第132期—2025年2月21日

I’m sorry to say I think this is going to be “pick on the biotech sector” day. Albert Bourla was booed at an event at the White House yesterday, and I think that’s kind of the tip of the iceberg of the negative things that happened and the conversation about our sector this week.

We’re going to kick things off with a really cool discussion about a story that I know everyone read. It was an excellent story that Adam wrote at STAT about zombie biotechs and how, when biotech companies crash out, they often think of creative ways to use their large cash piles that still exist. So, Adam, I’m going to kick it over to you. Everyone I know read that story, and it raised a lot of emotions and opinions on both sides. Just give us a brief summary, and then let’s jump into a discussion about this topic and how people feel about it.

1. The Zombie Biotech Army

Thanks for having me on today. This is not a new topic. It’s something that I think we’ve all talked about in the past. By “biotech zombies”—and others have used the term as well—we’re talking about companies that trade at a negative enterprise value. Essentially, their equity is worth less than the cash they have on the balance sheet.

Oftentimes, that situation arises when companies have significant setbacks—clinical trial setbacks—with their pipelines. It’s indicative of an overall issue that we have in biotech. I track about 700, give or take, public biotech companies, and about 200 of those trade at a negative EV in some form or another. So I guess that’s the army of zombies that we’re talking about.

As you mentioned, it’s a question of what to do with these companies and why they continue to exist, whether those companies can turn themselves around, or whether the capital—the money—that those companies have should either be returned to shareholders or used in some more productive way.

All right, let’s open the floor for people to just jump in and tell us what you think.

Maybe I’ll jump in. I thought there were some really good discussions online, on X, about this. There was a good exchange between Daphne and John Maraganore and a few others about how you know when something is a zombie. Maybe it looks dead on the outside, but can you always tell? We’ve seen some incredible zombie transformations where we’re like, “Wow, that company maybe looked like a zombie for a while, but it really wasn’t.”

I thought it was great that John mentioned Alnylam. As an investor, we are always looking to find companies that look like zombies but aren’t, because those can create pretty interesting opportunities. I point to Taysha as probably one of those. I think that company had been trading below cash for some time, and we, along with other investors, were able to see an opportunity with its gene therapy program for Rett syndrome. Voilà, the company has reemerged and is back to life.

So, Adam or others, how do you know if something is a zombie, or if it just looks like a zombie on the outside but really has a lot of life in it?

Tess, I love your perspective, and I think that’s a great question. A lot of the time, it’s actually very hard to tell. But I also think that many investors are just very quick today to write off companies that, if they actually looked hard enough and looked at the data, are not really—maybe they’re zombiesque, but they’re not really quite there.

No, you’re absolutely right. There are so many great comments from John and others. There’s another one on X talking about Jazz Pharmaceuticals, Pharmacyclics, Neurocrine, and Immunomedics, and a number of other companies that you could have called zombies at the time but have done very, very well. Of course, these are just some, and one could argue, “Well, that’s good that you’re calling out 10 companies, but what about 100 of the other ones?”

I do have to say, being on boards and an investor in some of these companies that one might call zombies, one of the things these companies do is they are forced to truly focus. They have a hyperfocus, plus survival and working very hard. So what you have is the team that’s usually left standing in many of these so-called zombie companies. They’re really determined, and they do miracles. They also focus just on 1 program, not on 2, 3, or 4.

So I think that a combination of very strong teams that are remaining, plus hopefully there are some investors, Tess, like you—it’s great to hear that you’re working on that and picking out some of these companies and putting some money into them—means that they can come out stronger than they even would have otherwise.

I expected a defense of zombies coming on this call, just given your guys’ backgrounds. I think, yes, you can point to companies that are exceptions and that are not really zombies, or just temporary zombies, whatever term you want to use. I think some of the ones you raised are—I wouldn’t put those in those categories.

For instance, Immunomedics—I wouldn’t put it in that category. I don’t think that it was a zombie. I think that was actually a case of an activist investor coming in and throwing out an incompetent management team because they knew that the drug was working. I think that’s not a zombie. That’s not a zombie example.

But I think, again, these are some hard things that the industry has to grapple with. When you look in the aggregate, there’s a lot of money that is wasted, whether that’s because of arrogance, greed, or people who don’t want to give up their positions and think that they know better.

The example that I used in my column this week, Cargo Therapeutics, was, through no fault of that company, a company that no one is saying shouldn’t have been formed in the first place. There was strong scientific rationale, and it had very sophisticated investors who backed the company, but they backed it for a very specific reason. That experiment was run, and the experiment failed.

I’m not the only one saying that Cargo should be shut down. I talked to many of the company’s largest shareholders, and they want the company to be shut down because they said, “This is what we funded. It didn’t work, and we’re not interested in whatever else they’re going to be doing.”

I just think that, yes, I’m sympathetic, and I understand that you can pull out examples. But I think in the aggregate, the industry has a problem with a lot of these companies.

Adam, I think, like anything else, there’s a whole degree of how much this kind of irks people based on how hard of a pivot companies are going for. You have the truly ridiculous examples where a company crashes and then rebrands itself as an obesity play, right?

But also, on a more legitimate scale, you brought up Galapagos, which had—it has to be a record—the largest negative enterprise value ever. I have the highest respect for Paul Stoffels, but the first deal that he did was a CAR-T deal. The investors in that company really hated that deal. It was a totally different area from what the company had been founded on and had worked on forever through the Gilead transaction.

I think those are really the cases that get people fired up about this. It’s like, “I invested in you to do this, and now you’ve taken our investment dollars—which, for large investors, can not be easy to get out of—and now you’re doing something that I’m totally not interested in.”

2. Returning Value To Shareholders

There are ways. Like I said, it’s not just about shutting the company down. You can find a merger partner. In the case of Galapagos, I haven’t really followed all the details lately, but the spinco that they’re doing—I mean, there are other ways of unlocking shareholder value in some of these companies.

Part of the problem, I think, is that we just have so many redundancies. We have so many companies that are trying to do sort of the same thing, similarly, and doing them badly. I know it’s incredibly difficult to do, but you can think of a situation where maybe there are assets from several different companies that can be rolled up together.

I know it’s easy to say that; it’s much more difficult to do those kinds of things. But I think it gets to the broader idea that we need some consolidation, at least on the public side.

Tess.

So, Adam, maybe just sharing something that builds on that—and Tim's ears are going to burn here, because this is something that we talked about a lot—is this whole idea of an investor mandate. You bring it up with Cargo, this whole idea of an investor mandate, right? Do you have that money, when it goes to the company, and it's not like all the company's money and purely theirs to decide what to do with? Technically, I guess it is their decision, but that money came from investors, right? So, do you have a mandate from your investors to do what you should be doing?

Sometimes you get companies that are below cash, but their investors still love what they're doing. We'll talk about Solid Biosciences in a bit, but they were trading below cash for a fair amount of time, and we were still holders. A lot of their other investors were still holders, and we liked what they were doing, too. So, what's a way to test if you have that investor mandate?

Tim, Peter, and I had brainstormed about this before, and Tim had some really great thoughts on this. What if you do something where you basically say, “Look, what we wanted to do didn't work. You can either get your shares back, or get your money back. We'll give you X dollars per share, or you can stay with us on this next journey to do whatever.” Investors can walk with their feet or not, and those who stay get a larger stake of whatever that next journey is.

We see this with some of the reverse mergers. What I love that some reverse-merger companies are doing now is having the shell say, “Hey, existing holders of the shell, you can get a dividend, or your shares bought back, or something like that,” while the new investors are functionally the people putting in the PIPE. That's how it should work. People should choose. You want your investors to choose you, not force yourself on them. So, just a thought, and something that we—

I think I totally agree with you. Those sorts of solutions certainly work. I'd love to hear Josh's take. I think Josh's around on this call. Josh, do you have a take on this?

Yeah, Adam, if anything, I'm even more sympathetic to the cause of the shareholder than you are. Companies definitely don't spend enough time thinking about their shareholders. There are obvious agency reasons for that. I'll tell some stories.

Twenty years ago, I was advising Royalty Pharma. There was a huge battle on their board. Half the board thought the idea of buying pharmaceutical royalties was stupid, that they shouldn't continue to do that, and that they should just cash out and return the cash. The other half didn't. We advisers came up with a structure where people could choose to stay in or not, and half of them cashed out. Talk about a mistake, right? That company's value went up a hundredfold from that point. It was a great idea to buy pharmaceutical royalties.

On the other hand, in the last couple of years, every time I push this idea—and Tess, you and Peter and I have spent a lot of time talking about this; in fact, I pitched it to RA Capital companies—you and Peter were fine, but you have colleagues who are in the weeds on individual companies. It's very hard for them to say, “Hey, we want to return cash,” because it's so hard to get cash. I've been completely unsuccessful in getting a company in the last 2 or 3 years to voluntarily agree to return cash to shareholders. They will do it with a gun to their head.

I almost wonder if, when we fund these biotech companies, we should create incentives for management: if you give the money back, you're going to get a big bonus or something. Basically, if you give the money back, there's less money around to pay management, right? No one wants to talk about that. Agency factors are very important in actual real-world behavior.

All right. Well, Adam, awesome piece. We could talk about this literally for the whole hour, and I know people will continue to talk about it over Twitter. Thanks a lot. You're going to stay and join us for some news items, and—

Yeah, for sure.

Yeah. I'm going to start with you. Stoke signed a rest-of-world deal with Biogen on its Dravet syndrome program. Tell us about that.

3. Stoke Signs With Biogen

Yeah. So, that deal—what was it? I lose track of time. Tuesday morning—they struck a partnership with Biogen for, basically, ex-North American rights to their Dravet syndrome drug.

I think it had a sort of mixed reaction. I didn't think the deal was so bad; the market disagreed. The stock went down after the deal, but it gives Stoke one of the things that was a big overhang as they go ahead to run the Phase 3 study that they need to run. There was obviously a recognition that they needed to raise money to fund the Phase 3 study, and it was one of the reasons the stock had been depressed going into this.

They did raise the money. It was a nondilutive way to raise money, selling off a portion of the commercial rights to the drug. They kept the North American rights, the U.S. rights. We can debate whether or not that was a good deal. I thought it was, but I also talked to some people who thought that it wasn't—the idea that this is now an encumbered asset, essentially dead money, or a company that now just has to go through the paces of running the study, which will take at least a couple of years.

And, of course, they were also on a lot of people's—I think yours included—a lot of people's buyout list. So whenever you—

Sign a partnership rather than getting—

Right—

Acquired, those types of investors sell and move on, so there—

Probably was a lot of that, too.

All right, let's move on. Tess, I'm going to go over to you. We had some Duchenne news. Solid seems to be the company on Sarepta's heels in terms of the microdystrophin gene therapies. I know RA is an investor in Solid, but tell us about their data. It had a very positive market reaction.

4. Solid Raises A Fairness Debate

Yes, absolutely. Thanks, Brian. This is a company with a pretty long history. They were founded back in 2014 to develop a gene therapy for Duchenne muscular dystrophy, and they have seen a lot of ups and downs. They were certainly trading like a zombie company for a while, and they released data earlier this week from a small number of patients—just 3 patients—who had been dosed with their gene therapy.

What they showed was average microdystrophin expression of about 110%, which is pretty remarkable. When you look at that compared to Sarepta's gene therapy, I think they show around 34%. Pfizer's was upwards of 34%; Pfizer's program was discontinued for safety reasons, and I think it might have been closer to 50%. So, high microdystrophin expression was one thing, and then one of the things that was really interesting was that they also showed data suggesting the potential for some kind of cardiac benefits. It's obviously still early, but they looked at LVEF for their 3 patients as well.

This was certainly a positive update for them. The next step is talking with the FDA midyear about next steps and the potential for accelerated approval.

All right. So, this actually brings us to another angle to the story that brings us to, I think, another aspect of biotech mechanics. I went over there on Tuesday and interviewed Bo Cumbo about this news. Before I did, I put a shout-out on Twitter saying I was going over there and asking whether anybody had any questions.

There was an overwhelming response regarding the way that Solid raised money off of this news. We've talked about this before, and I know I've written about this before. It was one of these situations where they announced the news on Tuesday, but in the days leading up to announcing it, they had confidentially gotten together with bankers and a handful of institutional investors and locked in a raise before even putting this data out there publicly.

I think they raised $200 million at $4 a share. I asked the CEO, Bo, about this, and he had a very thoughtful response. His response was, “Look, biotech has been terrible lately, especially in the gene therapy space. You can't count on a good stock reaction sometimes, even when you have good news lately.”

And so he felt, given the position they were in, that locking that in with those institutional investors beforehand was the right thing to do. I think that’s a fair argument. But I would also say there are 2 counterarguments.

Number 1, you could argue that those institutions have a vested interest in getting the lowest price possible, and so their feedback on the data might not be what the actual overall market’s feedback was. You might be leaving money on the table. For example, the stock has traded north of $6. I think it’s in the mid-$5s right now. They diluted a lot at $4 and maybe could have done that at $5, $6, or $7.

But I think the bigger issue, at least the one I’m interested in, is that our industry is the only industry that does raises like this regularly. A lot of generalists and retail investors have, I think, valid concerns about the fairness of our industry. A lot of people are saying, “Why did somebody else get an early look at this data, and why were they able to invest at such a low price when I don’t have that same opportunity?” I think there’s a valid argument on that side, too.

So I’ll put this topic out for discussion, too, because I think it’s another really important issue about what it means to invest in biotech.

Who wants to start first?

Yeah, I’ll share some thoughts. I think, as you shared, Brian, we were certainly investors in the follow-on that they did after the data.

Bo raises a really good point: What is the market reaction going to be to the data? What are the key things to present and share when you’re doing a data release? Sometimes that’s not really clear, right? In particular, in the market environment we’re in, where you have a data release, you certainly want to be able to raise money to get to that next stage. That investor feedback can be really helpful to enable the raise.

Also importantly, for Solid Biosciences, they did share the data and then they did the pricing later, right? There was some time for the market to see the data. Importantly, it’s always a demand-and-supply question. They had to raise a very large amount of money, and they had a number of investors they were talking with.

An important thing to remember about investors is that we’re very, very competitive with each other, right? What’s the way to outbid other investors? It’s paying a higher price. Investors are always able to do that, and when there’s a lot of demand, that’s what you see: investors bidding up the stock. That’s what we see in the market every day.

I think the price reaction we saw in the aftermath of that follow-on, as well, is really a reflection of the company being in a position where it has good data and is also well-funded, right? That dynamic is a really important one to remember. Sure, every investor would like the lowest price, but you’re constantly being tested on what price you’re willing to pay because you can always get outbid.

That dynamic is ever-present, and we see it continuing to happen in financings on a pretty regular basis.

Adam, this raise was very similar to a PIPE. I know that you see the retail Twitter comments whenever we see a situation like this, when there’s data in a PIPE. What’s your take?

I think part of this reflects just the uneven playing field right now in terms of the finite capital markets. Companies have to raise money, and they’re sort of at a disadvantage because it’s difficult to raise money. They’re at the mercy of investors and funds.

I like a lot of these deals. I wonder how much an RA that wants to build positions in a company is building a position in the open market versus going to a company and saying, “Hey, we’ll give you $100 million, but we want it at a discount.” You go in and basically put a term sheet on the desk and say, “Take it or leave it.”

I think we’re seeing a lot more of that, and that’s sort of what the PIPEs are doing, right? You’re not going out and just buying in the open market. You’re going into these companies and saying—look, there are some benefits to the companies that do this well. Companies want a good, stable group of shareholders. I’m not saying it’s all one-sided, but it is indicative of where the market is right now.

Maybe just 2 other points to add to that. One is that it’s actually very difficult to build a meaningful position on the open market in many biotechs simply because of volume. There’s very limited volume. For an institutional investor to build a meaningful position, that does require financing.

Point 2 is that I think what you say about PIPEs—gee, it would be nice if it were that way, but again, there’s always the risk of being outcompeted by peers. That is what creates pricing tension and allows companies to bid things up.

As an investor, you always have to be careful when you’re going to a company and saying, “Here’s what we can pay.” What if you have a peer that comes in tomorrow and says, “I can pay that, and I can throw on another 10%”? You better have been really truthful about what you said your pricing sensitivity was originally.

That pricing tension really continues to exist for companies. While investors are certainly in a position where there are a lot of companies trading at very discounted values, we’re still very much in competition with each other. Companies should always think about that as they’re considering these different financings.

You continue to see a lot of companies testing that and saying, “Look, I’m going to put data out to see how the market reacts, and I’m going to use that to raise money.” You may have other companies, particularly when the data is a little messier, where they might see some benefit to testing that a little beforehand to understand whether there is a path forward.

Many companies may be in a position where they’re saying, “Hey, I could raise money off of these 3 patients, but what if that’s not a good idea and investors aren’t excited? I should really wait until I have 10,” or something like that. Those discussions can be very helpful for companies in making that decision.

And Brian, what’s your banking perspective on this? Of course, like every issue, there’s a whole spectrum of how these look. On the PIPE variety, we’ve even seen some where those institutional investors have been given blinded data that nobody else sees weeks or months ahead of a big data or medical meeting announcement.

I think those really bother a lot of retail investors. How do you feel, from a banking perspective, about how needed these things are to get these deals done?

I think Tess’s comments should be taken seriously. What I mean by that is that we’re in a free market, right? The company is going to do what’s in its self-interest. The investors are going to do what’s in their self-interest, and yet they choose to do these types of transactions.

There’s a reason, which is that retail investors can’t come in and look at 4 data points or whatever at some biotech company and figure out what to do, but they sure love to jump in once an RA gets a crack at it, right?

If you think of the IPO market, IPOs are oftentimes underpriced and jump on the first day. These PIPE discounts are the same thing, where you’re essentially inducing the investor to come in, do the work, and participate in the deal.

Tess, your points about the competition are just right on. It’s highly competitive, and we see that on the banking side all the time. What’s so funny is that you’ll have a company where there’s no interest, right? No one wants to put money into XYZ company. You’re out as the banker, knocking on doors, and no one wants to listen to you.

You can call your friends like Tess: “Hey, Tess, should you look at this?” Tess, I love you, but we don't love that company. Sorry. And then, all of a sudden, one party's in, and pretty soon you have 50 people who want to jump in. So it's a very interesting dynamic, and I do think there's a method to what appears to be a bit of madness.

All right, let's move on. We had some sad news this morning. Bluebird Bio is doing a take-private acquisition. Adam, tell us about some of the details and your thoughts on that.

5. Biotech Faces A Reckoning

Yeah. So, Bluebird is going to sell itself, or is selling itself, to a couple of private equity firms. I think the deal, minus the CVR, is about a $30 million deal. It's not very surprising, to be honest, given the financial difficulties.

I'm sure you guys have talked about Bluebird and the gene-therapy situation there, probably on the Hangout in the past, but we've certainly addressed it at STAT and on our podcast. The company was in a very difficult financial position. They had loan covenants, and it seems like, from what they said in the release, that they had exhausted all other options to raise money. So they had to do this—essentially, what amounts to a take-under.

Under the CVR, there's a little upside based on the potential for sales of their gene-therapy products going forward, but it's a pretty high bar to meet. I mentioned this on Twitter, Brian, and I know you sort of have the same kind of historical perspective on this. Bluebird is a company that was really, at one point, at the vanguard of gene therapy.

If you go back to 2013 or 2014, they really could do no wrong. They were sort of proving that gene therapy, at least from a scientific basis, was something that was possible and could cure patients of these horrible diseases—in their case, cerebral adrenoleukodystrophy and beta thalassemia.

But ultimately, they ran into the buzz saw of just the business case and how you turn these breakthrough scientific achievements that everyone is proud of, and everyone points to as the reason to be in biotech, into a successful business venture. It turns out that it's very difficult.

I see Eric has joined us. Eric, you've covered this company for many years. What do you think will be the story of Bluebird at the end of the day?

Well, unfortunately, this isn't the ending that any of us would have liked. As Adam just articulately laid out, it's been a long, slow decline that nobody should be surprised about in terms of the unhappy ending today.

But there is 1 silver lining: Bluebird's products are going to, I think, persist under new hands and ownership, of course, but at least persist for those patients with CALD, beta thalassemia, and sickle-cell disease who sorely need these options. There aren't that many patients that Bluebird can serve in the future.

Many of us, including Adam and myself, have written about our skepticism toward the margin structure, the business opportunity, and the profitability of these drugs. We'll see if they can do any better in other people's hands, but at least for the time being, the products will be out there and available to those who so choose.

And I think, partly, when I look at Bluebird too—and Eric, you know this well—the problem there is just this fundamental question: Can you make the margins work? As you mentioned, there's just the business case to be made for this particular kind of product.

But if you dig in more granularly into Bluebird, they made a lot of mistakes. They had some scientific hiccups and setbacks, if you go back to 2015, with their first construct, which ran into some trouble. They essentially had to do a lot more work to figure out how to get it to be effective, and they had manufacturing issues there.

So there were things that were specific to Bluebird. They spent so much money. You remember—they just spent so much money, and even when people were saying to them, “Why are you spending so much money?” they did. I think there was this resistance on the part of management: They believed in the mission and didn't heed the call of investors saying, “Maybe throttle back.”

All those sorts of things contributed to the demise of the company, on top of just this difficulty of making gene therapy work as a business. There's another angle to this story I've never heard anyone mention. It's something we talk about a lot lately that I think is interesting to note, too: I actually think this is one of the first companies ever to be wiped out, in part, by Chinese competition.

I remember very well ASCO 2015, everyone waiting with bated breath for Bluebird to present its BCMA data. The announcement came out, and at the same time it was like, “Hey, there's some Chinese company working on the same thing.” Nobody knew that.

Today, the Chinese company is worth $7 billion and Bluebird is essentially going bankrupt. If that Chinese company didn't exist, Bluebird would own the BCMA market right now and probably be worth $7 billion or $8 billion. I think that's really, historically, the first example of that actually happening. So I think that's interesting, too.

Brian, just to jump in on that, if there's 1 thing we should all be learning in Western biotech, it's that one could probably be a little bit more efficient about how you run a biotech.

I remember talking to Bluebird management over the years, and there was just such confidence that they were doing the right thing. They're all great people; I'm not saying there's anything wrong with them. But they were just very confident that they had it figured out, and they didn't.

If there's 1 thing that I think could be very disruptive, it's for biotech companies to start to compete on efficiency. Tess, I know at RA you kind of preach this a little bit, right? Why don't we try starting the next Bluebird with 15 people and see if we can do that? I actually think you could do it, and it could be a much better business model and a way to outcompete the Chinese.

I think that's a very good point. Lastly on this, I don't want to get into this, but in the spirit of picking on the biotech model today, I thought Angelica Peebles, the CNBC biopharma reporter, brought up another thing that really irks people: The CEO of this company, over time, cashed out like $80 million, despite the company never succeeding over the long term. It's a free market, but that also bothers a lot of people.

Lastly, 1 other negative item in the news, and then we're going to go to happier, greener pastures. Septerna, which was an IPO just, I think, in November, is very similar to the Cargo story. It has already crashed and burned, and I think it reminded people of the risks of the biotech sector. Is there anything—any learnings—from this one?

I mean, I don't think Septerna did anything wrong, right? They discovered that they had a significant bibin side effect with 1 of their drugs. It's 1 of the risks that we all take in biotech, and unfortunately, they got hit by it.

Yeah. Maybe just to add an extra caveat, my colleague Jake is on the board here. This is, I'd say, a growing list of companies that shortly after IPO have seen some kind of toxicity, and it just reminds us: My gosh, small-molecule drug development is really hard, and until you see it in the clinic, there's a lot that you don't know.

What's interesting, and what Septerna highlighted in their press release, is that they've got multiple attractive PTH1R agonists that they're planning to accelerate, and they're planning to get 1 into the clinic later this year. It just reminds us of the importance of having backups.

I remember when I was working with Carl DeCicco back at Foghorn, him really preaching that and reminding us: Eliquis—how many drugs had to fail before Eliquis, which was the backup of the backup of the backup, actually made it into clinical trials and made it to market?

That's just a reminder of how important it is. We talk about efficiency, but efficiency shouldn't come at the expense of good risk-mitigation strategies for valuable targets.

The other problem here, as Adam and Tess both mentioned, is that this is a recent IPO. This is unfortunately at least the second, maybe even the third, IPO to have blown up in the last 6 months since going public.

That really wears on biotech more broadly than even the relevance to the few investors who might have owned this security, and casts a pall over the industry when you have companies that are so fresh and new losing money this early.

I just want to chime in here. The sentiment out there is terrible right now in biotech, probably a lot worse than the XBI stock performance or anything else you might be reading about in the papers. It’s because of these types of transactions that just go south so soon. Of course, people are crowding into the same set of names and seemingly losing money hand over fist on a daily basis.

So it’s hard out there. Our clients are hurting. I’m sure others on the call are hurting, too, and we’ve got to be doing something different in terms of our investment strategy. I’m not sure we’re on the right path right now.

6. Mergers Could Lift Biotech

All right. We have a lot still to cover. I’m going to try to go through some of these quickly, and let’s talk about happier things. SpringWorks has been in the news. Merck KGaA is in talks to potentially acquire them, and at this point, that’s not a rumor. Both companies have confirmed it in the media, but it does seem to be taking a lot longer than people may have expected.

SpringWorks had earnings yesterday and released them but didn’t have a call or anything, so I think that says something. Tell us anything you can about that and just overall M&A sentiment. I saw a headline in the news a day or 2 ago that said the Trump FTC might not actually dial back the pressure on big mergers like people were thinking. What are you hearing in terms of all of that?

Just to comment on SpringWorks, first of all, I don’t have any specific information. If I did, I couldn’t comment on it. What I can say is that, interestingly, in my PhD dissertation, I looked at the following question: If there’s a credible announcement that such-and-such companies are in talks, what happens to the stock next? This is credible; it’s not some rumor that was on social media.

What I found was—and I looked at about 150 of these over the years—that about half the time the merger happens and the stock goes up, and about half the time the merger doesn’t happen and, of course, the stock goes down. So you saw SpringWorks pop up, which is the right thing, but if you were a merger arb and wanted to ask the question, “Could you make money by buying SpringWorks right now?” the answer would be that there should be no profit opportunity.

I don’t know what’s going to happen with Merck KGaA. Obviously, Merck has made an offer, right? So now it’s going to be up to the bankers for SpringWorks and the board of SpringWorks: Is this offer good enough, or are they better off continuing to operate on their own? They have to figure that out.

How much time is it going to take? People see the announcement and they’re like, “Okay, this is going to happen tomorrow.” It usually takes 2 to 4 months. The reason is that the bankers are probably going to keep shopping SpringWorks to make sure that they have the best and highest offer. They’re going to torture Merck KGaA, which is unfortunately now exposed, saying, “Hey, we want to buy this company.” The bankers are going to use the leverage that they’ve got.

There’s going to be incredible pressure on the board of SpringWorks right now, right? It’s out in the open, and whoever their bankers are, they’re working day and night to see if they can get an alternative offer. I would think that there are multiple bidders in the picture just because SpringWorks is an attractive company. It’s fair to point out that SpringWorks’ assets are probably not going to get picked up by a large pharma, and that’s because large pharma companies are generally focused on big indications in oncology, while SpringWorks is going after midsize and smaller indications.

From a disclosure standpoint, I don’t know if you know this, but Merck had to come out and acknowledge that there was interest in the company. That happened from Merck KGaA—I guess it’s some German securities rule. If the deal falls apart—let’s say they can’t reach terms and Merck decides to walk away—do they also have to disclose that? Do you know how that works?

I don’t think they do. We have the same rules in the U.K., where if you’re AstraZeneca and you receive a big offer from Pfizer, you can’t just sit on it and not tell investors about it. It’s so restrictive over there because of this thing called the Code that you’ve got to be really careful if you’re Pfizer about making a merger overture, because you don’t want to trigger the Code. So I would assume Merck KGaA could just go on its merry way.

Great. Let’s keep moving. Tess, I’m going to go over to you. M&A is something that we would love to have as a spark to the biotech sector. Another thing we watch closely, especially in the middle of earnings, is how drug launches are going. A really high-profile one is BridgeBio with Attruby. Alnylam might be in the space as soon as next month, too. It seems to be going okay, right?

Sure. Yeah, it seems to be going well. This was a launch that had a lot of eyes on it. There were a lot of people who were pretty skeptical about another small molecule for ATTR cardiomyopathy, and BridgeBio really impressed, having over 1,000 unique prescriptions since FDA approval, which was really recent. They’ve just been on the market for a couple of months at this point.

I think this speaks to a broader trend of companies being able to commercialize on their own, right? That’s traditionally been really hard, and there’s been this “short the launch” kind of philosophy around smaller biotechs. But we’re seeing some real successes. It’s probably a little too early to call that completely for BridgeBio, but it’s certainly looking very strong out of the gate.

Brian, I want to jump in on your question on M&A. You asked me the same question; like a politician, I just didn’t answer it. We think M&A is going to be pretty strong. I saw the point on the FTC. I think that’s going to be okay for most of what we worry about, but one thing we were recently looking at at Stifel was how many of these launches are going well.

We saw the same thing Tess just said: There are a lot of launches that are going well. What we noticed is that, in almost every case, a company that has a good launch gets bought. It was very striking. Try to list out the companies that had launches that beat consensus that didn’t get bought. Not many. There are some, but not a lot.

7. Obesity Moves Beyond Weight Loss

All right. You can’t have a call without talking about obesity. One of Adam’s colleagues, Angus Chen, at STAT wrote a really great piece on the obesity space, and his point was that, from a patient perspective, not everybody is looking for overly dramatic percentages of weight loss. I’ve always felt strongly about the same thing. Whenever we have new data, everyone zeros in on the percentage of weight loss, but I think there are other factors, like tolerability, that are a lot more important. That’s where I go straight to when I see new data.

We also had some news just this morning. The FDA announced that there’s no longer a shortage, and that could affect the compounders like Hims. Tell us a little bit of a roundup of what’s going on in obesity lately.

We couldn’t agree more. In fact, my colleague Louise Chen, who covers the obesity space here for us at Cantor, has been singing the same tune. It’s quite surprising that every time a new data set, phase 1 or phase 2, comes out from a novel GLP-1 or combination partner, the first thing people do is look at that percentage of weight loss and analyze it in excruciating detail. They treat a 20% reduction in body mass quite differently from a 21% or 22% reduction. It just doesn’t make much sense, right?

As you say, tolerability is very important. The other thing that’s very important, of course, is convenience. I don’t think patients know whether they’re losing 20%, 21%, or 22% of their body mass. I think they certainly know if they’re injecting themselves on a weekly, monthly, or maybe even, in the future, quarterly basis. They certainly realize whether they’re feeling like crap or not on a daily basis because of it.

I think this whole space has a long way to play out. As we start to separate the winners from the losers here, it’ll probably be much more about those 2 latter points—tolerability and convenience—than efficacy.

I’d also like to add to that point. I’m happy to cover the legal aspects as well. I’ve been talking to and looking at some of the data provided by companies like Hims that are providing a lot of the drugs—the GLP-1s—from compounding pharmacies. What’s interesting is that tolerability and convenience are actually divided into men and women.

Women seem to be much more interested in complete weight loss, although you’re right: does somebody really know whether it’s 20% or 23% weight loss? Men seem to care a lot more about tolerability and some of the side effects, such as muscle loss. That’s been interesting as well, and I’m curious how that will affect sales and development of future drugs.

Luba [?], not to put you on the spot—or if anyone else knows—now that the FDA made this announcement this morning, what are the repercussions for Hims? Do they have a certain time period during which they’re still able to do this, or what’s their status right now?

Yeah. I can tell you that they knew this was coming—not just because of what Novo, Eli Lilly, and others have been saying, but because Eli Lilly and Novo have filed lawsuits to force the FDA to declare that there is no longer a shortage and to stop distribution of GLP-1s by compounding pharmacies.

This is something Hims has anticipated and knows is going to happen, and has played behind the scenes, I’m sure, to try not to make that happen. But this is a major blow to sales, and I’m sure they’re going to try to figure out a way to push back. If the FDA has basically said that’s it and that’s their final decision, that is going to be their final decision. They can’t continue selling drugs from compounders.

Just to point out, there’s a bit of a subtlety here that’s not at all obvious. If you go through the compounding rules, let’s say, Brian, you’ve got some type of disease and there’s an on-patent drug that, for some reason, isn’t going to work for you.

That’s right—like dosing. Yeah, you’re right. Dosing, yes, of course. Or if you have an allergy to a particular ingredient. But the majority of sales have been because there are 2 factors under which you can make the drug in compounding. So, you’re right: there’s going to be a percentage of those people who still can get it, but certainly not for the mass production that they’ve had before.

So, just to point out, if you go through the Hims site and actually try to get your own obesity prescription, what you’ll see is that it will very rapidly try to qualify you as a nonresponder to currently available doses. Their business model shifted about 2 months ago to what they call customized compounding.

Luba, you’re right: they’ve anticipated this. They’re 1 step ahead. The issue that they’re going to run into is going to be on the patent side—

Right. So, it’s fine to, as you kind of hinted, have some prescriptions that involve alternative dosing, but at some point, if they’re using dosing rules to essentially dodge compounding regulations, they may find themselves in a lawsuit over the Novo patents that they’re going to have a tough time with.

Yeah, absolutely. I saw another really interesting obesity headline this morning. I can’t remember where, sadly, but I saw that Eli Lilly has already apparently produced about $500 million worth of its oral therapy that it licensed from Chugai. And that’s before the data.

I think that really goes to show what a big pharma game this is: they’re putting $500 million of drug supply at risk if there’s a chance that the data doesn’t turn out to be as strong or successful as they thought it would. That’s a tough thing for smaller biotech companies to do. We’ve talked at length about some of the acquisitions that haven’t happened yet, and I think it just goes to show the investment that’s required for even larger companies to potentially compete in this space.

All right. And Brian, before you exit obesity, you should probably mention that, while we have been speaking about it, Betaville has a Viking Therapeutics takeout rumor. So there you go. On a Friday, of course—on a Friday.

Let me just scan to make sure we didn’t miss anything that was absolutely critical. I think we got everything. We’re at the top of the hour. There’s actually enough material to do this for a second hour, but we’ll stop at that with some of the main news items.

I’ll give everyone an opportunity to speak up with any closing remarks, if anyone would like to do that. No? Okay. Well, thanks a lot to our co-host and to Adam for joining us today, and thanks a lot to the listeners. I look forward to doing this again a week from now.