A spotlight on biotech

Dr George Syrmalis is the CEO of The iQ Group Global. The iQ Group Global is basically a biotech investment bank. They do lots of investment banking operations, funds management, money raising and so on for biotech generally and they’ve got a few funds in which they invest in biotech. They also own the IP for a particular therapeutic treatment which is a biosensor which they’re going to use for detecting glucose in saliva as opposed to fingerprint glucose testing for diabetics, which is a couple of years away. 

Anyway, the reason for talking to George Syrmalis is to understand more about investing in biotech because it’s such a complicated and difficult area, so I thought it’d be a good idea to ask him how to approach it and what are the ways that people should think about investing in biotech and it’s fascinating. Really worth listening to this interview because it will give you some pointers from an expert about how to go about it. It may tell you things that you didn’t really know about what to do about biotech and one of the things, just by way of preview, is that the probability of success is just 30%. Maybe that’s better than some of the ways of investing on the share market, but 30% is not that much. 

Here’s Dr George Syrmalis, he’s the CEO of The iQ Group Global. 

George, obviously IQ Global I think is a specialist biotech investment bank virtually, you do a lot of things.  Perhaps we could start by just talking about what it’s like to invest in biotech because obviously from particularly ordinary investors’ point of view it’s a very different form of investing in many ways to most investments, partly because of the long timeframes that are involved.

That is correct.  I mean, it is very much, as you note, quite an alternative asset.  I mean, the biggest impediment with biotechnology is, a) understanding what the company’s actually doing; b) trying to get your head around how one will exit an investment; and c) understanding the risk factors inherent in drug development.  So whilst the methodology of investing in the instruments could be the same, it’s a different outlook all together.  Imagine this, that the average time to take a drug in front of a regulator from the laboratory is about 10-12 years. 

Your preclinical testing to get it in front of the regulator is 10 years lead time.  Then your spend is close to $2 billion and the statistical probability that you’ll actually get it in front of the regulator is somewhere around 30%.  So the odds are stacked against you and of course getting it through the regulator is…

George, that is amazing!  10 years, $2 billion dollars, 30% probability only, is that right?

That is correct and that’s to make it to the pharmacy shelf.  That doesn’t guarantee commercial success.

Right.

Then you have to look at your patent life.  So the drug made it now to the shops, let’s assume it’s a great seller, how many years is it going to be patent protected before the generics kick in place.  The generics are really good for your reimbursement organisations and for the patients ultimately, but then that drives the pharma profit straight down the day that they’re released.  You, as an investor, have to be able to answer all these questions before you invest and you have to be able to hang in there during the various phases of financing that biotechs do in that 10-12 year cycle as I said earlier.

I think you have to be an informed investor, you have to put there cash that you don’t really need and you have to be able to assess, apart from the intellectual property, the actual management team’s ability to, a) develop the drug; b) raise the cash; and c) if they don’t have the capability for either, recruit really good people to be able to do it. 

Would you advise to only invest after a certain time, after one of the phases?  Obviously, there’s phase 1, phase 2, phase 3 clinical trials. 

Correct.

Should you only invest after say, phase 2 or after phase 1 or is it worthwhile investing at the beginning ever?

I’ll tell you what, the deeper you go into it, the less the risk.  Once you finish preclinical and you start clinical trials you’ve reduced the risk, right?  Then the end of successful phase 1 clinical trials further reduces the risk, but what happens is this usually adds disproportionately to the valuation of the company.  What you will buy at 20 cents for instance at phase 1, at the end of phase 2 or phase 3 will probably cost you $4 or $5 dollars. 

The risks or the probability presumably is reduced.  Are you saying that the risks or the probability is not sufficiently increased to offset the normal pricing increase?

Well I’m saying that in essence the probability is never at its best because even when you submit to the regulatory agency, still you have a 30% probability that you’re not going to make it.  And if you do make it, Alan, one has to take into account that’s your licence to put the drug on the shelf.  It’s like just any ordinary business starting off right at that point so it guarantees nothing whatsoever. 

I think if one is able to make an informed decision, they’re able to invest early on at preclinical, so to speak, where you can buy a stock in the Australian exchange for a few cents perhaps and then be able to realise and exit when it has progressed through to phase 1 through to phase 2 clinical trials, provided the company has foreseen that exit and has listed on an accredited stock exchange like the ASX or the NASDAQ.  It makes better sense than paying $8 bucks for something which is still not approved.

So you reckon it’s better to buy at preclinical trial stage and then possibly sell after phase 1 or phase 2?

Correct, provided the company has listed, is on the stock exchange so then you can realise the exit. 

How does one go about making an informed decision at that point?  How do you choose a drug that’s likely to be valued at a higher price?

That’s where it can get a bit tricky and that’s when I think people should start listening to people that understand the space.  You have to understand what this drug is for, what the competition is, what the competition is developing, is it a first in class, is it a last in class, is it a medical device, is there the statistical probability that a definitive cure will occur for that disease…?  Because all of this then will validate the investment that you’ve done.  As I said before, you’ve got to look at that management team and not just judge them as scientists and their ability to develop the drug, but also judge them as financiers and their ability to raise the cash to take the drug to the regulator and in a non-dilutive smart way if possible.  Unless you then really deeply understand biotech or consult somebody who does, it’ll be a bit like walking in the dark.

It’s like going down the horses and picking a horse to put on.

It is a bit like that, but I think it’s statistically a higher probability that you will win money on the horses than biotech because we haven’t got the regulatory agencies intervening. 

Right, I suppose what keeps everyone interested in the field is the occasional blockbuster drug that makes billions.  What are some of the big drugs and what’s the probability of getting them?  I’m thinking of Viagra, obviously, or ones like that.

Well, Viagra, as you know, is a drug that commenced its pathway to the regulator by being a drug for pulmonary arterial hypertension and the data didn’t go so well and they observed adverse events which were basically the erections that were registered as adverse events in the clinical trial, so they pulled the drug back, they commenced a new clinical trial with new end points and then they developed it for erectile dysfunction which was not even classified as a disease then, and as far as I know I don’t think anybody else would have been able to pull it off.

But, Humira, that’s a blockbuster.  That’s an anti-TNF for rheumatoid arthritis, it’s also expensive, a biologic drug.  There’s a fair few of these.  Keppra another anti-epileptic.  The most effective drugs and the drugs that basically create a benchmark become a reference.  The ones that also become the blockbusters and the first in class.  Reinventing another new formulation and having IP and just being in the field and just doing what everybody else does will not make you a blockbuster. 

But usually biotech and biotech investors are really now these days going down a field where a disease is not managed by managing the symptoms but by managing the mode of action of disease.  That’s why you see these massive valuations of billions of dollars in American companies that do - CRISPR for instance, or that do chimeric antigen receptor therapy for cancers, haematologic cancers.  Because they’re opening up completely new fields and they’re not just alleviating the symptoms of a disease, they’re actually curing the disease. 

What about the difference between investing in drugs and investing in devices.   Is it safer to invest in medical devices or is it all much the same?

It is safer because medical devices are considerably easier to basically develop.  They do not require the expense depending on the device and there’s different levels of classification when you’re approving devices.  The problem with devices sometimes is the device will get approved and unless it’s a ground-breaking device for instance, it may not get reimbursed.  Then the revenue that the company was hoping it will have will not have it because people will not be willing to pay for it as private individuals.  So then what happens is the market cap of these companies is significantly smaller compared to the companies that do the biologic drugs or genetic therapies, if you like, for that matter.

What’s your view of stem cells?  Is that an emerging area that is likely to make money for investors?

Stem cells is great area.  You look at how stem cells have evolved over the last 10 years.  I mean, clinics have been popping up in various places of the world.  The big question with stem cells therapy is what the regulator is willing to do and how they will acknowledge these clinics.  Here in Australia they’ve done a lot for stem cell clinics in they’re not a panarchy, they’re not a solution to everything.  But for certainly pathologies where tissue needs to be regenerated, mainly orthopaedic applications it’s just a really great application.  However, this is not so much a function of a drug per se as it is a technique that a physician applies in generating those stem cells.  If you want to look at modern drug companies, you can look at the Kite team, which is a company that was originally bought for $12 billion dollars by Gilead.  These guys are still developing a product to treat large B-cell lymphomas.

So that’s a big price?

A massive price.  There was another company which developed again a genetic therapy for a certain anomaly in the eye, and they estimate that the reimbursement price for this procedure will be close to $500,000, so the insurance companies or the government will have to basically fork out half a million bucks in order for a patient to have this procedure done.

It’s hard to imagine that happening to be honest.

Well, actually in America they’re already talking about it and they will be reimbursing it, perhaps not to that degree, not to that half a million bucks, but definitely a few hundred thousand dollars. Somebody speculated that this gene therapy may cost up to $850,000 dollars. 

Well, I suppose if it saves your life you’d be prepared to pay, but the question is whether someone else like the government or the insurance companies are prepared to pay.  That’s a lot of money.

Correct.  It’s a company worth taking a look at, Spark Therapeutics.

What is it?

Spark Therapeutics.  It’s the company which is developing that treatment that I told you about.  They’re the ones that will be pricing it.  So you can understand everybody that’s put in money in this company is sort of valuing the company against the estimated number of patients versus half a million bucks per patient.

That’s amazing.  Perhaps we could just talk about IQ Global for a minute.  Obviously, you do a lot of investment banking work but you also have some investment funds that people can invest in biotech through it, could you tell us about what those are? 

Correct.  We have our Series 8 which is sophisticated investment only fund that invests in the Australian private companies that will go public.  Automatically what this means is the investor will be able to realise and exit and it may not be for the multiples that you would exit if the drug was at the regulatory phase, it will be for considerably less, but at least they exit and at least they make a profit.  This is an early stage venture capital limited partnership which is approved by the Department of Innovation and Industry.  And similar to other funds again for sophisticated investors that they invest in local Australian biotech.  Other funds we do with basically public and listed companies so we wait for milestones to be announced and usually we will exit a position when positive milestones are announced after a clinical trial.

What sort of returns do you achieve?

Look, for a public exit private company, after three years a typical return that one would expect to achieve would not be less than 10 times their investment.  For a private company, I’ll give you a typical example without knowing the company here.  We invested in a Melbourne biotech that was doing a treatment for a rare disease.  We invested at about 85 cents and we exited about 18 months later at $7 per share, so it was a good investment given the fact that it was a company…

But how often do you manage that?

We’re very careful with the positions that we take.  I have a firm belief here that you make your profit when you buy cheap.  We look at buying these companies early on and cheap because we know exactly what we’re looking at.  Our investment objective is completely detached to the regulatory approval because we seek to exit early on, prior to even realising phase 2 clinical trials to be honest with you.  So that way the ability to exit the investment becomes a milestone in itself that adds value. 

I understand you’ve also got your own therapeutic device or treatment which is saliva testing for diabetic sugars, is that correct?

We have acquired the intellectual property from the University of Newcastle on the biosensor and the first test that we’re developing on this biosensor is to measure glucose in saliva.  We’re aiming, once this product is regulated to substitute for the finger prick test and for the continuous monitoring devices, so then patients that have diabetes type 1 sometimes have to often measure up to eight times per day.  Our objective is to be able to put this in the market, the global market of course, not just the local one, and to substitute for the finger prick tests for the same price that the patients pay for the finger prick tests.

How far off doing that are you?

We think that we’re not more than 24 months away.  We have two sets of milestones yet to reach with our R&D partners, well actually really in effect, one set of milestones yet to reach and then we’re applying for our regulatory approval in Europe as well as FDA.

I’m interested partly because I’ve got a type 1 diabetic daughter who is pricking her finger all the time, possibly more than 8 times a day, so a saliva test would be great, I’m looking forward to it.

Well, you’ll understand then the pain that goes with it, and it’s not only a pain, it’s that concern, you see.  And we’re building this around a digital platform so the result gets uploaded and it gets analysed, it gets interfaced with artificial intelligence systems, it gets correlated with other people of the same epidemiologic characteristics.  And at the same time whilst your child is at school you can actually see them, monitoring on your phone and see what her results were, or it can remind her, etcetera, etcetera…

So whilst we think that, yes, we didn’t discover glucose monitoring in itself, but it’s the only meaningful innovation for diabetic patients that has occurred in 40 years’ time and all this is a result of Newcastle University.  That’s amazing I think. 

It is.  Well, looking forward to that and obviously it will undoubtedly make quite a lot of money if and when it comes out.

Yes, yes.  We like to say at the stage that we are – don’t forget, this is biotech – that when it comes out, as opposed to if that comes out.  We’ve gone through the difficulties of this.  We have de-risked a lot of it, right?  We feel we’re on a good road and in two years’ time this will be out. 

Have you got a fund that people can invest in the biosensor?

Well, now this is getting a bit tricky because we’re realising an IPO on NASDAQ in the coming few weeks, so we’re coming out of the Securities Exchange Commission any day now, our prospectus is coming out.  So as you can understand, due to regulatory constraints I can’t say anything about that.

And you’re going on NASDAQ, not the ASX?

No, we’re not going on the ASX, we’re going on NASDAQ because we believe NASDAQ is a market with a lot of depth that has a considerably better understanding of biotechnology and many more sophisticated investors that make educated investments and do not want to rush out of the investment after a month.  The last thing we want is superfunds that will rise, a 20% profit and then just dump your stock and walk away.

Well, we look forward to that and obviously there may be some opportunities for people if they want to to invest via NASDAQ, but there you are.  It’s good to talk to you, George, thank you very much.

Thank you, Alan.  Thank you for your time and I look forward to speaking to you again.

Yes, and you too.  Thank you.

Thank you, bye.

That was Dr George Syrmalis, CEO of the IQ Global Group.