Lab Notebook Software, Bypassed By Biologists, Poses Tough Challenge For Software Developers

By Steve Dickman, CBT Advisors

More than ten years ago, I stopped using paper notebooks for my writing and consulting work. As someone who writes and thinks for a living, this was a big transition. But what a payoff I received in return! I no longer had to refer to handwritten notes or to type them later. My typed notes suddenly became searchable and editable. Since they are easy to access, they push me to new conclusions and new beginnings.

Just imagine how useful such a shift would be for biologists. Unlike the typical solitary writer or consultant, biologists work both on their own and collaboratively. Keeping their thoughts locked in paper notebooks has got slow down the free flow of ideas both between biologists as well as inside each one’s head. Indeed, putting biological data – in handwriting! – into a notebook that can only be read by one person seems almost criminal. “Cloud” software platforms have already enabled faster, more efficient collaboration in many industries and on many levels. Think Salesforce, Dropbox and Slack. Why not free the data and biologists’ early thoughts about it? Why not let the “hive mind” of the community go to work earlier and more efficiently? Over the internet, such sharing could break geographic boundaries and supercharge the thinking of biologists all over the world.

Especially in the areas of biology research that have a natural affinity for digital data and analysis – think genomics – biologists are already using online tools to record and share data. The same is true for chemistry, where protocols and starting materials (such as chemical precursors) are much more standardized. But in the less digitally aligned areas of biology, the shift from paper to electronic laboratory notebooks and similar online tools has been slow, sometimes glacially so. When it comes to their personal lives, the same biologists are emailing, texting and Slacking with the rest of us. But for many if not most biologists, when it comes to recording or sharing data, unless the lab procedure is performed by robots, the front end of the data collection process still looks like it did decades ago. Fresh data is recorded on paper or locked up within individual pieces of laboratory equipment. Then, later, perhaps, it gets transcribed into a sanitized version of biological reality.

The push for widespread electronic lab notebook (ELN) use is just beginning in biology. (The fact that these software tools are still even called “electronic lab notebooks” points to the fact that adoption has been repeatedly attempted – and has repeatedly failed – ever since “electronic” was the term for what we now call “online.”) One company I know performed an analysis that showed that electronic data recording and workflow management tools has only penetrated 8% of biology labs. Even if the actual number is larger – several industry-based biologists I asked said that 8% sounded low – the opportunity is undoubtedly huge. Consequently, a number of small and big software providers have plunged into this messy world, each hoping to convert biologists to a new paradigm or, better yet, to capture a mass movement that they believe is already underway. Some investors, including the Silicon Valley heavyweight firm Andreessen Horowitz, have announced a bold and public stake in the “clouding” of biology, as they call it, and promising big productivity and ease-of-use gains from that. The way that role model companies such as Salesforce and Dropbox have taken over other verticals, would certainly point to possible or even dramatic improvements. Seen in this light, the progress of the early entrants into ELN field would seem to be the leading indicators for when biology will shift more of its daily practice to the cloud and how completely and efficiently that can happen.

This piece aims to answer these key questions: Why has change been so slow? How is that starting to shift? And for what I believe to be at least a $10 billion question: will this transition happen quickly and powerfully enough to reward the companies, including those in the portfolios of investors like Andreessen Horowitz, currently hoping to capitalize on it?

Adoption is a tough slog

The challenges in converting biologists to cloud tools fall into a number of categories. To me, they break down like this:

Inertia and lack of immediate value: What has made Salesforce work in customer relations management, for example, is the obvious utility of the platform at local scale but especially globally. By contrast, at this early point in the ELN adoption curve, there is a lot of inertia retarding adoption and little history of productivity gains. One entrepreneurial molecular geneticist I know, currently working as a product development lead at a Bay Area molecular diagnostics company, said that he had thought about starting an ELN company back in 2012 but then abandoned it. Adoption of ELNs in biotech and academic biology labs “is very likely inevitable,” he wrote, “but the platform has to be heavily customized to each company’s unique needs, so it’ll likely be very complicated, need a LOT of effort to initiate, need extensive training for users to get it, require separate audits and so on.”

Even after biologists get over the initial activation energy barrier, the “aha” may not arrive immediately, if it does at all. One academic biologist I interviewed, Kristen DeAngelis, a junior faculty member at the University of Massachusetts in Amherst, put it like this: “When I was a postdoc at one of the government labs in 2007, there was a big push for electronic lab notebooks. They didn’t catch on. The software was clunky and slow, so it was not possible to capture observations as quickly as with writing; it was difficult to make sketches and record observations like numbers; and there is a big cost to switching, since lab notebooks have to stay in the lab for safety, so purchase of special tablets just for this was required and not many labs could make it work.” Set against these practical challenges, the promise of “big-data-like” returns on the initial ELN investment might be perceived as pie in the sky.

Secrecy and competition: Competition in academic biology, let alone in biotech, can sometimes be brutal. Every vendor makes it possible to limit outsiders’ access to online data but how many biologists will feel like they can trust this promise in light of the security breaches that have run rampant in, say, the financial sector? Especially because so many person-hours are invested in each hard-won experiment needed to win publication in a top journal, some academic biologists will likely prefer to go slow on uploading to any online platform including ELNs. 

Degree of difficulty of biology: Some biological problems require inordinate amounts of faith and hard work, sometimes over years. In identifying new classes of receptor proteins (think about the netrins, for example, discovered by Marc Tessier-Lavigne, now president of Stanford University after three years of NOT discovering them) or puzzling out the intricacies of complex biological pathways, working solo or in a small, tight-knit group will be seen as an advantage. Easy connection with other biologists, not so much.

Lack of a common standardized computable biology language: This is a big one. Unlike, say, chemistry, in which most terms are unambiguous and new ones are rare, biology is a rapidly evolving field with little or no standardization of terms. Machine learning algorithms have been challenged by biology for a long time. As I wrote for the journal PLOS Biology in a different context fourteen years ago, ‘whereas extraction of person and place names from news text routinely reaches 93%, results in biology remain mired in the 75%–80% range.’ I quoted a brilliant structural linguist, Lynette Hirschman of the MITRE Corporation: ‘ “It’s a little depressing. Even something as simple as a slash may imply two different entities or a single compound.” Programmers eager to codify the rules of biology,’ my piece went on, ‘have been stymied by what one bioinformaticist calls “a sea of exceptions.”’ Even now, the lack of standard terms and the constant addition of new ones is a major hurdle for improving the utility of ELNs.

Both the software itself and the software-biologist interface is not doing the job: Working biologists from all parts of the spectrum – academia, the biotech industry and the pharmaceutical industry – reported major or minor difficulties with existing software packages. From pharma, where ELN use is typically mandatory, one senior neuroscientist I know reported that “The [ELN] software is actually a little slow. I believe the server is in France so it takes a few minutes to open the program and it is sluggish. That definitely aggravates people and makes them less inclined to adopt but honestly people don’t have a choice. It’s actually part of everyone in R&D’s performance review to adopt ELN best practices.” Adopt ELNs kicking and screaming! What a great marketing angle!

A very accomplished bioinformaticist responded to my email query about ELNs by saying that, barely one year into their transition to ELNs, his company had already split into two sets of users, one of which was continuing to use one platform while the other abandoned it and embarked on another. He wrote that the platform that part of the company abandoned – I won’t name it here – “…was advertised with the promise it can do anything — and that was the argument for buying it and [the accompanying] initial optimism.  But that ‘do anything’ meant a lot of customization. Underneath it is an Oracle database that tries to be very, very generic. So you end up paying for [the vendor] to do that customization. So there was one [vendor representative] nearly living with us and still progress was very slow. That led to dissatisfaction.”

From academia, Megan Krench, who completed her neuroscience PhD in 2016 at MIT, reported that it was “astonishing” to her that academic biologists are not more avid users of ELN. She went on: “I’m not sure that we will see widespread adoption in the next ten years, since we haven’t seen it in the last ten. Everyone who has been a grad student in the last ten years was a digital native: why weren’t we all keeping ELNs?” This former student went on to say that “…of the roughly twenty labs I knew in grad school, only one had a lab-wide policy to use ELNs – and that was a young professors’ lab where he bought everyone iPads as a carrot to entice good bookkeeping. Of the roughly fifteen people in my lab, perhaps two of them kept an ELN instead a traditional paper one.”

DeAngelis, the University of Massachusetts biology professor, rounded out her comments by writing, “You didn’t ask [what my lab uses for a lab notebook]. I buy these by the case and issue them to all my lab members”:

Lab notebook _SL1500_

The lab notebook of tomorrow? © 2017 TOPS Products (www.tops-products.com)

The lab notebook of tomorrow?

Attracting entrants

Despite or perhaps because of all these challenges, it seems like the ELN market, such as it is, has attracted more new entrants than ever. If anyone can foresee the drivers of change in the laboratory market, these companies can. In digging into this topic, Benchling is the company with which I spent the most time in researching this post (see disclosure). Benchling is in the portfolio of Andreessen Horowitz, which makes it one of the most high-profile players in a very diverse group of companies.

To read the rest of this post, click through to the original post here.

 

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Can This $181 Billion Fund You Have Never Heard Of Succeed At Playing The Long Game In Life Sciences?

Traditional life sciences investors have made lots and lots of money from recent multi-billion dollar exits like Receptos, Alios and Acerta. But lately I’ve noticed a different life sciences investing strategy, one closer to the way social/mobile/software investors invest. By paying higher entry prices for later mega-rounds in ambitious life sciences companies, including both therapeutics and non-therapeutics companies, these deep-pocketed investors hope to reproduce their earlier successes investing in the likes of Amazon and Tesla. Their capital, which comes without the usual board seats and tight monitoring, is deeply welcome, because it allows these companies (similar to consumer companies like AirBnB and Uber) to stay under the radar much longer than if they would have to file for an initial public offering (IPO). By the time some of these companies finally surface, they may have catalyzed profound change as well as making money.

My curiosity about this new approach took me to Edinburgh, to the shadow of its imposing castle, where I got to look at this type of investing through the eyes of one of its top practitioners, an investment management firm known as Baillie Gifford.

Never heard of Baillie Gifford? Neither had I when they first approached me in 2015 through a mutual acquaintance at MIT for a friendly chat. It turns out that Baillie Gifford is a global investment fund that quietly deploys the assets of some of the largest pension funds in the United States as well as investing on behalf of many other clients. After doing business for over 100 years, Baillie Gifford currently has 145 billion GBP ($181 billion) under management.

“Life sciences companies are an increasingly important part of our research agenda.” That was the essence of what the Baillie Gifford team told me back in 2015. Talk about turning talk into action. Barely eighteen months later, the fund had made six investments in life sciences companies in rounds totaling over $1 billion.

Table 1. Baillie Gifford’s publicly disclosed life sciences and healthcare investments (not including health IT investment ZocDoc) as of April 11, 2017.

Table 1. Baillie Gifford’s publicly disclosed life sciences and healthcare investments (not including health IT investment ZocDoc) as of April 11, 2017. Data from Pitchbook and Crunchbase

The common theme among all of these investments is “growth.” In order to have a chance at making outsize returns – think at least 50% a year if not 100% or 200% – an investor has to bet on a company that can change the world – before the change has happened. Baillie Gifford’s strategy in finding these investments focuses on identifying “mega-trends,” major changes that may be slow to take hold, but once in place, can be extremely influential. Widespread access to the internet would be one example of a modern megatrend. Within biotech, the trend toward ever-cheaper and ever-more-widespread gene sequencing would be another.

Trying to make money this way is very different from traditional biotech venture investing. But the size and number of recent such financings show the growing popularity of this model. Recipients include the synthetic biology companies Ginkgo Bioworks and Zymergen; the Google-funded, data-intense companies Flatiron Health and Verily; the Illumina spinout GRAIL; and the medical device company Intarcia Therapeutics. The Baillie Gifford portfolio alone contains Ginkgo, Flatiron and Intarcia along with therapeutics companies CureVac, Denali Therapeutics and UNITY Biotechnology.

Baillie Gifford is not the only fund coming into life sciences and healthcare investments with big dollars and long-term views. Domestic US fund Alaska Permanent Fund was a big pre-IPO investor in Juno. More recently, that fund invested in the $61 million Series A round of Cambridge, MA-based biotech Codiak Biosciences and in the $217 million Series A round of Denali. Sovereign wealth funds such as Singapore-based Temasek are also increasingly joining syndicates in biotech companies such as Alzheimer’s therapeutics developer TauRx, also based in Singapore, as well as US-based companies such as gene editing-focused biotech Homology Medicines and primary care-focused healthcare play Iora Health. Based on various analyses my firm has carried out on fund flows in this sector, I expect other sovereign wealth funds to increase, in some cases significantly, their investing activity in life sciences and healthcare.

Fewer. Larger. Later.

In contrast to typical life sciences venture capitalists (VCs) who invest in ten therapeutics companies hoping to make big multiples on two or three of them, Baillie Gifford invests in fewer life science opportunities and puts much larger amounts of money to work in each investment. The team is also unconventional. Unlike the typical crossover fund or hedge fund team stuffed with MD-PhDs and clinical development experts, the Baillie Gifford team consists of generalists. Tom Slater is one example. A 2000 computer science graduate, Slater joined Baillie Gifford straight out of college. After working on Asia and UK equity teams, Slater joined the Long Term Global Growth team in 2009, and since 2015, he has been head of US Equities. Because Baillie Gifford is owned jointly by its 41 partners, Slater has considerable “skin in the game.”

Tom Slater

Tom Slater. Photo courtesy Tom Slater

To read the rest of this post, visit:

http://www.forbes.com/sites/stevedickman/2017/04/12/the-long-game-in-life-sciences-181-billion-fund-baillie-gifford-invests-big-in-private-companies/

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Q&A Bryan Roberts

Whatever venture capitalist Bryan Roberts is doing, it’s working. Roberts, a general partner with Venrock, has had nine of his portfolio companies reach a valuation of a billion dollars or more. Those investments were in digital health (AthenaHealth), genomics (Illumina) and biotech (Receptos). Now Roberts focuses mainly on digital health. Read my questions and his responses from our January 11 fireside chat at the Digital Medicine Showcase in San Francisco. On January 25, Venrock closed on a new $450 million fund.

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Dickman: Independent of returns, which of your investments have been the most satisfying to you so far?

Roberts: I get the most satisfaction out of doing things that, when we start with them, nobody else likes. That no one else thinks will work. They don’t like the people, the idea. Nothing. It’s not just that the timing is off. Regardless of timing, they believe it’s a silly idea forever.

And I feel like I spend years going, “I don’t know why everyone in the world doesn’t love this.” But it takes a long time. And then they sort of flip. Other investors start to like them. That is the part I like.

Dickman: Have you gotten to the point where you are using data science and machine learning to help you make investments?

Roberts: We do not use it at all in choosing deals. For the most part, our investments are made in things where there are way more variables than there are equations. You are making decisions in the face of ambiguity that is pretty pervasive. So you can’t actually use data or even diligence to get yourself to an endpoint. By contrast, data science has become indispensable for companies doing product development. It’s like the electrical grid for them.

Dickman: You have always had an amazing network. What do you learn from big companies in pharma or digital health that you see as potential acquirers of the ventures you invest in?

Roberts: I do not look at big companies that way. I have tended to focus on orthogonal solutions to what I think are big problems. My thesis on most big companies is, what they will consider acquiring in five years will be different from what they would consider acquiring today. Either it will be different people or a different strategy or something. I don’t know what they will consider acquiring but it will be different. There is actually no “signal value” for me in what they like today, except on the investments that I made five years ago. I used to come to this conference and spend lots of time with those folks and I do not do that anymore. It’s the portfolio companies that have to spend time with those folks, not me. Because in my thinking I need to be out five years.

Dickman: What drives your investment decisions in pharma and biotech and in digital health?

Roberts: For me, those opportunities are chosen by entrepreneurs I get attached to intellectually and they are about an orthogonal approach to a big problem. Back in the day, Sirna Therapeutics (Editor: then called Ribozyme Pharmaceuticals) was trading at $6M market cap because it was about to go out of business. And on its old business model it should have gone out of business. That was at the same time as when its competitor Alnylam was doing its series B financing. We actually looked at both of them and made a decision to invest in Sirna. There was a huge price difference – Sirna’s price was much lower. The thing that was interesting to us about Sirna was, they had done 18-24 months of work in the space of RNA interference. And they had intellectual property and manufacturing. It was that that drove our decision more than, say, what Merck was thinking about at that time.

Dickman: In around 2012, you kept doing some biotech but you really dove into digital health. Was that the right move?

Roberts: I am hugely intellectually selfish. I work on stuff that is interesting to me from an intellectual perspective. The sea changes going on in how people pay for and organize health care have been fascinating to me. We’ll see whether in fifteen years whether it is as robustly successful an ecosystem as biotech or genomics.

To read the rest of the questions and answers, please go to this link to see the rest of this post on Forbes:

http://www.forbes.com/sites/stevedickman/2017/01/31/thirteen-questions-for-bryan-roberts-of-venrock/#227c152718d7

N.B. Roberts’ responses were edited for clarity. A video link to the entire chat can be found here courtesy of EBD Group.

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Can biology, even drug discovery, ever be “clouded”? It’s early but Andreesen Horowitz VC thinks so

By Steve Dickman, CEO, CBT Advisors

Can you create biological insight on a laptop? If you could, it might overturn a fundamental paradigm of drug discovery: that it takes a great scientist or team of scientists to find a clear path through the messy complexity of biology. In the conventional model, sometimes the scientist is at a university. Other times she is in a company. But always, always, there is a series of iterative interactions – scientist running experiments in lab, scientist struggling to interpret results, scientist designing new experiments, scientist analyzing new results – until biological insight arises. If it ever does.

Of course, many drug discovery advances over the past thirty years have been driven by technological innovation: combinatorial chemistry; high-throughput screening; vastly improved imaging and prediction software; and rapid and reproducible assays run in some cases by robots on groups of cells or even individual cells leading to large and hopefully meaningful datasets.

But none of these advances has replaced the “Aha” moment of insight that arises from a human being’s engagement with a biological phenomenon that is thorny or one that had not even been perceived to exist. I always expected – and still do expect – to find that kind of insight in labs, not on laptops.

But now a renowned Stanford professor-turned-Silicon Valley venture capitalist, Vijay Pande, has set his sights on this challenge. Pande, the architect of the award-winning Folding@Home project and himself an award-winner in computational biology, recently joined a top Palo-Alto-based venture fund, Andreesen Horowitz, which formed a new $200 million fund to invest in “cloud biology” and other areas of software companies in the bio space. To read the post, click here or copy-paste http://onforb.es/1Sq3Q2G.

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Why Denali Raised A $217 Million Financing Round: Not Just ‘Because It Could’

On May 14, when venture capitalists and sovereign wealth funds announced the largest first round venture financing in the history of biotech, $217 million for Denali Therapeutics, my “bubble alarm” went off. On its face, this is exactly the kind of extravagant financing that happens at the peak of a market. It felt a bit like the IPO of DrKoop.com all over again.

But once I got over my initial shock, I realized that the financing, while risky, in fact makes logical sense from several different vantage points. I came up with three reasons – beyond “because it could” – why the company raised so much money.

Denali will use what it says are novel approaches to find treatments for heretofore nearly untreatable neurodegenerative diseases such as Alzheimer’s and Parkinson’s. Denali certainly has the pedigree for its ambition to be taken seriously. The team members announced so far are all superstars from Genentech. The investors include Fidelity, Flagship and Arch, as well as the Alaska Permanent Fund.

Here is a teaser version of my four reasons that this round could become so big.

1. Prior success with a similar strategy. Case in point: Juno.

2. Prior success at Genentech.

3. “If there is money on the table…”

4. It’s the biology, stupid.

To read the details about why this financing became so massive and to learn more about Denali’s challenges and its strategy for overcoming them, read my latest post on Forbes here:

http://www.forbes.com/sites/stevedickman/2015/05/21/why-denali-raised-a-217-million-financing-round-not-just-because-it-could/

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Can Pharma Conquer the Consumer the Way Apple Did? This App Might Help

By Steve Dickman

CEO, CBT Advisors

Apps are moving much closer to delivering real therapeutic benefit, as I wrote last month on Forbes. But life science venture capital  investors of any stripe – financial or corporate — are reluctant to invest in app developers. For most venture capitalists (VCs), anything you can buy in an app store is, with rare exceptions, not yet a “doable deal.”

Simon Meier of Roche Venture Fund

Simon Meier of Roche Venture Fund

Then, earlier this month, I noticed that a life sciences venture capitalist I know, Simon Meier, a corporate VC from Roche Venture Fund, had just invested in a $4.8 million round raised by mySugr, an Austrian app developer that has produced some popular apps to help both Type 1 and Type 2 diabetics manage their disease. According to TechCrunch, mySugr has attracted over 230,000 registered users to its diabetes management apps and web-based educational tools. Roche Venture Fund had previously invested in Foundation Medicine, an investment which is turning out phenomenally well due to the billion-dollar majority acquisition of the company in January by none other than Roche itself.

In my latest post on Forbes, I show what mySugr is doing; describe what the success case looks like (lucrative but not in a drug-like way); and give a few reasons why it was attractive to the fund, which seems to be one of the only life science venture groups investing in apps (two more are here and here) and which was in fact the only life science investor in a round otherwise composed of IT investors. Then I share my take on what this type of deal, especially if it is repeated, might mean for the pharmaceutical industry.

Read the rest of my post here:  http://www.forbes.com/sites/stevedickman/2015/03/25/can-pharma-conquer-the-consumer-the-way-apple-did-this-app-might-help/

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Coming to an App Store Near You: Drug-Like Interventions

By Steve Dickman, CEO, CBT Advisors

A note to my readers: As of this week, I have been made a contributor to Forbes and many of my pieces will appear there. Thanks for your continued readership and please keep the comments and questions coming on Forbes, Twitter and LinkedIn.

Although replacing pharmaceuticals with apps still sounds like science fiction, it will be just a few years before getting medical treatment by downloading an app from the Apple App Store or from Google Play will begin to seem routine. All the pieces are coming together: startups are working on real medical challenges, apps are showing clinical utility and a path is emerging to approval by the Food and Drug Administration (FDA). The only things missing at this point are definitive proof and, oh yes, venture money. At a panel that I put together at Biotech Showcase in San Francisco last month (panel video here), three startups showed how they are tackling both the lack of funds as well as some real health issues: smoking cessation, attention deficit disorders and migraine. It is instructive that each of these companies sees peer-reviewed, controlled clinical trials as a must. A consensus seems to be emerging that in order to occupy the more clinically useful – and more highly remunerated – realm of “apps-as-drugs,” the winners will have to do much more than just monitoring.

To read the rest of my post and see which companies are emerging as leaders in the apps-as-drugs field, click the link or copy-paste it:
http://www.forbes.com/sites/stevedickman/2015/02/11/coming-to-an-app-store-near-you-drug-like-interventions/

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BIO CEO 2015 Conference Preview

By Steve Dickman, CEO, CBT Advisors

Feb. 3, 2015

One conference that is a highlight for me every year is BIO CEO in New York. This year’s edition arrives next Monday Feb. 9, concluding on Tuesday Feb. 10. One of many reasons I like it so much is that so many fund managers attend. That makes for some excellent Q&A and chatter in the hallways of the Waldorf.

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If you can get there, I highly encourage it. If not, read the tweets (hashtag is #BIOCEO15) and other media coverage.

The sessions I am most looking forward to include these:

  • “Emerging Trends in Deal Structures,” Mon. Feb. 9 at 9:30am. Panelists will discuss recent trends in both performance milestones and earnouts as well as swaps between pharmaceutical companies of therapeutic assets. Excellent panelists include:
    • Bruce Booth, Partner, Atlas Venture
    • David H. Donabedian, PhD, Vice President, Head of Ventures & Early Stage Collaborations, AbbVie
    • Randall Mills, PhD, President and CEO, California Institute of Regenerative Medicine (CIRM)
    • Adelene Perkins, CEO, Infinity Pharmaceuticals
    • Mark Schoenebaum, MD, Managing Director, Evercore ISI

It will be especially interesting to hear from Randall Mills, who is ushering CIRM into a hectic phase of clinical trial funding after that state agency’s first few years funding mostly early-stage research. And it is always fun to hear from Mark Schoenebaum. I half-expect him to steal the show…

  • “Getting Ahead of Ebola and Other Infectious Threats—Overturning Assumptions,” Mon. Feb. 9 at 11am. The panel will discuss how companies are trying to bring new vaccines and therapies to market faster, with implications likely for a wide array of diseases. Ebola was on the front page of the New York Times on Sunday with good news, finally: the recent outbreak seems to be ebbing. However, as much as the topic will predictably fade, there will certainly be new outbreaks of Ebola and other emerging diseases and actual strategies from government and industry have been in short supply. I am glad that there is a representative of the Gates Foundation on this panel alongside some biotech luminaries to bring the much-needed non-profit perspective. Panelists:
    • Ripley Ballou, MD, Head of Ebola Vaccine Research, GSK
    • Chris Garabedian, President & CEO, Sarepta Therapeutics
    • Peter Khoury, PhD, Senior Program Officer, Bill & Melinda Gates Foundation
    • Guillaume Leroy, PhD, Head of Dengue Vaccines, Sanofi Pasteur
    • Clifford J. Stocks, CEO, Theraclone Sciences
  • “Digital Health—Early Successes for Investors and Biotech R&D Productivity,” Mon. Feb. 9 at 3pm. This session will feature perspectives from both financial and corporate as well as from experts who have broad exposure to digital health investments. One focus will be how digital health companies are improving R&D productivity for biotechs. I had panelist Julie Papanek on my “apps as drugs” panel at Biotech Showcase (the link will take you to a video of the full panel), which took place in January. There, Julie helped me learn about what VCs are doing (and not doing) in the space. Panelists:
    • Angela Bakker Lee, PhD, Partner, VP Healthcare, Global Business Services, IBM
    • Donald Jones, Chairman, Wireless-Life Sciences Alliance
    • Julie Papanek, Principal, Canaan Partners
    • Ryan Pierce, Entrepreneur in Residence, Rock Health
  • VC Funding Report for biotech. Dave Thomas from BIO Industry Analysis will be unveiling his new biotech VC Funding Report. This first-of-its-kind study looks at where venture financing has been put to work in terms of disease area and novelty of research over the last decade (five years pre and post economic crisis). Results are broken down across fourteen disease areas, including oncology, cardiovascular, neurology, psychiatry and more.

There are also some high-profile hour-long “fireside chats.” For example, on Tuesday morning, Gilead’s John Milligan will be followed by Alnylam’s John Maraganore. I wonder if anyone else remembers that Gilead started out as an antisense therapeutics company! Then on Tuesday afternoon, a chat with Peter Greenleaf from Sucampo will be followed by Ron Cohen of Acorda and then by Ian Read of Pfizer. I will try to attend many of these. Reading the CEOs’ body language and hearing their jokes will help me interpret both company commentary as well as investor sentiment in the months to come.

In between these plenary sessions, there are over a hundred company presentations. I hope to see you there.

# # #

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It Had to be You: Why Roche Was the Lone Suitor for Foundation Medicine

By Steve Dickman, CEO, CBT Advisors

January 16, 2015

Originally published on Xconomy

The buzz from day one of the JP Morgan conference in San Francisco earlier this week was the announcement on Sunday night by Roche that it was acquiring a majority interest in Foundation Medicine (NASDAQ: FMI) for a bit more than $1 billion in cash for a little more than half the company, which translates into $50 a share. Those were just the latest eye-popping numbers from Foundation, which went public in September, 2013, amid warnings of a biotech bubble. From its initial offering price of $18, Foundation proceeded to enjoy a first-day jump all the way up to $35 a share, straining credulity for those investors focused on the fact that the company had not received meaningful reimbursement for its flagship cancer diagnostic product FoundationOne.

It’s sixteen months later and Foundation still has not received the positive coverage decisions from Medicare or major private insurers that it would need in order to even dream of making money on its sequence-based diagnostic test. The stock had ridden down to $23 a share before the acquisition and there was plenty of short interest even at that level (pity those investors who did not cover those shorts on Friday!).

Roche was the only pharmaceutical company in the world that had a rationale for acquiring control of Foundation. It is best positioned to make the acquisition a success.

But Roche still went ahead and bought an unprofitable company for $1 billion in a transaction reminiscent of its purchase of a controlling stake in Genentech in 1990. Aside from the deal structures, which in both cases leave the US management team intact if now reporting to Roche HQ in Basel, there would seem to be virtually no similarity. Roche has moved far beyond its early-1990s status as a small-molecule-heavy European pharma eager to transition into biologics. At the time of the initial Roche transaction Genentech was already a powerful product engine, having developed early protein replacement therapeutics human insulin and human growth hormone with lots more in the pipeline and vibrant science to match. By contrast, Foundation has done little more than make losses on its diagnostics business.

But there is one big parallel between that deal and this one: In both cases, Roche believes that it has seen the future of the pharmaceutical industry. And it can only grasp that future by placing a large and risky bet on a US innovator company. Roche’s thorough transformation into a company invested in targeted therapies driven by disease biology supports my thesis that it was the only pharmaceutical company in the world that had a rationale for acquiring control of Foundation and that it is the one best positioned to make the acquisition a success.

In my view, the key reasons boil down to these:

  • Roche was early and fervent in its embrace of diagnostics as drivers of drug development and sales. I know only one top executive in the pharmaceutical industry who cut his teeth in molecular diagnostics and he did so at Roche– Dan O’Day, who was CEO of Roche Molecular Diagnostics from 2006 to 2010 and is currently COO of Roche Pharma. Once the Foundation transaction is completed, O’Day and two others chosen by Roche will join Foundation’s board of directors. Aside from the personal, Foundation also fell on fertile ground at Roche on the institutional level. Roche had already changed its drug-discovery focus to be more diagnostics-driven than most other pharmaceutical companies on virtually every level. As Roche CEO Severin Schwan declared in 2012: “More than 60% of our pharmaceutical pipeline projects are coupled with the development of companion diagnostics in order to make treatments more effective.” That number has almost certainly gone up.
  • Roche was the pharma that had most thoroughly integrated clinical genome sequencing into its trial protocols, long before it had figured out how best to use the data. In my work with biotech companies, I had been hearing for years how Roche had embraced sequence data as a key success factor for the pharma industry of the future. As soon as the cost of sequencing became halfway affordable (maybe $5,000 to $10,000 per full sequence), Roche began to require genome sequence data as a key data point from every patient in every clinical trial. If there was any doubt about how highly Roche regarded sequencing, its $51-a-share Illumina bid in 2012 dispelled it. (Illumina, whose CEO Jay Flatley said at the time that the bid seriously undervalued his company, now trades at $181). An executive speaking under condition of anonymity who knows Roche Ventures well confirmed that Roche places high importance on sequence data, both data which it has itself collected as well as data being collected by Foundation. As an aside, Roche Ventures had invested in Foundation two rounds before the IPO in 2012 and had no strings attached in the form of a promised acquisition or partnering deal. That investment is another indicator of the value Roche management placed on keeping up with the world of clinical sequencing. That executive told me on Monday that Roche was counting on Foundation’s data scientists to be able to make the most effective use of their own data banks of both sequence data and outcomes data and that the prospect of joining forces was irresistible.
  • Roche realized that it would face competition if another pharma company scooped up Foundation. Roche believes that in genomic profiling, it has identified a common theme for creating value in oncology therapeutics of whatever stripe – targeted therapies like kinase inhibitors; biologics like monoclonal antibodies; and even immuno-oncology approaches like checkpoint inhibitors. Having made this observation, it did not want anyone else to catch up. Combining Roche’s clinical sequence data and its drug pipeline with Foundation’s gene-level and patient-level insights clearly would realize the most powerful synergy. But in the hands of another pharma, the Foundation team and data sets could have posed competition. Ergo, Roche decided to buy it now.
  • Roche is counting on a shift from biochemical targets to genomic profile targets, especially in drugs for solid tumors. Foundation’s “poster child” cancer cases are those in which genetic profiling suggested – against all experience of oncologists and with no evidence from n-of-1,000 clinical trials – that cancer drug X, developed for, say, ovarian cancer, would work best in cancer indication Y (e.g. prostate cancer). Because the patient is desperate, the physician prescribes the drug and voila – there is a response or even a remission. This pattern echoes what has happened in blood cancers such as chronic lymphocytic leukemia (CLL), in which old-fashioned chemotherapeutic agents have been replaced by biologics like rituximab (Rituxan) and are being augmented or, eventually, replaced again by kinase inhibitors like ibrutinib (Imbruvica). This will likely happen in solid tumors as well: chemo as we know it will be scaled back (though, like that other blunt instrument, surgery, it will likely never completely disappear) and physicians will chase cancer cells through various waves of genetic mutations, each of which demands a different targeted therapeutic or biologic to hold it at bay. In that world, the company that is most on top of the mutation patterns and treatment patterns and can incorporate those into both its drug development efforts and its sales pitch, wins, or at least has an edge. Diagnostics will likely be an important part of immunotherapy as well, an area where Roche is currently weak. Right now companies like Juno (NASDAQ: JUNO), Kite (NASDAQ: KITE), Bellicum (NASDAQ: BLCM) and Novartis are taking baby steps with CAR-T. Most companies are focusing on surface antigens like CD19 that are widely expressed and therefore do not require molecular diagnostics.  To realize the full potential of these therapies, companies will need to match patient-specific tumor profiles with panels of off-the-shelf biologic reagents and cell engineering products. That’s where Foundation’s tests might come in.
  • Foundation is setting new standards in cancer genome analysis. Foundation has raised the bar in the accuracy of genome-based tumor profiling (sensitivity, specificity) by something like a factor of three, and built robust and scalable informatics and analytics. Roche was already using the Foundation platform on a limited basis and realized that it was simpler to expand that use rather than to try to copy it.

Since the last few pharma mega-mergers, the industry’s biggest players have gone in wildly different directions. Novartis embraced gene therapy and gene editing. AstraZeneca doubled down on the biologics franchise it obtained with the acquisition of MedImmune. Bristol Myers and Merck have raced ahead in checkpoint inhibitors. Merck, Sanofi and to some extent Pfizer have rapidly expanded investment in “beyond the pill” and “digital interventions” (apps as drugs). And Roche took up diagnostics and genetics. For Roche, drug development, especially in oncology, is all about “genetics-driven medicine,” which in their view requires “genetics-driven drug development” and “genetics-driven marketing.” No one else has placed such a big bet on genetics though all pharma companies are certainly exploring it. For example, AstraZeneca, Johnson & Johnson and Sanofi recently announced a collaboration with Illumina (NASDAQ:ILMN) to develop a “next-generation-sequencing based test system for oncology.” In some sense, if Roche wins this one, others – e.g. those betting on checkpoint inhibitors and CAR-T cells – might lose out.

In CBT Advisors’ world of venture-backed biotech companies, this landscape poses significant challenges. Gone are the days when a biotech’s innovation would be appreciated by as many as five or ten pharma companies at the same time (there are barely fifteen left that regularly carry out M&A) and there could be a big bidding war. The biotechs’ leverage is not what it used to be. Counterbalancing that is the obvious productivity flop in pharma R&D. Biotech is the only place pharma can turn for real innovation. And turn they do, early and often.

This creates a bonanza for firms like mine that assist early, science-driven companies in managing their public positioning and their BD pitch from day one to create the largest possible exits. Now more than ever, the right story sells, just maybe to only one or two bidders. In Foundation’s case, the billion-dollar number was probably what it took to get the company’s pre-IPO investors (who included Google Ventures and Bill Gates not to mention smart funds like Casdin Capital) to give up on at least some of their dreams of long-term returns in exchange for a sweet 10-12x (I’m guessing) on their last pre-IPO investment from early 2013.

From Foundation’s point of view, the deal does three things, all of them good:

  • Cashes out the early investors at a price they can accept.
  • Delays, perhaps indefinitely, the need to break even on selling tests and shifts the focus to drug development and companion diagnostics
  • Relieves the constant pressure to market the company’s analytic services to multiple pharma companies in deals that have been the main source of revenue for Foundation to this point. That pressure was undoubtedly going to become heavier as Foundation’s pharma partners realized that, quarter after quarter, there was no reimbursement coming from Medicare and little from other payers, leaving pharma to provide the vast majority of the company’s source of revenue. (A first small insurer in Grand Rapids, MI, announced coverage of FoundationOne and another Foundation test in October, 2014.)

Back to why the acquirer had to be Roche: remember that over the last 25 years, Roche has had the undoubtedly humbling but ultimately very profitable experience of owning Genentech. Revenues and product pipeline from that acquisition long ago overtook those products from Roche’s own drug development in volume and importance. In some sense, Genentech has come to own Roche. Since Roche is nowhere near as advanced in gene therapy as Novartis nor as advanced in checkpoint inhibitors as Merck and Bristol-Myers, the move to own Foundation is an attempt to be the best it can be as a genetics-driven drug developer and marketer. No other pharma would have seen this deal that way. When and if Foundation’s investment bank called around looking for better offers, I bet no one called them back.

For Roche, the deal will either turn out to be a leap frog or, maybe, a dead end. But if cancer therapies, especially for solid tumors, really do wind up getting developed and marketed in a genome-driven way – and many trends point in that direction – then this move will have turned out to be prescient indeed.

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Why have only a few European biotechs made it through the IPO window?

By Steve Dickman, CEO, CBT Advisors

Posted to Boston Biotech Watch and to the Partnering360 blog

If the recent falloff in biotech IPOs continues, then many European biotechs would seem to have missed the longest, widest IPO window in the history of the industry. Why did a few European biotechs manage to go public (on NASDAQ, Euronext and the London Stock Exchange) in this window when most others did not succeed or even try?

In recent advisory work for about a dozen companies at various stages of the IPO process, five of which went public, and at a panel discussion organized by your correspondent and the EBD Group on the topic of European biotechs having US IPOs at last month’s BioPharm America conference, I identified three major trends contributing to the paucity of European IPOs:

  • Lack of access to EU capital for EU companies;
  • Absence of interest from (US) crossover investors in EU companies (maybe because they were not asked to invest); and
  • The conservative attitude of European IPO investors.

Sorting out the reasons for this phenomenon is important because of the long-term implications for the biotech industry in Europe. I’ll circle back to that larger question after looking at the data on some representative European IPOs and examining the reasons more European biotechs have not made it to an IPO during this window.

In Table 1 below I put together a sampling of eight European biotech and life sciences companies that pulled off IPOs in 2013 and 2014, their locations, their IPO dates and the amount of capital they raised.

Performance of some IPOs by European biotechs.

Table 1: Performance of some IPOs by European biotechs. Bold: CBT Advisors clients

Some observations:

  • Companies came from several European countries.
  • They went public on several stock exchanges.
  • Some of them raised a considerable amount of money (though typically less if they went public in Europe).
  • Most of these are therapeutics companies (similar to the US IPO crop).
  • With one dramatic exception, the stocks have traded down.

By comparison, according to data from an industry insider we know, this group of European companies have raised about the same on average as US biotechs that have gone public on NASDAQ in 2013/14 – $68.5 million for these six vs. $64 million to $70 million in the comparable crop of US-based biotechs. The trading down tells me that, while investor interest was just as strong initially for the European biotechs as for their US counterparts, the European companies either did not have the news flow or (my hypothesis) they lacked the “true believers” in their stories that would have been required to keep prices up in the months after their IPO.

Venture investors like panelist Rafaèle Tordjman, a general partner with Paris-based VC fund Sofinnova Partners, recalled that there have always been such challenges for European companies. “Our portfolio company Movetis went public on Euronext at the same time [in 2009] and at the same stage as Ironwood Pharmaceuticals but the valuation was three times less!” To be fair, she continued in an email, Movetis, later acquired by Shire, owned only European rights to its gastroenterology product whereas Ironwood owned worldwide rights. But the valuation gap still seemed disproportionate.

What is striking is the number of US companies that have gone public on NASDAQ: About 70, by my count, versus just six European companies. According to OECD, in 2013 there were 2,954 “dedicated” biotechnology companies in the United States and 2,654 in Europe. “Dedicated” firms are those that devote at least 75% of their production of goods and services, or R&D, to biotechnology. Even if these numbers were off by a large amount based on different definitions or stages of biotechs, and even taking into account the superb performance of the US stock market across the board as compared with the market in recession-prone Europe, it would still seem that a number of envious European biotechs are looking across the pond and wondering why their star has not yet risen. Here are my three answers:

Lack of capital from local investors

Despite the huge increase in investment interest in biotech in the United States from both specialist biotech investors as well as generalists, the sector has not gained wide enough appeal yet among either category of European investors to provide sustained support for a European biotech industry on either US or European exchanges. On top of that, what has happened lately is a wave of specialist support for US biotechs, which have been able to go public without much generalist backing at all.

In part, the lack of support in Europe for European biotechs is in part a function of scarcity, said Philip Astley-Sparke, a Venture Partner at the top-tier Dutch VC fund Forbion. He also happens to be President, US, of UniQure, one of the successful US IPO candidates. “Historically, LSE biotech listings did not get done unless generalists were involved to a large degree. In the States, no generalists are required.  These UK generalists are unlikely to be diversifying into US biotech. Hence, a few UK biotech IPOs may get done and then a single disappointment sends the generalists running for cover. This makes the market less stable. By contrast, a few blow ups on NASDAQ is just noise.”

In any event, the total amounts raised by biotechs in both IPOs and follow-ons combined have turned up in Europe but they still lag US deals by a wide margin (Figure 1).

Biotech deal volumes (cumulative) 2004-2014: Europe lags

Figure 1: Europe lags in volume. Data courtesy Dealogic. Figure courtesy FT.

Some reasons vary country by country. Germany, in particular, has lain fallow for many years in the aftermath of the dot-com boom. German tech stocks have come roaring back but there has not been a single biotech IPO on the Frankfurt exchange. Only one Germany biotech company, Affimed Therapeutics, an antibody therapeutics company in Heidelberg, had a NASDAQ IPO in 2013-14. It raised $56 million.

In other European countries such as the Netherlands and Great Britain, there are quite a few high-quality biotech companies so windows might someday reopen. There are signs of a thaw in Switzerland, where both institutional and retail investors were burned by disappointing clinical results from companies like Addex and Cytos. On September 23, the day after the panel discussion took place, Zurich-area biotech Molecular Partners announced that it was filing for a blockbuster $134 million IPO by the end of the year on the Swiss exchange SIX.

But none of the European biotechs I know would be likely to choose an EU over a US IPO if current conditions prevail. If the wave of IPOs that hit NASDAQ were to later reach Europe’s shores after it hit NASDAQ, this would be about the time for it to happen, but, with the exception of that one big-ticket Swiss IPO attempt, there is little sign of a biotech boom on Euronext or other exchanges.

In fact, on October 21, just before this post went to press, Molecular Partners pulled its IPO due to “market conditions.” “Whenever Wall Street starts coughing, Europe gets pneumonia,” was how one European biotech industry insider characterized that reversal.

Missing crossover investors

For those who have not encountered them, crossover investors, mostly US-based, have been driving the surge in biotech investment for some time now. This is a big change from the 1990s and early 2000s, when many pre-IPO investors, including venture capitalists, were eager to “flip” their shares immediately post-IPO. That period ended abruptly in around 2003-2004. What has happened lately is really the opposite. Savvy crossover funds jam-packed with PhDs and MDs are getting in just before the IPO with the goal of getting a bite of the company at a better valuation than they would get at the IPO. The same investors then typically buy in the IPO, then hold for clinical data. That is, the US crossover investors are not investing in the biotech as a non-public entity in order to turn it into a public entity that is now liquid and “flippable” but rather to turn it into a public entity in which they can share in and reap the rewards for good data (once their lockups have come off and they are allowed to sell shares).

It’s not that Europe has none of these deep-pocketed, risk-loving investors. Some have played quite strongly in the recent boom – some funds in Switzerland, Polar Capital in London and Omega Funds in London come to mind. But the diversity of the crossover investing sector, including mutual funds and some VC-like funds as well as traditional long-only hedge funds, and the sheer number of funds in the United States dominate the industry. Indeed, Omega has begun to invest more frequently out of its Boston office and considers itself more of a global investor. At least twenty US funds, some of them able to deploy many hundreds of millions of dollars in capital, have been extraordinarily active over the past two to three years.

There is no law preventing European management teams from pitching the same crossover investors that their US counterparts are pitching. But the logistical challenges are apparent. Ultimately, said Astley-Sparke, “a European company coming to the US has to be here a year in advance, doing non-deal road show work, getting in front of the crossover investors and preferably doing a crossover round. That [crossover round], in my experience, is almost a pre-requisite for being taken public by one of the larger banks.” Tordjman concurred that for Sofinnova’s portfolio company ProQR, a Netherlands-based therapeutics company focused on cystic fibrosis, the crossover round was very helpful.

Panelist Dan Grau, the President of UK-based Heptares Therapeutics, a highly regarded, still-private drug discovery and development company with management located in both London and Boston, concurred. “The pathway of doing a crossover financing to lead you to an IPO is clearly the preferred pathway,” he said. The caveat for companies, said Tordjman, is that in order to access all that capital in the United States, sometime companies have to make sacrifices in their valuation. “It’s an equilibrium,” she said. Lining up the preferences of existing investor against the valuation wishes of new investors requires careful thought and planning.

It will be a while before such a fund group can emerge in Europe. Some of the US-based crossover investors are part of decades-old fund families (e.g. Fidelity). Others among the seven thousand hedge funds in the United States are the specialists focusing specifically on pre-IPO biotech. It will almost certainly require a pretty large crop of European biotech IPOs that turn into long-term success stories for an investor pool like this to be replicated in Europe, if it ever is.

“What are you selling, the promise or the actuality?”

The final factor that is holding Europe back is more of a cultural one. US and European investors think they are buying different things and value companies accordingly. European investors want to see more data; US investors are more interested in the “sex and violence,” as Astley-Sparke put it in an email, that accompany earlier-stage companies. Grau summed it up nicely on the panel: “For US investors, there is a greater appetite for something that has potential and promise but may not have shown its data, may not have become actual yet. One doesn’t see exactly the same kind of fever on the European side, which sometimes be a bit more conservative in looking for the evidence in hand, especially for therapeutics, that you have crossed a risk threshold. So that is a potential dividing line. The reception we have as a Phase 1 stage clinical company with a substantial preclinical pipeline on Wall Street, whether we are talking to the buy side or the bankers, is very intense. They see the prospect of a very interesting data flow coming soon.”

US investors do occasionally invest in EU companies such as Innate Pharma and GenFit, both in France, says Otello Stampacchia, a Partner with Omega Funds. “Typically,” he says, “these investors need to see a clear value proposition (e.g. when there is more attractive pricing of assets in European companies) as well as a presence in a very topical space – immuno-oncology for Innate, NASH for GenFit.”

What hangs in the balance for the European biotech industry is more than just the return rates for some biotech VCs or the valuations of a few biotech companies, as important as those aspects absolutely are for the readers of this blog. IPOs these days are financing events rather than exit opportunities. This is consistent with the “buy-and-hold” approach that most crossover investors are taking now with most therapeutics company shares they own. But then what is the endgame? For many companies developing exciting new therapeutics, that will be acquisition by existing biotech players. Biogen Idec found its high-flying dimethyl fumarate product Tecfidera in a European biotech. Amgen snapped up Micromet and BioVex, both of which moved part of their operations to the United States prior to acquisition. Amgen kept a research facility open in Munich but the companies otherwise were lost as sources for new ideas, entrepreneurs and capital in Europe. Other such examples are bound to follow.

As I see it, what is at stake is Europe’s ability to build IPOable companies and fund them beyond the first good dataset. What makes a place a good biotech hub is well-known to us in the biotech nexus of Boston: Durable, lasting sustainable companies generating products, revenues, returns, innovation, ecosystems and spinouts. If the companies are all getting acquired – nipped in the bud, so to speak – such an ecosystem does not arise. If Europe wants to have a sustainable biotech industry, it doesn’t want all the companies acquired, at least not before there is enough value in the company and its team that it can create spinoffs and get them funded. On the other hand, if I’m a VC shareholder, I want and need them to get acquired.

Panelist Sinclair Dunlop, the Founder and Managing Partner of Epidarex Capital, an Edinburgh-based VC fund, agreed that this is a challenge, but that the interests are actually aligned right now in favor of acquisition. “[As an investor], you have to make money. You’ve GOT to be able to deliver competitive financial returns to financial institutions that back the cluster in those locations. Only then have you got a shot at recycling capital and ultimately growing it. One thing we lack in certain parts of Europe is the generation of entrepreneurs who have made their mint and who are now back to recycle their cash. You don’t have that yet in enough parts of Europe.”

Meantime, Tordjman reported that DBV Technologies, a Paris-area Sofinnova portfolio company making protective immunotherapies against peanut allergies – largely a US market – had announced an hour before the panel began that it was taking the next logical step after it pulled off a successful 2012 Euronext IPO and, in September, 2014, obtained excellent Phase 2b data: it filed an F-1 with the SEC to go public (again) and have a dual listing on NASDAQ.

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