Podcast Transcript

David Brühlmann [00:00:29]:
Is the biotech investment model broken, or has something structurally shifted that scientists need to understand? Welcome back to Part Two with Michael Rome of Foresite Capital. In Part One, we opened the conversation on how investors evaluate early-stage therapeutics and what they’re looking for. Now we go further into the realities of today’s funding environment, what scientists underestimate about how investors think, and the signals that separate strong programs from the rest.

I’d like to shift gears a bit and address the elephant in the room because, over the last couple of years, I’ve heard the same thing very often when speaking with biotech leaders and CMC leaders: it has become very difficult to secure funding. So I’m really glad to be able to ask this question to an investor. What is your view on that? Is the current biotech investment model broken? Or if it’s not broken, what has changed?

Michael Rome [00:02:47]:
Taking a step back and asking how we got to the place we’re in right now, where funding has become more difficult—particularly for novel concepts—I like to think about it from a financial perspective. In 2020, when COVID occurred and the Federal Reserve ended up lowering interest rates effectively to zero, that led to a flood of money into risk assets, particularly biotech. We had never seen an era where the biotech industry suddenly experienced such an influx of capital. As we all remember, it happened very quickly during the early stages of COVID. Effectively, the Federal Reserve injected a lot of money into the economy. All of a sudden, there was new money available.

I think it’s fair to say that before 2020, we saw a gradual increase in capital flowing into biotech. More money was entering the sector over time, which made sense because clinical development takes longer than many other product cycles. So we had a very steady climb in investment. Then, in 2020, we experienced this huge boom. At that point, investors who weren’t biotech specialists were also looking for places to deploy capital. Because there had historically been more discipline and fewer companies in the sector, many early-stage companies suddenly found themselves with unprecedented access to funding. Some companies had only been formed a year earlier and were working on concepts such as gene editing. Yet all of a sudden, they had access to large amounts of capital. During 2020, we saw an enormous number of new biotech companies being formed. We also saw what I believe was a record year for biotech IPOs. Companies were going public while still preclinical, which is highly unusual in the biotech industry. So all this capital became available, and biotech was booming throughout 2020 and into 2021. Then all of a sudden, the music stopped.

We experienced an unwinding of what had been happening in biotech. Inflation became a major issue, the Federal Reserve started raising interest rates, and we saw the exact opposite dynamic occur. Money began flowing out of risk assets, particularly biotech. Many generalist investors left the sector and moved into other areas such as cryptocurrencies and AI, which became more attractive destinations for risk capital. Funding then began to dry up.

The public markets effectively closed for biotech companies. There’s always a lag effect, but eventually earlier-stage companies could no longer access public-market capital. That led to the environment we’re in today. We can talk about how some of those factors are changing. I think we’re seeing some encouraging developments in M&A activity that may eventually flow back to earlier-stage companies and support new funding.

But because we experienced such a rapid withdrawal of capital, it became extremely difficult for early-stage biotech companies to raise the funding they needed. Essentially, we went through a valley of death where it was very hard for earlier-stage companies to achieve exits. As a result, investors became less willing to fund opportunities that were viewed as higher risk, and fewer novel concepts received financing. That’s really the consequence of that capital cycle.

David Brühlmann [00:05:55]:
In this challenging situation—or season—that we’re in, what advice would you give a startup founder, especially an early-stage startup founder, to make a strong case? And what do founders perhaps underestimate when they approach an investor?

Michael Rome [00:06:10]:
Because of the way the market has adjusted during the period I was describing, it’s become much more product-focused.
Investors are really looking for companies that have a pathway to an approved drug. So if I’m an early-stage founder, I would probably approach the problem very much through the lens of: What drugs are out there now? Where are the unmet medical needs? How do I get from an idea to an approved drug? Having that sort of framework outlined is really important. You can look at the opposite end of the spectrum and say, “We’ve seen these huge advances in gene editing, so I’m going to start a gene-editing company.” If you come to an investor looking for capital, we might say, “The area is really interesting, but we don’t know how much money it’s going to take to get to an approved drug. We don’t see the pathway yet.”

Because the market has shifted to a more product-focused lens, it’s much harder to get funding without that roadmap. Let’s say you approach an investor with an idea and say, “There’s a large unmet medical need in IBD.” I’ll make up a hypothetical example. Suppose you’re looking at approved mechanisms such as IL-23 or TNF-alpha, along with TL1A, which is a newer mechanism.
You could say, “I’m going to develop a trispecific antibody that addresses all three of these mechanisms of action. Here’s the pathway to getting an approved drug. Here’s the type of clinical trial we would run.” Having those details thought through—even at a very early stage—can be extremely beneficial because it helps investors understand how value will be created.

David Brühlmann [00:07:36]:
To what extent do you look at CMC expertise and manufacturing readiness when you’re evaluating a company?

Michael Rome [00:07:44]:
I would say it’s a much more important area of focus for later-stage companies. When we’re investing in a company that is, let’s say, in Phase 3 development, we spend a lot of time understanding CMC and manufacturing to make sure there are no bottlenecks.
One of the biggest issues we’ve seen across our portfolio is companies that have done a great job on the clinical side and have a pathway to an approved drug, but their CMC package isn’t fully buttoned up yet. We know that the FDA, especially in recent years, has been very focused on these issues.

As a result, we’ve seen CMC-related delays extend as long as two years beyond the availability of clinical data. That can be extremely expensive for a company, especially when competitors are advancing in parallel. So we spend a lot of time evaluating readiness in that area. We have strong expertise internally. Several members of our team have spent decades in the biotech industry. We also rely on outside consultants to help us understand specific areas in greater depth. For an earlier-stage company, where the primary question is whether the drug will work or not, we’re much less focused on CMC. But once a company reaches the later stages of development, we’re going to be much more focused on those details.

David Brühlmann [00:08:50]:
Earlier in our conversation, Michael, you mentioned that if you come across a proven entrepreneur—or somebody you’ve worked with successfully in the past—you’re much more likely to invest because you know they’re a strong leader and manager. I’m curious, because you’ve seen so many different founders and leaders over the years: what are some of the common mindsets or leadership traits that consistently impress you and contribute to success?

Michael Rome [00:09:18]:
Look, biotech is really hard, right? Most biotech companies that are started are going to fail. To some degree, we’re looking for pattern recognition. What do we see in CEOs that has worked in the past? The thing I’ll say is that there are many different paths to success. You can have CEOs with very different personality traits. In fact, one commonality is how different successful CEOs can be.

We’ll look for those various patterns. You might have an individual running a company who is extremely focused. They may also be very competitive—not always, but often. They may have a specific area where they want to create the best molecule possible, and they’ll work quickly and relentlessly to do so. We think those are great traits.

Something that isn’t talked about enough, but is really important, is execution and how good a team is at executing. We’ll look for that ability in an entrepreneur. It helps if they’ve done it before. Have they built a biotech company? Have they successfully executed across the different functions?

As we know, there are many areas within biotech—CMC, clinical development, preclinical development, regulatory affairs, and others. Does that entrepreneur have a grasp of those areas, or do they have the right people and team in place? I wouldn’t say that’s a prerequisite for investing in every company, but proven experience certainly helps. Our industry is very different from the technology industry. You can have a technology CEO who’s 22 years old. In biotech, experience matters. Often people have advanced degrees and have spent a decade or more in the industry learning how it works. The nice thing is that we tend to interact with people who have been in the business for a long time and have developed a mature framework for approaching problems.

David Brühlmann [00:10:59]:
Yeah, that definitely makes sense. You need a lot of expertise in our field. And yes, biotech is hard. Looking at the current landscape of technologies, novel molecules, and funding challenges, what are the most promising areas you’re investing in? Are there areas or technologies that you would suggest startups pursue?

Michael Rome [00:11:24]:
One area that really excites me is what’s happening in small-molecule oncology right now, particularly modalities such as degraders and heterobifunctional molecules. What’s attractive from an investor’s point of view is that these technologies are often not being used to target entirely novel biology. Instead, they’re being used in unique ways to address disease drivers that traditional small molecules couldn’t effectively target. I like this area because it’s somewhat de-risked from a biology perspective, and we now have proof of concept across a number of companies. You have companies that are experts in developing degraders.

We like the advances occurring on the chemistry side. When I was a graduate student 20 years ago, medicinal chemistry was guided by rules such as Lipinski’s Rule of Five. At that time, many chemists would have said it wouldn’t be possible to design heterobifunctional molecules with molecular weights two or three times larger than conventional drugs because of concerns around permeability, bioavailability, and other drug-like properties.

What we’ve seen over the last five to ten years is that it is possible to make these molecules. As a result, a number of companies are now pursuing very exciting biology. Take a company like Kymera Therapeutics, which has developed a STAT6 degrader. STAT6 is a difficult target to drug, and a degrader is a very logical approach in that setting. That proof of concept is important. Now we’re seeing companies use these technologies to tackle even harder biological problems.

For example, there was a company called Halda Therapeutics, which was acquired by Johnson & Johnson a few months ago. Halda developed a very interesting class of molecules called RIPTACs. What RIPTACs do is allow you to target a known molecular driver of cancer. The RIPTAC developed by Halda targeted the androgen receptor (AR) protein in prostate cancer. The other side of the RIPTAC—a heterobifunctional molecule—targets an essential cellular protein. In this case, it targeted BRD4. What was groundbreaking about Halda’s data was that they demonstrated they could use AR as a targeting moiety to selectively destroy cancer cells. Even if the cell contained multiple co-occurring driver mutations, simply using AR as a molecular “ZIP code” proved to be a very important proof of concept for the field.

When I think about next-generation drugs, I think we’re going to see approaches that don’t just target a single protein but instead provide capabilities similar to what we’ve seen with antibody-drug conjugates, adapted for highly specific small molecules.
The last thing I’ll mention is the technology developed by Revolution Medicines, which I think is another groundbreaking platform with applications across many diseases. Revolution Medicines has developed RAS-targeting drugs, including pan-RAS inhibitors. These molecules bind to RAS and form a complex with cyclophilin. In essence, they use a ubiquitously expressed cellular protein to create a trapping mechanism around an oncogenic driver.

All of these approaches—whether degraders, RIPTACs, or cyclophilin-based molecular glues and complexes—are beginning to converge. I think we’re on the verge of a revolution in these types of drug-discovery concepts, not only in oncology but potentially in many other therapeutic areas as well.

David Brühlmann [00:14:42]:
Let’s get practical at this stage, Michael, and talk to the startup founder who is preparing for their next funding round. What are two or three things they should start doing today?

Michael Rome [00:14:55]:
I can relate to that question because we have an incubator and are constantly evaluating concepts that haven’t yet received outside funding. We’re often asking ourselves: How would this look to an outside investor? So we’re constantly thinking about how to create companies that will have appeal. For me, it goes back to the concept we discussed earlier: understanding the unmet medical need and the market before focusing on the scientific solution. What I sometimes see are scientific founders who are brilliant in their field but haven’t yet fully developed the business case. They’ll say, “We have this incredible technical capability that allows us to do X, Y, and Z.” But when you start asking questions, it’s not obvious what unmet medical need they’re solving or what market opportunity they’re addressing.

When we’re thinking about starting a company, we take the opposite approach. We begin with the market need. We ask: What are the barriers to entry? How difficult is the problem? What opportunity exists? We think through those questions first and then work backward toward the scientific solution. So if I’m a new founder preparing to pitch a venture capitalist, I would frame the story in that way. Think carefully about the problem you’re solving, why it matters, and how you’re going to solve it. That would be my advice to early-stage founders.

David Brühlmann [00:16:12]:
Yeah, Smart Biotech Scientists, this is great advice. Start with the end in mind. Understand what your customer needs and then reverse-engineer the solution. As we are wrapping up, Michael, what additional questions should I have asked?

Michael Rome [00:16:27]:
We covered a lot. We talked about what’s happening in China and some of the geopolitical issues. Maybe it would be interesting to talk about where biotech is headed and what the future looks like. We’re obviously spending a lot of time thinking about that. One thing that’s been very positive for biotech is the amount of M&A activity we’ve seen over the last six months.

This will have a lagging effect on earlier-stage companies, but when later-stage biotech companies get acquired, capital tends to flow back into the sector because investors have generated returns and can redeploy that capital into earlier-stage opportunities. As a result, we should see more money flowing back to venture capital firms focused on earlier-stage companies. You may even see more generalist investors become interested in biotech again because they’ll look at the M&A activity and say, “There’s a pathway to generating returns here.”

Typically, these effects occur with a lag of six months to a year. As we move through this cycle, I think the environment for biotech venture capital is going to become healthier. It should help address some of the challenges we’ve discussed.
I tend to think of the industry in cycles. We experienced a biotech boom during COVID. Then we went through a valley-of-death period. Now I think we’re entering a new cycle where M&A activity is accelerating. That’s healthy for the sector. It’s not all positive, however. When you look at what’s happening at the FDA, there’s been a lot of uncertainty and organizational change. We’d like to see more stability there.

That is one area we’re watching carefully because regulatory stability matters for the entire biotech industry. I still believe the FDA is the best regulatory organization for biotech in the world. The agency has incredible career scientists and physicians—people who could have pursued more lucrative careers elsewhere but chose to serve the public. There are many talented people at the FDA. It would be great to see that culture continue and to see more stability moving forward. So we’re watching that closely.
At the same time, the positive M&A environment is a strong underlying driver for the sector. If that continues, I’m optimistic. I think we’re entering a period where more capital will become available to fund biotech companies.

David Brühlmann [00:18:39]:
This has been great, Michael. With everything we’ve discussed today, what is the single most important takeaway from our conversation?

Michael Rome [00:18:47]:
I think what’s important is that we’re speaking to a very specific audience within the biotech industry. It’s valuable for investors and scientists to communicate more closely because better communication benefits everyone. We can learn from scientists about challenges in CMC, manufacturing, development, and other areas that investors need to understand. I spend a lot of time with companies, whether that’s having dinner with CEOs, speaking with CSOs, or talking with the people doing the work inside these organizations. It’s always valuable to stay educated about what’s happening on the ground. So thinking about these topics through the framework you’ve used and the questions you’ve asked has definitely been helpful for me.

David Brühlmann [00:19:26]:
Yes, that’s such a good point. It’s very important to understand what other people are doing and to communicate proactively and effectively so that we can collaborate better. Where can people get in touch with you, learn more about your work, and better understand investing?

Michael Rome [00:19:43]:
Sure. I would recommend visiting our company website, Foresite Capital. We also have a LinkedIn presence where we post updates about what’s happening at our portfolio companies. So definitely check out LinkedIn. I’m on LinkedIn as well, so feel free to reach out and send me a message. I’m always happy to connect. Those are the primary ways people can interact with us.

David Brühlmann [00:20:02]:
Fantastic. Thank you so much, Michael, for sharing your insights and for opening up a perspective that many of our audience members may not be as familiar with—the world of funding and investing. Smart Biotech Scientists, you’ll find all the relevant information in the show notes. Please feel free to reach out to Michael and his team. And once again, Michael, thank you so much for being on the show today.

Michael Rome [00:20:23]:
Thank you, David. I really enjoyed the conversation and all the great questions.

David Brühlmann [00:20:26]:
That brings us to the end of this rare conversation from the investor’s seat. Michael Rome shared candid perspectives on funding, what separates winning teams, and where he would place his bets for the next decade.