The business behind biotech breakthroughs

Lynn Norris:

Welcome to Navigating Beyond the Expected, a podcast from Truist Securities. Biotechnology companies operate at the cutting edge of science, but bringing a breakthrough all the way to market requires more than innovation. It takes capital, strategy, and an understanding of what investors are looking for at every stage of growth. I’m your host, Lynn Norris, and today, we’re exploring how biotech companies earn investor confidence with two Truist Securities colleagues who work with clients on these challenges every day. Eugene Rozelman is managing director of biopharma investment banking, and Laura Chittick is the group head of healthcare corporate banking. Welcome, Eugene and Laura.

Laura Chittick:

Thanks for having us.

Eugene Rozelman:

It’s a pleasure. Thank you.

Lynn Norris:

So, let’s start out by understanding the roles you each have at Truist Securities and the clients you work with. Laura, why don’t you start?

Laura Chittick:

Sure, thank you. I run healthcare corporate banking here at Truist, and we have a team of bankers focused on sub-sectors across healthcare. So that includes payors, providers, life sciences, health tech. And our job is to ensure that we’re bringing all of Truist expertise and capabilities to clients. With biopharma clients in particular, we not only help advise on capital formation, and in particular, lending and debt capital markets, but we also work with clients on risk management strategies as well as treasury services and payments.

Lynn Norris:

Eugene?

Eugene Rozelman:

So, as a managing director on the healthcare team, I focus on biopharma companies, and my objective is to be a trusted financial advisor to biotech company management teams and boards throughout their lifecycle, from startup through commercialization or acquisition.

Lynn Norris:

Okay. Well, then I know we’re talking to the right people for this conversation. Eugene, biotech funding has always tended to move in cycles, periods when capital is more readily available, and other periods where investors become much more selective. What tends to stay consistent in what serious investors are looking for?

Eugene Rozelman:

That’s an important question. Regardless of where the market cycle is, experienced investors with scientific acumen spend most of their time asking whether the biology’s likely to work and are really less focused on where we are in the financing cycle at any given time. So while markets tend to fluctuate, valuations are certainly cyclical, but the biology is not. Biology is not impacted by where we are in the market cycle. And so clinical data always wins. If a company’s developing a product that has clear efficacy, good safety from well-designed trials with clinically meaningful endpoints, that’s ultimately going to drive value regardless of where we are in the market cycle. This work needs to be shepherded by strong management teams. In fact, I would say that strong management teams matter regardless of where you are in the cycle, but in difficult market environments, that really creates an opportunity for strong management teams to distinguish themselves with investors.

Lynn Norris:

Does what investors focus on change as they analyze companies in different lifecycle stages, from early development through to commercialization?

Eugene Rozelman:

Absolutely, Lynn, that’s a great question. Early-stage investors tend to underwrite the science and typically have a stable of PhDs on staff, while those investors that focus on more mature companies are backing things like the development strategy a company might have, the market opportunity that the company’s developing drugs for, the ability for the company to execute commercially in the later stages of a company’s lifecycle. So, in early biotech, scientific risk really dominates the narrative for investors and their review of opportunities. Later, the focus really shifts to things like regulatory manufacturing, commercial execution, reimbursement, and those types of nuances.

Lynn Norris:

What about when they’re transitioning from one stage to the next? What do management teams need to be able to communicate clearly so the right investors understand the opportunity?

Eugene Rozelman:

Company leaders need to be able to communicate things like timeline, capital needs as they change, and risks as they evolve in a way that shows that they are being transparent with investors, which is critical. And importantly, management needs to set realistic expectations on timeline and execution. So, for example, in early discovery or preclinical stage of a company, investors know that data is limited. So, they’re really focused on wanting to understand: Is the biology compelling? Is the target that the company’s going after validated? Once the company gets into the clinic in the early stages, phase one, phase two, investors are really starting to think about safety signals. Is the drug showing signs of efficacy in treating the disease that they’re targeting? And then finally, once you get to the later stages of development, you’re really moving beyond the science. In phase three and beyond, you’re talking about: What’s the regulatory strategy? Does the management team have a good grasp on path to approval?

Manufacturing starts to become important as you need to scale to treat more patients, and of course, to support larger trials and commercialization, you need more capital. So, the capital needs really hit an inflection point in later stages of a company’s development cycle. If a management team is able to get a drug through approval, they start to focus on commercialization, and that’s a whole new conversation. Investors want to understand a company’s strategy around launch execution, physician adoption, patient access, reimbursement. How are they going about building a sales force? Is it outsourced? Is it in-house? And at that point, companies start to look more like operating businesses than research organizations, and that’s a whole new set of calculus for investors. But regardless of where a company is in its cycle, management teams need to communicate clearly and consistently throughout. And it’s critically important not to oversell. The goal should be for management teams to deliver on realistic milestones and keep the story consistent with investors.

Lynn Norris:

So, let’s assume a biotech company has some positive early data on the product, they have communicated their milestones, they know where they are in the regulatory path. Where in their lifecycle does it make sense to have an M&A strategy?

Eugene Rozelman:

Seasoned management teams know that there are different inflection points throughout a company’s lifecycle where M&A is relevant, and they need to be prepared for the potential conversation. So, having an M&A strategy consistently throughout the lifecycle of a company is imperative, and that strategy evolves as the company’s stage of development progresses as well. But underpinning the M&A strategy, management team has to be driving a company to be successful as an independent entity, and that’s how they position themselves to be a great takeout candidate for an M&A partner.

Lynn Norris:

That makes sense. Yeah. So, the investment story doesn’t end with raising capital; it also shapes the strategic options a company has later on. Now, Laura, you spend a lot of your time advising biotech management companies on capital issues. So, let’s get a bit of their perspective. You’ve talked about an interesting dynamic that biotechs have to navigate. The fact that most companies have a fairly structured and predictable development lifecycle, but the outcomes they face can be completely binary and unpredictable. Can you explain what you mean by that and why it matters financially?

Laura Chittick:

Sure, Lynn, that’s a great question. People think often of biotechs as being somewhat risky investments. And what’s interesting is that they do actually have a fairly structured path. In order to sell a drug or therapeutic to the public, you have to have FDA approval. And because of that, there’s a process that you go through with the FDA. First, you get permission to test the drug in humans, and then there’s a whole process of testing. And along that path, there can be any given times when something doesn’t work out, the science doesn’t play through as expected, and that can very significantly change a company’s path.

Lynn Norris:

Do you have any examples of that you can share with us where it maybe went completely differently than you expected?

Laura Chittick:

Unfortunately, Alzheimer’s is an example. There have been multiple trials in Alzheimer’s that, maybe at the end of the phase three trial, the amyloid plaque was removed or decreased, but patients didn’t demonstrate in any statistical manner an improvement in cognitive function. So, that has happened frequently in Alzheimer’s.

Lynn Norris:

Well, given that, how do you advise management teams to prepare their finances for both success moving forward and possible setbacks?

Laura Chittick:

This is where the budgeting and scenario planning process is so critical, because management teams really need to think through, in any given scenario: “How much money will I need to go to the next step?” Or it might be changing something, and therefore, maybe not able to raise as much money, but needing enough to get through a certain time period. And so management companies can do this in a few ways. They definitely want to plan the various scenarios, and identify the steps at each scenario, and then also figure out multiple ways to fund. So, in many cases, the idea is, “Oh, we have a successful phase one, and then we will raise more equity.” But you might also say, “Well, a certain phase is not successful. Then we need to cut back on expenses to get to the next step.” And then once all of this planning is in place, management teams need the fortitude to say, “Okay, now, I’m willing to execute.”

There are times when it is time to raise equity, and the markets are good, but perhaps not perfect, because it is rare to find a perfect market. And management teams think, “You know what? I want a higher valuation.” We’re always working with companies to get as high a valuation as possible, but a lot of times, the objective is to make sure you are properly funded for the next stage and not perfecting a dollar-per-share valuation.

Lynn Norris:

Well, so as you’re advising companies when they’re moving along through their lifecycle, how is your conversation changing with management teams about specifics in capital structure? Are you talking about equity? How do those conversations go as they move along?

Laura Chittick:

Eugene and I both have a lot of conversations about the right financing at the right time. And the choice of capital is really a choice of what will help a company grow best. Cost is important, but it’s not a strategic question. The strategic question is really what is your use of funds, and how much flexibility do you want? And the structure comes from there, and then cost is essentially an output. So just to give you some examples. You’re in phase one of clinical trials. There’s a long time to—I mean years to profitability, and lots of different points where you may want to pivot. You want your funding to come from patient capital, and in many situations, from private equity versus public equity. Then you get into phase two/phase three, you have a little more certainty, and that’s when you can think more about public equity or even a convert.

Lending is much later when you have positive free cash flow. The other thing you can think about in phase three, as you are looking at a larger clinical trial, therefore more money, is: Should I raise more equity? Should I look to sell or partner and share in expenses? Should I think about selling a future royalty, some percentage of my future revenues? So there are a lot of different options at that point in time.

Lynn Norris:

Eugene, how does the investor perspective work into that calculation?

Eugene Rozelman:

Management teams always need to be thinking ahead in terms of where they want to be going and making sure that they’re seeding conversations with the investor groups that they want to court for their next phase of development and that funding cycle. For example, as we talked about earlier, there are investors that are specifically set up to evaluate science but tend to not want to be part of the company when it evolves into regulatory risk or commercialization risk. So, you have to be ready as a management team to cycle those investors out and swap in the investors that are fit for purpose for those stages of your company’s lifecycle. And it goes beyond just stage. There are investors that have different perspectives on going it alone versus partnering and how to fully fund a company to its ultimate outcome, whether that’s commercialization or acquisition. I’ve had situations where really strong life-sciences investors are supporting a company and want it to retain total rights globally for the asset and continue to fund the company that way, but management and other investors feel like it’s appropriate to license out a geography.

For example, keep the U.S. but license out Europe, or license out Asia. And if they go ahead and pull the trigger on that strategy, I’ve seen them lose a subset of their investors that wanted the company to keep 100% of the asset in-house. So being mindful of that across the lifecycle of a company is important.

Lynn Norris:

That just goes to show that every investor is going to have a different reason for putting money into a particular company at a particular point in its lifecycle, and then also different expectations for what they’d consider a positive return. Are there times when companies have a harder time matching their financial and also their human resources to those expectations?

Laura Chittick:

Eugene mentioned earlier there are times when companies are shifting from being a research-based business to an operating business. That is a function of making sure that you have the right people in place internally. So as companies grow and get closer to commercialization, a lot of times, there is additional hiring. We focus on two things. One is just always keeping sight on that cash, and do you have enough to move you forward? Another thing that I spend a lot of time with clients is the operating side, and just ensuring that companies feel ready for that next stage. So, for example, are they automating some of their daily business processes, even how they’re making payments? When you’re a smaller company, it is very easy to get things like that done.

As you get larger and are running large trials and have more and more expenses to more and more places, having a much more streamlined payment strategy is very important. So we do a lot of work around the operational side as well.

Lynn Norris:

Biotechs can have a notoriously long development cycle to get a drug approved. What separates a capital raise that strengthens a company’s long-term position versus one that’s just buying them time?

Laura Chittick:

It’s a great question. And if you’re ever in a situation as a CEO, CFO, and you feel like your next raise is just buying you time, that’s a pretty tough position. Sometimes, the next inflection point is additional data where you can then raise more. Sometimes, the next inflection point is to profitability, where you no longer need to raise, but you do want to be very careful thinking through what is that amount and how long does it get me through? So that’s a key question to communicate to investors.

Lynn Norris:

Well, how can management teams recognize when they’re in a position of strength that could be a good time to act?

Laura Chittick:

The best time is always when the market is open, when you can most easily raise the money. Sometimes, we see companies worrying to their detriment about, “I don’t want to do this incremental raise. It’ll dilute existing shareholders.” And you do clearly care about proving to existing shareholders that they had a good investment. But one of the most critical questions to ask is just, will this grow the pie overall? Will this next investment bring the company to a higher level? And if the answer to that is yes, then both your existing and any new investors will be happy.

Lynn Norris:

Let’s talk for a few minutes about that exciting time every biotech hopes to get to, when they’re having bigger conversations about scaling manufacturing or maybe partnering or considering a sale. There are lots of big decisions to be made there. Eugene, when a biotech hits some big inflection point, something like late-stage data coming in or a needed approval from the FDA, what goes into the decision about scaling up independently, or maybe looking for a partner or buyer instead?

Eugene Rozelman:

That’s extremely important, and it’s something we deal with on a daily basis. And there are a lot of factors that really impact how a company should think about this. Those include things like: What is the therapeutic area that you’re focusing in? Different therapeutic areas lend themselves to different development and commercialization strategies. For example, if you’re focused in a rare disease which has few patients, typically, you can fund development and commercialization with investors as a standalone company. If you’re going after very large markets, on the other hand, such as cardiovascular indications, lipid lowering, and things in heart disease, those late-stage development trials require thousands of patients and massive primary-care sales organizations. Typically, a standalone company would not be able to get the funding required to effectively approach those markets. So not only do capital needs scale up, it’s really a question of expertise and execution.

A management team within a company can be really expert scientists and great at clinical development, but don’t necessarily have the expertise to build and run commercial organizations. So, do you bring that expertise in-house? Or do you think about partnering or selling at that point in time is another key consideration.

Lynn Norris:

How do you help clients think through that decision, then before they’re forced to make it under pressure? Laura?

Laura Chittick:

This is why we’re talking with companies so early. Because there is a lot to think about when you’re planning ahead of time, some of these major like: “Oh, okay, are we going to manufacture ourselves? Are we going to have a partner? Are we going to go at commercialization ourselves and hire a sales team?” That is a large amount of capital. And often, this is a time when you can actually start to think about debt. But years before a company is ready to raise debt, we’re already talking to them about this is what this may look like. And part of the reason we’re having that conversation is that debt is very different from equity as far as how it impacts the company’s flexibility. So it can be wonderful because it can help gear growth, and it is a relatively cheap form of capital. But a company does have to be comfortable with covenants; meaning, your free cash flow relative to your total debt or relative to the amount of interest and principal due at any time.

Are you comfortable committing to a lender or to an investor, what that level will be? Or do you want more flexibility? And sometimes, companies say, “Okay, we have this approved drug, and we are ready to go ahead with the sales force. And we have a path to profitability that is very fast, and we can really start to think through using debt in our capital structure.” Other companies say, “We’re doing all that, and we’re going to plow all of those earnings back into research and development for the next drug.” In which case, debt probably isn’t the right solution for you because it makes more sense to have equity. So we talk about that early so that the pros and cons of debt versus other types of capital are well understood.

Lynn Norris:

So, a theme through a lot of this conversation is that it’s not just about raising money; biotechs need to keep a lot of moving parts aligned, their basic science, their regulatory affairs, their growth plans, their potential investors, on and on. So, from each of your vantage points, how does working together affect the advice you’re able to give your clients? Laura, I’ll start with you.

Laura Chittick:

One great thing about sitting with clients with the two of us is that, as we’re listening to a client’s story and where they’re looking to go, we are listening from two different perspectives. So, as I’m hearing a client’s story, I am in many ways thinking through it as a lender or a potential debt investor would hear certain elements of that story. Whereas Eugene has a lens of what an equity investor might think, or even what a potential buyer might think. And to be able to hear the same story but to have two different lenses on it enables us to provide the company with just a much more robust set of advice. I also think it’s important to remember that on any given day, management only has time to think about one or two main things.

And one way where Eugene and I can be helpful is one of us might be advising on the key thing management is focused on, and the other might be thinking about all of the other things they need to think about. Maybe Eugene is advising on an acquisition and thinking through valuation, and I’m talking to the treasury team, saying, “Are you going to pay for this acquisition in U.S. dollar or some other currency?”

Eugene Rozelman:

To Laura’s point, I think we have different but importantly complementary vantage points when we talk to clients. In my everyday work, I have visibility into the marketplace that our clients just don’t because they’re busy focusing on their day-to-day. Whereas the conversations that I have with companies and investors can inform the thought process and decision-making and give our clients real-time data and perspective to make the best decisions possible. So the capital markets play a major role in decision-making. Can you raise the capital needed to fund substantial late-stage trials or to fund the sales force that you need if you want to go it alone? And then the questions around cost of capital are impacted by current market conditions and options. Is it equity? Is it debt? Is it a combination of the two? And then things like shareholder support. Do you have the right shareholder base to continue to fund with either equity or debt or some hybrid solutions?

Or does your shareholder base want you to partner or monetize the company? So, visibility into those things, combined with a holistic perspective and product offering, really gives us an opportunity to give practical, well-rounded advice to companies throughout the stages of their lifecycle.

Lynn Norris:

It sounds like one of the big lessons here is that the right capital strategy has to be flexible, something that changes as the company matures. That’s important to keep in mind. Thank you. Biotechnology is a big business, but it’s also so important to the future of healthcare for all of us. So thank you for helping us understand these dynamics.

Laura Chittick:

Thanks for having us.

Eugene Rozelman:

Thank you so much.

Lynn Norris:

All right. But before we let you go, I’ve got just a few more questions for you so we can get to know you a little better. We’ll start with you, Laura. Are you ready?

Laura Chittick:

Yeah.

Lynn Norris:

When you’re reading or watching a show, binge it or a bit at a time?

Laura Chittick:

I do like to read. And when I have a weekend when I have extra time to read, I actually love to go through a full book rather than just reading 10 pages and not being able to finish and then picking it up two weeks later.

Lynn Norris:

That is great. All right, Eugene, what’s one part of the day you really look forward to?

Eugene Rozelman:

Honestly, my favorite part of the day is breakfast. So morning time works for me.

Lynn Norris:

Awesome. All right, I have one more for both of you, and you can take a little more time with this one if you’d like. Laura, what’s one way you try to go beyond the expected in work or in life?

Laura Chittick:

It’s funny, I think I used to try to do too much. So, as an example, I had one weekend years ago, when my kids were little, and I was hosting a birthday party at my house, and I decided I needed to make the cake on my own. And I had an LBO that we were working on that weekend. Whereas now, I’ve realized definitely buy the cake. It’ll taste much better. Everybody will be more happy. Just focus on the more important things, like: Am I present? Am I listening? Am I spending time with friends and family?

Lynn Norris:

Oh, that’s great. Yeah, that’s definitely important to be in the moment. Yeah. Eugene, what’s one way you try to go beyond the expected in work or in life?

Eugene Rozelman:

So, I think the answer for me is, honestly, the same for both my personal and professional life, and it’s really about breaking things down to what are the basic things that I know to be true that are important fundamentally that I could use to be the best self I can be—whether it’s family context, personal life, bettering myself, or helping colleagues, or driving the business that I’m working on. And honestly, keeping it practical, applicable to everyday situations, and figuring out how to help clients, colleagues, and people around me on a day-to-day basis.

Lynn Norris:

That’s great too. Well, that was excellent, you two. Thank you for being here on Navigating Beyond the Expected. I hope we’ll get to have you back soon.

Laura Chittick:

Thank you.

Eugene Rozelman:

Thanks, Lynn. Appreciate it.

Lynn Norris:

Listeners, thanks for joining us on Navigating Beyond the Expected. Each month, we bring you new conversations with Truist Securities experts on the issue shaping corporate and investment banking. Subscribe today so you never miss an episode, and check out more Beyond the Expected insights, videos, and articles at truist.com/beyond. You can also subscribe to I’ve Been Meaning to Do That, the podcast from Truist Wealth at truist.com/dothat. I’m Lynn Norris. We’ll see you next time.

Truist Securities is the full-service corporate and investment banking arm of Truist Financial Corporation. With a rich history extending back more than 125 years, Truist Securities offers a robust capital markets and investment banking platform that includes a comprehensive array of strategic advisory, mergers and acquisitions, and capital markets capabilities for corporate and institutional clients, including sales, trading, and research services in both fixed income and equity. The firm also provides corporate finance, asset finance, risk management, liquidity, and treasury management solutions to meet clients’ full spectrum of financial needs.

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