Podcast Transcript

David Brühlmann [00:00:25]:
You’ve got strong science, so why isn’t that always good enough to get funded? On the Smart Biotech Scientist, we usually talk bioprocessing with the scientists developing therapies and technologies. Today we are talking with the person writing the checks. Michael Rome leads the therapeutics investing practice at Foresite Capital. He has led numerous investments, including XinThera, which was acquired by Gilead Sciences, Affinivax, acquired by GSK, Turning Point Therapeutics, acquired by BMS, and lots more. If you’re building a startup and wondering what it takes to attract capital, pull up a chair. Here’s how investors evaluate your work. Welcome, Michael. It’s good to have you on today.

Michael Rome [00:02:31]:
Thank you so much for having me, David.

David Brühlmann [00:02:32]:
Sure, Michael. To get us started, let’s start with this perhaps a bit controversial question. What do you believe about early-stage biotech investing that most people disagree with?

Michael Rome [00:02:44]:
I gotta say that is a tough question. So, maybe stepping back. Biotech, of course, is focused on cutting-edge science in the pharmaceutical industry. But biotech investing—there are many approaches that you can take to investing, and many different firms approach things differently. So, basically, we’re in this highly technical industry. There are a lot of ways to operate. One way is to focus on finding out whether the drug works—yes or no—and having the team very focused on executing that process. But in investing, you might have separate mandates. One investment firm could be looking at a 10-year horizon, and that could be a consequence of their fund structure. Another firm could be more late-stage, and so they’re looking for things that might play out in a shorter timeframe than 10 years.

I would say what is different about our firm and how we think about the world is we’re doing multi-stage investing. So we’re doing early-stage, middle-stage, and late-stage investing all out of the same fund. This is somewhat different from how a lot of other venture capital firms are structured, where they may focus only on early-stage investing and company incubation.

So what makes us a little bit different is that investing across the spectrum of companies gives us a viewpoint into the world from multiple different angles. And what we tend to do is try to be very product-focused. We find out what the market needs, design a product accordingly, and identify large unmet medical needs. This is how we’re viewing things.

And if we’re thinking about an early-stage company, our understanding of late-stage investing really helps inform that process. That’s a little bit different from VCs who are only doing early-stage investing. And vice versa, when we’re doing late-stage investing, we’re thinking about the world from a longer-term horizon and how a traditional venture capitalist might think about it.

David Brühlmann [00:04:36]:
Speaking of multiple views, you’re also bringing a unique angle to investing because you started out in science. So tell us how you got drawn into science and how you eventually became an investor.

Michael Rome [00:04:49]:
Absolutely. So I would say I was drawn to science from an early age. I probably showed the most inclination toward the world of math. So early on, I think math was a big interest of mine. And then later on, biology became my primary focus.

I think when I was in high school, I really hadn’t decided yet what path I was going to take, whether I would go a more scientific route. I also had interests in economics and politics, so I really had broad interests. My father is actually a PhD-trained scientist who ran a lab at UCLA for over 40 years. So from an early age as well, I was exposed to a lot of science.

I was fortunate—I kind of watched the molecular biology revolution occur. This was probably close to 30 years ago. I remember being around in my dad’s lab and understanding better what experiments were going on and how they were using E. coli to express proteins. So I witnessed that molecular biology revolution, and I always thought it was interesting. Then when I got into college, it really solidified for me. I wanted to have an understanding of things not only from a mathematical angle but also from the broader perspective of biology. That is kind of my background and how I got involved in science.

I started working in a lab when I entered college, so I had a lot of lab experience and eventually decided to do my PhD in biochemistry. I was an undergraduate at UCLA studying Molecular, Cell, and Developmental Biology. I had experience in labs focused on neuroscience and microbiology, so I had a pretty broad background, but I was drawn a little more toward the quantitative side. So I went on to get my PhD in Biochemistry from Caltech. The program spans both biology and chemistry departments. What was informative for me at that time was that I really found out my passion wasn’t necessarily sitting at the bench, doing experiments, and pipetting. It was all very interesting, but for me that wasn’t the main appeal.

What I really liked was understanding what was going on in the field. Journal club was probably my favorite part of graduate school—getting to analyze papers, discuss ideas, and ask questions. Likewise, I enjoyed lab meetings where people would present their work and we would try to interpret the data and solve problems. That’s what appealed to me.
I got that sense probably early on in graduate school, and at the same time I always had an interest in what was going on in the biotech industry. I think that’s less talked about in academia, and you kind of have to explore it on your own. I started doing that early on. So when I thought about career paths, biotech was much more appealing to me than an academic career, and I started leaning in that direction very, very early.

David Brühlmann [00:07:25]:
And what finally pushed you over the line into investing? What was that?

Michael Rome [00:07:31]:
Investing is really unique. I would say for most PhDs or MDs, it tends to be a career path pursued by less than half a percent of people with advanced science degrees.

What I really liked about biotech was seeing all of these companies doing different things across various therapeutic areas. I was always curious about how drug development worked and what problems were being solved in these different areas.

I got into investing by doing basic analysis of biotech companies. Obviously, my background is scientific, but I started getting really curious about the financial angle. I’ve always had an interest in financial markets, but I would say that became much more of a passion after my PhD.

Combining my interest in biotech with understanding how these companies are run from a financial perspective was very interesting to me. I started exploring different career paths, and being a biotech investor brought those interests together. You could look at lots of companies, understand different areas of science, and connect the dots across fields. That’s where investing really appealed to me.

As far as getting the training to become an investor, I probably spent two years toward the end of graduate school learning things like how to build a financial model and how to value companies, especially when their products are very long-dated. I learned frameworks for valuing businesses economically, including building discounted cash flow models, which are commonly used to value these types of companies.

All of that was very interesting to me, and it really fit with my interests, so I decided to pursue the investing path.

David Brühlmann [00:09:03]:
I am thrilled to have this conversation with you today about investing because we usually cover very scientific topics. We typically go into the nitty-gritty of technology and science. So let’s start very simply. For scientists who have never interacted with an investor, what do you actually do on a daily basis? And more importantly, what does a firm like Foresite Capital actually look for when deploying capital into a company?

Michael Rome [00:09:34]:
So if I were to explain what we do to a scientist, it’s really simple. We’re trying to find the best biotech ideas and companies and invest in them over the long term.

What is very different about our job and our business is that we’re constantly looking at companies and new ideas and rotating into different areas. That forms the basis for how we operate as investors. One challenge in our sector—similar to what you might find in technology—is that change happens very rapidly. If you look at cancer care 10 years ago and compare it to where we are today, you see that a large proportion of current cancer therapies were developed within the last decade. It really underscores how much change is occurring in our sector.

What differs from a traditional scientific role is that we’re constantly changing topics and looking at different things. My team probably talks to around 10 companies a day across different time zones, including the United States and Asia.

Whereas a scientist is often very focused on a specific project, we’re looking broadly across many topics and opportunities.

David Brühlmann [00:10:45]:
So when you say broadly, that means different kinds of companies, different sizes, different areas of expertise, technology companies versus perhaps molecule-focused or therapeutic companies, and other things you’re looking at?

Michael Rome [00:10:58]:
I would say yes to all of that. Our firm, as I mentioned earlier, looks at companies across multiple stages. We do things like company incubation. We have an incubator called Foresite Labs. We also look at companies in the middle stages—the more traditional venture-backed companies. Then we look all the way through to publicly traded companies, and we even have a full-time trader at the firm. So we have platforms that allow us to participate across all of these different stages of investing.
What we’re trying to do is identify areas of change. If it’s an earlier-stage company, we’re really trying to partner with the founders and scientists, and we can play various roles depending on the company’s needs.

As far as therapeutic areas go, we tend to focus on four major categories. We spend a lot of time in autoimmune diseases. We have a significant concentration of companies in oncology. We’re also active in cardiometabolic diseases, and we have two cardiologists on our team who still see patients. A newer area for us, where we’ve really become more concentrated over the last four or five years, is neuroscience.

Unlike some of the other categories, where the biology is relatively well understood from a mechanistic perspective, neuroscience remains much more of a black box. A lot of the underlying biology is only now beginning to emerge.
So we’re constantly moving between these sectors, understanding the latest science, evaluating which companies we should be paying attention to, and also monitoring developments on the pharmaceutical company side.
I’d like to think of investing as a continual education process.

David Brühlmann [00:12:35]:
Yeah, that sounds very exciting. When you look at an early-stage company specifically, what are some aspects you’re carefully considering? What are the things that tell you, “Well, this is definitely a company worth pursuing,” and what are perhaps some red flags when you look at these companies?

Michael Rome [00:12:53]:
I would say we approach early-stage investing from multiple angles. One way that we tend to start companies is by backing entrepreneurs that we’ve worked with in the past. We’ve found that even if, let’s just say, we made an investment in a later-stage company and had interacted with the Chief Scientific Officer, and thought, “Wow, this is an extraordinary person,” we might then back that person in a future venture.

Another way we’ll do it is if we had a portfolio company that was acquired, and then we backed the team again afterward. We’ve been really fortunate to back an entrepreneur named Qing Dong. Qing was the CEO of a company called FronThera, his second company, XinThera, was sold to Gilead, and he’s now on his third company. So Qing is really a repeat entrepreneur. I consider him one of the best chemists in the world, and we would form a partnership that way. So those are two categories.

The other thing we’ll do is try to find assets through an in-licensing model and build a company around them, whether that company is clinical-stage or later-stage. Obviously, success in that model depends on finding good assets. We’ve been active in Asia for the past six years and have completed close to ten transactions with companies there. An example is a portfolio company called Candid Therapeutics. Candid ended up in-licensing three assets from China: one from a private company called EpimAb, one from a public company called Genor Biopharma, and the third from WuXi Biologics. Candid is developing T-cell engagers for autoimmune diseases. Two of those assets actually had extensive Phase 1 clinical data in oncology. The principle was to repurpose those T-cell engagers for autoimmune indications.

Candid was led by a very well-known biotech entrepreneur named Ken Song. I can describe the story in more detail, but Ken’s team did an excellent job advancing those assets and ultimately completed a transaction with UCB about a week ago.
So we have these models where we’re backing entrepreneurs, finding assets, and being really flexible in what we can do, primarily because we have this incubator called Foresite Labs, which enables us to explore many of these concepts and early-stage ideas.
The last thing I’ll say is that we’re also interested in entirely new therapeutic categories. For example, it could be a company developing novel therapies for depression. We might make a small investment in a company exploring those concepts. Those opportunities haven’t necessarily matured into the types of companies I talked about earlier, but we have a framework that allows us to explore these kinds of early-stage ideas.

David Brühlmann [00:15:29]:
You mentioned Asia, and China in particular. We definitely live in a global world. Not only is investing becoming global, but company formation is becoming increasingly global as well. We work across continents and countries. What is driving that shift from your perspective as you’re researching companies across different geographies? And what does that mean for early discovery, development, and ultimately manufacturing?

Michael Rome [00:15:56]:
The primary driver behind the growing interest in biotech abroad, especially in Asia over the past decade, is that if you take China as an example, what has occurred there has essentially been a biotech revolution over the last 10 to 15 years. If you take a step back, what was happening is that many scientists were being trained in countries like the United States and Europe, where the biotech industry was already more established. Scientists from China would come to the U.S. and Europe for postgraduate training, including PhDs and MDs. I certainly had colleagues in graduate school who completed their undergraduate education at universities in China. So the United States has been an excellent training ground for many scientists coming from abroad. As science continued to advance in the U.S., China adapted very quickly. Scientists began founding biotech companies, and China—being highly entrepreneurial—saw what was happening in technology and, around 15 years ago, started placing a strong emphasis on biotech.

They leveraged scientists who had trained at top institutions, and biotech companies began emerging rapidly across China. The industry really took off during that period. As a result, investors—particularly venture capital firms in the U.S., Europe, and China—began investing heavily in the biotech sector roughly 10 years ago. Several factors contributed to this growth, but access to investment capital was especially important. Companies could also go public on Chinese stock exchanges and access capital from public market investors. These forces collectively accelerated the growth of the biotech industry.

China also became extremely effective at taking processes such as biologics development or small-molecule discovery and doing them not only more cost-effectively but often more quickly. As a result, the country advanced very rapidly over that 10-year period. Then something interesting happened. About six or seven years ago, China introduced restrictions on the types of biotech companies that could go public. As a result, liquidity for investors began to dry up. When public markets slow down, investment capital often follows. So you had a situation where many biotech companies had very promising pipelines and assets but were effectively stalled because access to capital became more challenging.

That happened around six or seven years ago, and that’s when investors from abroad started paying more attention. Suddenly there were many companies with strong assets that could no longer easily access capital or public-market liquidity and needed financing from private investors. That created a wave of venture capital firms entering China to invest in those companies. Frankly, we were seeing opportunities that were very attractive from a valuation perspective. We became interested in China initially by hearing about what was happening there, both at the company and asset level. We were one of the earlier firms to become active there.
We ended up getting connected with a pharmaceutical company in China called Haisco Pharmaceutical Group through an entrepreneur in our network. We started discussions with Haisco and eventually licensed a TYK2 inhibitor that I mentioned earlier.

That was our first transaction in China. I would say it was largely serendipitous—getting introduced to an entrepreneur, who then connected us to a pharmaceutical company, at a time when the financial markets there were essentially paused. That’s how we got involved, and we continue to think China remains a very interesting biotech ecosystem. I can talk, if you’d like, about where things stand today.

David Brühlmann [00:19:51]:
What I would like to follow up on, Michael, is the geopolitical situation today. There’s a lot of discussion around offshoring and onshoring strategies. Questions arise around what should be done in the U.S., what should be done in Europe, and what should be done in countries like China or India. What activities do you believe should still happen domestically in a country like the United States, and what activities should absolutely be outsourced to other geographies in order to accelerate development and work more efficiently—not only in development, but ultimately in bringing therapeutics into the clinic and, finally, to patients?

Michael Rome [00:20:25]:
So there’s a lot going on on the geopolitical front. I think I would categorize it this way: if you think about it from a later-stage pharmaceutical company perspective versus an earlier-stage biotech perspective, there are two dynamics playing out right now.

One is that you can see a push from the U.S. government, particularly during the Trump administration, to bring more manufacturing back to the United States. There are a whole set of dynamics around that. I should caveat that I’m not an expert in that area, but there’s definitely a focus on geopolitical concerns related to not having manufacturing capacity—especially for key drugs—located in the U.S. That’s a separate topic that’s currently playing out.

On the biotech side, which is much more familiar to me, there are different dynamics at work. I would say the biggest issue that both the U.S. and China have focused on is concern over U.S. clinical data and patient information being accessed by foreign entities. So there are privacy and data security concerns. There has been increased focus on that issue in biotech. There was legislation proposed toward the end of the Biden administration that sought to limit access to clinical data involving U.S. patients. So that’s been one major area of attention.

A second issue, which historically received less attention but is now becoming more prominent, involves drugs that were initially developed in China and later licensed into the United States. The concern is whether U.S. companies could be placed at a disadvantage if a significant amount of innovation is being licensed from abroad rather than developed domestically. That’s really the primary concern on the early-stage biotech side.

To elaborate, when a drug is licensed from China—and in most cases these are early-stage assets, perhaps in Phase 1 development or even late-stage preclinical development—the important thing to understand is that if the drug is licensed by a U.S. company, particularly a U.S. pharmaceutical company, the majority of development spending still occurs in the United States.

When a drug is licensed from China—and in most cases these are early-stage drugs—they could be in Phase 1, or they could be in late-stage preclinical, or even the data could have been generated in China first. What’s important to understand is that those drugs, if they are licensed by a U.S. company, particularly a U.S. pharma company, are going to result in the majority of drug development expense being spent on U.S. clinical trials.

The FDA mandates that over 50% of patients must be in the U.S., so companies end up spending hundreds of millions of dollars—often half a billion dollars—on late-stage clinical development, all in the United States. So even though the drug was originally developed in China, the bulk of biotech spend tends to be on that later-stage clinical work. And there could be an argument that you wouldn’t have that type of spending if you didn’t license the drug in the first place. So I think there’s definitely some validity to that.

On the earlier-stage side, what has happened in biotech is that I would estimate that perhaps 80% of companies I encounter have some degree of R&D activity in China. That could involve using CROs such as Pharmaron for small-molecule research or WuXi AppTec and WuXi Biologics for toxicology studies and other development activities. We’re seeing many U.S. companies adopt this model today, and the reason is fairly straightforward: it’s often significantly less expensive to conduct certain studies in China than elsewhere.

As a result, I don’t necessarily see the U.S. biotech industry being disrupted by these trends. Rather, I think we now have an industry that is highly interconnected with what’s happening in China. I see more drug development being enabled when both sides are working together. From a geopolitical-risk perspective, we haven’t seen anything specific that would completely prevent U.S.–China biotech partnerships. I often think about an example like Apple. Apple has extensive operations and partnerships in China, demonstrating the level of economic interdependence that exists. I think that kind of cooperation can create positive outcomes, particularly when it comes to getting medicines to patients.

David Brühlmann [00:24:03]:
That’s a wrap on Part One with Michael Rome. We’ve started to unpack what investors at Foresite Capital really look for, what shapes their thinking, and how the world of biotech investing is evolving. In Part Two, we go deeper into the harder questions about funding timelines and what separates the teams that make it from those that don’t.

Thank you for tuning in. Please leave a review on Apple Podcasts or your favorite podcast platform, and I’ll see you next time.