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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

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Convergence West Highlights: From iPhone Sequencing Apps to Funding Innovation in Biotech

Last Friday, Dec. 3, 2010, I attended the excellent Convergence West conference in San Francisco. Here are some highlights. I’ll be doing an additional post on my “fireside chat” with Jamie Heywood of PatientsLikeMe.com.

Topics covered:

  • We have seen the future of high speed genome sequencing – and it’s a bit of a gross-out
  • Diagnostics regulation and iPhone blood tests
  • Diabetes costs are immense
  • MEDCO gets it
  • Creative financing for mainstream biotech

Convergence Forum logo

We have seen the future of high speed genome sequencing – and it’s a bit of a gross-out

With three high-profile liquidity events* in 2010 for high-speed genomics companies, the financial markets seem to have embraced the prospect of low-cost, ubiquitous sequencing for all. But what will the sequencers be sequencing?

During a panel Q&A, I asked Eric Schadt, the Pacific Biosciences CSO, how close we are to wide clinical or even consumer use of that company’s world-beating technology. The applications he named ranged from the not-apparently-useful to the gross:

  • “In four to five years, we will be able to use our third-generation technology to sequence hundreds of gigabases for $100 in 15 minutes.”
  • “In 10 years it will be like an AT&T plan: sign up and get 10 genomes for your family.”
  • “Integrate the sequencer into your iPhone, wave it around and see the genomes of all the pathogens swirling around you all the time.”

We realize that there are plenty of applications for the sequencing of genomes besides the human one. We blogged about the genome-mining of gut bacteria here. But judging from the facial expressions, the reaction to the iPhone app for skin bacterium sequencing was a visceral ‘yuck.’

*Pacific Biosciences raised $200 million in its IPO on Oct. 27; rival Complete Genomics raised $54M in its IPO on Nov. 10. Ion Torrent was acquired on Aug. 18 by Life Technologies for $375M upfront and $350M in possible future milestones.

Diagnostics regulation and iPhone blood tests

A previous panel I moderated (at the Wolfe Biopharma conference in Boston on Oct. 19) featured a discussion of a new regulatory path for MDx at FDA, currently in a bill sponsored by Sen. Orrin Hatch to be introduced in the U.S. Congress’ “lame-duck” session in late 2010 or early 2011. During the Q&A, I asked the MDx panel about this and heard this groan from MDx company Saladax CEO Sal Salamone:

“I’ve been in diagnostics for twenty-five years. There were not a lot of big advances in the technology for diagnostics in that time but the costs of compliance with regulations have increased an order of magnitude.”

On a similar note, FDA is not the only new hurdle that MDx startups encounter on the way to the market. From entrepreneur Sridhar Iyengar, Founder of New Hampshire-based AgaMatrix, which has successfully partnered with Apple to bring real-time glucose testing to the iPhone:

  • “Working with Apple is a lot more difficult than working with FDA.”

Diabetes costs are immense

Tethys Bioscience is one of the highest-profile VC-backed MDx companies around, with a commercial platform, $48 million raised in the recent Series D round alone, high-profile investors from inside and outside healthcare and an indication focus – Type 2 diabetes – that is one of the most prevalent and expensive of those facing society. CEO Mickey Urdea therefore has a bias but he also has a point: Type 2 diabetes is a societal scourge.

  • “If you have gained 30-60 pounds in 6 months, it probably means you just retired from the Air Force” said Urdea.
  • Furthermore, Urdea said, the Air Force believes it will “go into bankruptcy” by 2017 if it doesn’t find a better way to combat diabetes.

MEDCO gets it

We heard from two panels that Medco Health is the company that is most on top of the shift in the U.S. health care system to a more incentive-driven and value-based model.

“Medco has the potential to change the paradigm for diagnostics. They are working on pairing diagnostics with generics to prove they are better than new drugs.” (Saladax CEO Sal Salamone). As one recent article on Medco’s MDx initiative put it, “With Medco Around for Dx Shops Developing PGx Tests Independently, Who Needs Pharma?”

  • Jamie Heywood, Founder-Chairman of PatientsLikeMe.com said jokingly that “Medco is starting to look like it could buy Merck.” This is not quite true – Medco (NYSE: MHS) at a $26 billion market cap is still much smaller than Merck (NYSE: MRK) at $108 billion. But since Merck spun out Medco back in 2003, Medco is up five-fold and Merck’s value is down.

Creative financing for mainstream biotech

The VC funding panel featured several successful examples of the high-risk, high-reward approach needed to pursue innovation in biotech.

  • Very encouraging: The VCs that are still investing in biotech “are more interested in in funding innovation today than at any time in the last 15 years,” said VC Bryan Roberts of Venrock. But, he continued, this is because “they are so scared by regulatory & commercial risks and [they fund earlier-stage projects because they] think they can get out before [they face those other risks].”
  • Pick your poison: “If you are not getting financial dilution (via VC) or IP dilution (via partnerships) then you have to have ‘bandwidth dilution’ through government funding,” said Oncomed CEO Paul Hastings
  • Find a contrarian: Hastings said that it takes a true contrarian within Big Pharma to push a deal with an innovative biotech. Hastings cited Moncef Slaoui, chairman of R&D at GlaxoSmithKline – who backed GSK’s 2008 acquisition of Sirtris – as one example. Roberts agreed: “Great decisions don’t get made by groups.” This was certainly true when Roberts and Jim Neidel helped CEO Howard Robin sell our Sirna Therapeutics for $1.1 billion to Peter Kim at Merck in 2006. (Sirna’s turnaround PIPE was a deal I did as a VC with TVM Capital in 2003.)
  • Power raiser: Oncomed (which is developing drugs targeting what it calls “tumor-initiating cells” aka cancer stem cells) has raised a lot more money than I had realized: $229M in equity including its investment from GSK & a further $100M from partnerships including GSK and Bayer Schering. Hastings said that Bayer Schering had struck the right attitude by
    • Showing up on a Saturday morning for a kickoff meeting; and
    • By the Bayer Schering team leader telling his 20-person team (visiting the 3-person Oncomed team) “We are here to learn from them and not the other way around.”

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