart attack, or getting cancer. So if you plot the chances of getting cancer this year, versus the highest chance you’ll ever have in your life, what you’ll see – for all of these diseases – is that the older you are, the higher your risk becomes. That is true for cardiovascular disease, Alzheimer’s, Parkinson’s, diabetes, and kidney disease.
Moving right along, one of the things that we don’t talk enough about in the aging space, but is critically important to understand why we think the technologies that the longevity biotech world is developing will be so powerful, is the issue of multimorbidity. That is basically having more than one chronic condition at once that you have to deal with. What you can see here is that as people get older, as you move towards 75, by that age about 41% of all people have at least two chronic conditions – and many of them have more. Then that number goes up and up and up as you get older. So people aren’t just dealing with their atherosclerosis, they are dealing with diabetes, with COPD, with senility, all at the same time. For that reason this great analysis, done by Dana Goldman and colleagues in 2013, shows that because there are all of these risks that come up together, if you just reduce risk and prevent one type of disease, let’s say reducing cancer risk, or reducing heart disease risk, you get almost no extension in healthy life span. Almost none. Here 75 years is the base case, and 76 years is what you get just by reducing the risk of one type of disease. If, however, you reduce risk of all the age-related diseases together by a smaller amount, only then do you see a huge jump in life span.
So this was a little tour of some perspectives that I like when thinking about this space. The last one I’m going to leave you with before we jump to the more technical financing part is this graph of life expectancy in the US over time. These are the UN projections for average life expectancy over the next century. When I went back far enough in the data, these are really clear projections forward of the trend from about 1970, it is almost a straight line. But I think that what we are at the cusp of in in the development of technology around longevity biotech is much less like this period from 1970 to 2020, where we were just starting to understand what the diseases of aging were actually caused by, what molecular characteristics they have, and how to approach them. I think that our new situation is going to be much more like the period from 1910 to 1950, when we were actually conquering many of the infectious diseases that were the leading causes of death at that time. We spend perhaps 50 to 100 years characterizing the germ theory of disease and then developing tools like vaccines and antibiotics, and as a result saw a massive upswing in average life span. So my projection here is that as we conquer the diseases of aging we’ll see a slope as new drugs come out that will be more similar to the earlier era in which we were conquering infectious diseases than in the later era when we were not making that much medical progress in treating aging.
Now on to the second part of the presentation. I’m going to show you six slides that will encapsulate what I think of biopharma VC space. We’re all in this universe of the startup ecosystem in biotech, and I think that, especially as this little niche industry that hasn’t launched many approved drugs, it is important to analyze what this bigger industry actually is, how it works, and what kind of success rates we should be expecting. I want to start with an overview of what the biopharma space is. These are companies that make drugs that go through clinical trials. That is most of what we do in the longevity space. There are a couple of interesting trends that have been happening in the biopharma space generally. The first is that the phase at which acquisitions are happening – most companies will ultimately get acquired by a pharmaceutical company, which will then run the latest stage trials and sell the drug – and those acquisitions have been happening earlier and earlier. You can see in the white line here, these are preclinical and phase I stage companies. Since 2013, the numbers of acquisitions of commercial and phase III stage companies have been going down.
So companies have been acquired earlier, but even though they are being acquired earlier, they are being acquired for larger amounts with less time spend in development of those companies. As an investor, these three facts are really exciting. It means that you are making more money, faster, and you have to do less work to get there. On the one hand that means this is a great time to be investing in biotech. On the other hand, it also makes investors worried.
Here is the second graph; most new drugs today come from biotech startups. This is a massive shift from what the world looked like twenty years ago. Twenty years ago you had the pharma companies that would either in-license stuff from academia, or they would do their own research and development to find drugs and approve those drugs. In 2017, 75% of all of the approved drugs came from biotech startups. Many of them were acquired and ultimately did the final trials with Big Pharma, but that is also a hugely defining factor. That means that the vehicle of choice for getting an approved drug is a biopharma startup.
Thirdly: drugs that come from startups do better in the clinic than drugs from Big Pharma. There is something that I find absolutely magical about the ability to take a very dedicated team of founder and founding scientist and throw them into a problem and say, alright, you guys need to get this thing to work. Your company, and everything that comes with it, many times reputation, many times validation of the scientific theory, all rides on getting this question right and answering this question in the right way. That pays off in the long term, because when drugs ultimately launch, it is almost twice as good for a drug to start in a biotech startup and be licensed to Big Pharma when compared to internal development in Big Pharma.
Fourth: total amounts of VC funding per round have been going up enormously in the last couple of years, particularly in 2017 and 2018 – I have the medians and the means graphed here. This chart shows average size per round, and you can see that in 2018 that series A and series B rounds for average biotech companies were around $30 million. That is a lot of money. Seed rounds, however, are staying relatively small – $2-3 million is the normal there.
Fifth: IPO valuations have been going up and up and up for preclinical and phase I stage assets, but not for phase III. Before I get to my last piece, I want to close on this overview of where we are in the biotech investment space. You can draw two conclusions as you look at these five pieces of data. The first conclusion is that this is absolutely the time to be doing a biotech startup in innovative drug development. The second conclusion is that this looks a lot like a bubble. If you look at the macroeconomic situation, starting from where a lot of my data starts, from 2011 until now, the stock market has been riding high, we’ve been in this expansionary economy. So a lot of investors who are thinking about, today, where I want to commit my money for a drug development program, they have to think about how is this market going to look three, four, five, ten years in the future. There are some worrying signs, for us, that we have to be taking this risk of a bubble in biotech very seriously.
One of the signs that is most apt is this graph. For those of you who don’t know, 2018 was the biggest year ever for IPOs in biotech companies. There were over 60 IPOs. However, something a little bit disturbing came along with these IPOs. On this graph, each company is a bar, and the size of the bar indicates what percentage change their stock has had between their IPO in 2018 and the end of 2018. You can see that more than half of them declined – and a lot of them declined by a lot, in less than a year. What this means to me is that the public markets are really, really harsh on these early stage biotech companies. Because there is an exuberance, many companies are jumping into the public markets without having to show any more data. Now that they are subject to public scrutiny, by people who aren’t trading on the potential of the company, but instead on what has the company done, they get hammered. This makes private investors, long term investors to fund clinical development that much more important. Potentially more important than it has ever been. It also means that investment going forward in the next five to six years is probably going to have to be more disciplined. I don’t think that this IPO window, with high valuations and freely available funds, is going to last.
That leads me to five quick conclusions about the biotech VC space. Number one, avoid exuberance as much as possible. Number two, focus on seed investments, getting in really early, as round sizes are not increasing there. Getting in early and following things through, the timing and the amounts make a lot sense. Number three, don’t plan for the IPO ecosystem to continue the way it has been. Number four, only exit when you have a clear value story, and you are confident that you can actually back away from the project. Don’t just throw it out into the world and see how it goes. Number five, and this is important, there are some cautionary things here, but I think that, overall, the trend that we’ve been seeing in the biotech ecosystem will continue.
I didn’t spent time on the data here, but the main reason that a lot of this boom has been so exaggerated is that Big Pharma research and development is changing fundamentally. Resources are going away from the Big Pharma companies doing research and development into biotech startups. That space that is being created, it isn’t being filled fast enough. So even though there are a lot of resources going into it, and there is a lot of excitement, Big Pharma companies still desperately need their pipelines to be filled – and filled with good drugs. So this space will continue to grow, as this trend continues in moving to this more efficient method of creating drugs in biotech startup companies.
My last piece that I want to do, very quickly, is just a little bit on my approach to how to play in this world, and how I’ve been working with scientists and entrepreneurs to do this. This is a venture-led company building process, where I think that there are five key things that a company needs to do in order to pull together their story and become a real biotech company. Number one, you identify exceptional research, and in our case it is longevity research. Number two, you partner with the people who know the science intimately, and never do a company without the scientists that know what they’re talking about. Work with the scientists that know the science, because when you run into trouble, and you will always run into trouble when doing basic research, they are the only ones who have run into the same thing ten times before, and know the answers to what is going on. It will slow down a company enormously if you don’t have those guys.
Number three, biotech is a bit unique compared to the tech world in how different the different phases of a company are as it progresses through its value chain. The guy who knows how to get toxicology studies done and the guy who knows how to correctly do a phase III clinical trial and the guy who knows how to successfully sell a drug on the marketplace are completely different from the guy who knows how to make a basic discovery in fruit flies. So having a team that comes in at the appropriate time to lead this process at the right time for that company is a characteristic of the best biotech companies that I know. One of the reasons that I want to focus on this VC-led or this company building model, and why I think it works so well, is that you have people in the board of directors or who helped to create the company that exist somehow behind the operational team, and the operational team can be led by a different person, whoever is needed the most for that phase of the company. But the overall mission and vision and science of the company can be supported by the founders all the way through, which is a model I really love.
Number four, you have to design your key value creating experiments, like what is the killer experiment, without this there is nothing. Then do that experiment and fail fast if you are going to fail. Then number five, biotech development is very expensive. You need to have a path to $20 million or $30 million rounds to do clinical trials. If you don’t think that you’ll be able to raise that money, then you need to have a partner on board early on who you think can.
Next slide, and I’m not going to spend a lot of time on this, in company building we do things in three phases. My favorite way of looking at building companies is in a hypothesis-led way. Whether you are an entrepreneur or a venture investor this, I think, should be the start: come up with a hypothesis. Then explore, validate the hypothesis, get the people on board, and then create the company. Then my last slide; it is easy to focus in on Silicon Valley and Boston as the two largest biotech hubs in the world. I think that doing so leaves so much on the table. Great basic research can be found everywhere in the world. There are fantastic institutions in Europe, in Southeast Asia, in the center of the United States that are underexplored. So a big part of what I do at Kronos is to look around at where that great research is done, and then move forward wherever it is, with a team that can actually accelerate it.
So anyway, that is a bit of my perspective on the longevity biotech space. Thank you for your attention; hopefully some of you found this useful information.