Simone Song isn’t afraid of the numbers.
(Bloomberg) — Simone Song isn’t afraid of the numbers.
As the former head of health banking for China at Goldman Sachs Group Inc., she was well aware of the staggering odds biotechnology companies face when she started her own venture fund in 2015.
Only about 10% of experimental drugs ever make it to the market. Even fewer startups survive, and all burn through millions of dollars in the process.
Song tackled the challenge by leaning into the uncertainties — and quantifying them through a bespoke software system that assesses the likelihood of a new biotechnology company succeeding. Her methods are helping her pick winners, she says: Her initial venture fund, ORI Healthcare Fund, has generated a 15% compounded annual internal rate of return and a 2.2 times multiple on invested capital.
“The traditional model is almost like a lottery,” with hopes of a rare home run keeping many companies and investors going, Song said, in an interview from her offices in downtown Hong Kong. “What we need is to translate data into investment insights. We have to be able to exhaust all the challenges, to mitigate the risks.”
Song’s return outpaces the notoriously volatile public biotech market, with the Nasdaq US Small Cap Pharma & Biotech Index down more than 20% over the past five years. Still, the outlook for the youngest companies and firms like hers that bet on them could be getting more difficult.
The number of initial public offerings for the industry globally — one way for investors to cash out — over the past five years peaked at 211 in 2021, and plummeted to just 26 this year through August, according to data compiled by Bloomberg. Acquisition rates by large drug companies have followed a similar path.
“The groups of biotechs reaching these major milestones each year is very small,” said Peter Wright, a McKinsey & Co. partner. “There is significant scientific and technical risk, and clinical development risk even before getting to the point of regulatory review and commercialization.”
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Investors are eschewing this corner of the drug industry. About one in eight companies in the Nasdaq Biotech Index are currently valued below their enterprise value, meaning their market capitalization is less than the net amount of cash they have on hand, Wright said.
Song’s masterpiece, ORIZon, embraced Big Data before it was in vogue. The system exhaustively identifies new companies that touch on health, currently about 3,500 a quarter, and teases out every compound in three critical areas: heart disease, cancer and ailments of aging like Alzheimer’s. It then pits them against the standard of care and emerging rivals.
“You need to mine this set of data to find opportunity, because if your drug cannot beat the standard of care and it cannot beat all the clinical assets ahead of it, you will fail,” she said. “We are looking at thousands of possibilities.”
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That’s part of the complexity and risk of the endeavor. Across the industry, there are an enormous number of compounds that go through the development process and fail, said Fabio La Mola, a health care partner at Bain & Co. in Singapore.
“It’s a difficult business because of what you’re trying to do, which is cure disease in humans,” La Mola said. “There’s no other system that can replicate it other than testing it in people. There are a lot of points of failure, but the main reason is no one fully understands human biology.”
Song’s team of 20 assess five technology risks and five human risks for each company — covering everything from runway risks like an implosion of a new technological approach to a chief executive officer who’s so invested in scientific iterations that they miss operational objectives.
Her system assesses factors like personnel and mass manufacturing. It can also identify a company staring down a patent cliff that will leave a gaping hole in sales for a specific disease, then calculate the going rate for acquiring nascent companies that can fill the hole.
The result is a cornucopia of information that exhaustively shines a light on risks and opportunities in one of the most challenging industries in the world. Based out of Hong Kong, she uses the system to examine biotechnology startups globally. Thus far, only companies in the US and Europe have made the cut.
Biotech startups generally post a 5% to 10% success rate once they’ve gotten a product into the clinic, or even lower for the toughest areas like the brain, La Mola said. So far, Song’s approach is holding up.
She raised $200 million for her initial fund, investing in 10 companies starting in 2016. Since then, two have been acquired by large pharmaceutical companies: Vertex Pharmaceuticals Inc. bought Semma Therapeutics Inc. for $950 million in 2019 and Sanofi bought Kymab for $1.1 billion, plus a potential $350 million more in milestones, in 2021.
After the Kymab and Semma sales, ORI redistributed their proceeds to investors, repaying 80% of the invested capital thus far, Song said. She plans to exit most of its remaining portfolio companies from Fund I by the end of next year, providing an expected 3.6 time return on invested capital.
Not every investment is a winner, however, with shares plummeting in Orchard Therapeutics Plc and TriSalus Life Sciences Inc., two public companies Song backed.
Ori is now working on its second fund, having raised $250 million out of an anticipated $300 million. That alone makes it a success, according to an ORIZon analysis, which shows that fewer than 10% of health-care VC managers successfully launch a second fund.
The situation is particularly fraught now.
“Basically, most managers fail,” Song said. “The market can bubble badly and deflate so painfully. We are just coming out of a bubble and are still in the stage of deflation, a very severe value deflation, where young companies can be very easily killed.”
McKinsey estimates that about 20 biotechs are bought each year by pharmaceutical companies, 20 reach the US market with their first approved drug and 50 will go public.
In 2022, 1,081 firms were run through ORIZon’s screening process, focused on areas like AI drug discovery, stem cell therapies, gene editing and novel delivery platforms. After the exhaustive analysis, four made the short list for potential investment. None have received funding from ORI or gotten a drug on the market – yet.
Bucking the Trend
Song has long been an outlier in fields traditionally dominated by men. The daughter of two scientists, she pursued finance after getting a degree at Shanghai’s Fudan University.
She left Goldman Sachs, where she was a managing director, when what she thought would be a routine colonoscopy turned up an unexpected mass. By the time she found out it was benign, she had decided to quit and open her own outfit, focused on getting treatments to patients more quickly.
Song’s approach is not only making things faster, it’s making them cheaper, said Matt Britz, chief operating officer at AffyImmune Therapeutics Inc., a Natick, Massachusetts-based start up company working on the use of cell-based immunotherapies to fight solid tumors where Song is a lead investor and chairwoman.
Getting vital information would normally require expensive consultants and take months, he said. Now, he gets that data — plus updates on competitors, potential next steps and partners — during bi-weekly meetings that last less than a hour.
“Simone can open up ORIZon and hit a button and it spits out what to target, how the protein is expressed, the current standard of care and the size of the patient population,” Britz said.
“This has turned out to be a really huge upside.”
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