Biotech Diaries: EcoR1 Surveys Investment Options at JPM
By Marie Powers
SAN FRANCISCO – The annual J.P. Morgan Healthcare Conference is perhaps more renowned for the dealmaking that occurs on the periphery of San Francisco's Westin St. Francis than for the news and views expressed within the hotel's hallowed halls. This year, one familiar face, Oleg Nodelman, was fronting a new venture, EcoR1 Capital LLC, which he founded just two months ago.
Nodelman spent more than a decade as an analyst and portfolio manager at BVF Partners LP, one of biotech's first dedicated hedge funds, before pursuing the dream of managing his own investment firm. A consummate contrarian, Nodelman's firm is seeking "un-followed, unloved, misunderstood and generally orphaned" biotechs, mostly in the public markets, with hidden value. In his estimation, that universe encompasses roughly 500 of the 600 or so globally traded biotechs.
"Although there is always considerable investment risk in biotech, mine is a highly differentiated approach to that of most biotech investors," he wrote in a holiday letter to friends explaining the firm's philosophy. "My goal is to find extraordinary companies that have been caught in an extraordinary time and help ensure that exceptional people are involved to help make those companies a success. Ideally, I will hold my investments forever."
Nodelman allowed BioWorld Today to tag along Tuesday during his foray into the J.P. Morgan playground as an investor hanging out his own shingle.
Here's a peek at his day:
7 a.m. Nodelman was waiting in the lobby of the Four Seasons Hotel with a longtime colleague who's a senior executive at a health care merchant bank and adviser to the firm. We were joined shortly by Kellee Kim, a Harvard University grad Nodelman lured away from a New York health care consulting firm to serve as his analyst.
Two additional members of the banking team also shared the breakfast conversation. There was lively banter about mutual friends, deals and potential biotech blow-ups, as well as the increasing creep of pre-J.P. Morgan meetings. "I had to fly in Sunday," one lamented. "I hope this doesn't evolve to Saturday night stayovers."
8:00 a.m. First meeting of the day, several doors from the restaurant, with the CEO of a Boston biotech focused on cancer therapeutics. Though media-shy, the legendary entrepreneur was gracious. He walked Nodelman and Kim quickly through a series of slides describing the potential indications, existing treatments and their shortcomings, proposed Phase I/II trial design and the compound's mechanism of action. The company, which may have a biomarker for the disease, is targeting a regulatory filing in mid-2015. The compound already has attracted potential suitors, but the company prefers to advance it unpartnered and launch independently in the U.S.
Nodelman asked about the history of the agent and was impressed with its pedigree. Although the dual inhibitor is more potent than existing cancer therapeutics, "we need to get into Phase I and see the toxicity," the CEO said.
"He's amazing," Nodelman said as we left. "I count him among a small group of people who make things happen in biotech." Nodelman is spending the week after J.P. Morgan in Boston to "kick the tires" with companies, consultants, bankers and inventors, so he'll revisit that opportunity.
8:30 a.m. With Kim departing for another meeting, Nodelman has built in 30 minutes to discuss his background and company. Based in the Mission Bay area of San Francisco, he confessed there's no "typical day." He often rises at 4:30 a.m. to scan the wires before the U.S. markets open. When something big happens in biotech, investors have only a short time to react, he observed. "I'm looking for the insight that others don't have," he said.
A fringe benefit of rising early is the opportunity to spend quality time with his wife and 19-month-old identical twin girls. A native of Kiev, Ukraine, Nodelman followed his freshman year at Georgetown University with a two-month stint as a Russian translator at the 1996 Summer Olympic Games in Atlanta, where he met his wife, a Georgia native who was serving as a Japanese translator.
When he's in town, Nodelman works from home some mornings and usually gets in a run or workout at the gym – a habit instilled recently on the advice of a mentor. He divides his time between meetings, phone calls and due diligence, preferring PubMed to expert analytics.
"I consider my relationship with the scientists at a lot of these companies as collaborative," he explained. "I'm not looking to extract information from anyone." In fact, the firm's name, EcoR1 , harkens to the enzyme that can be used to cut and reconstruct DNA – an appropriate metaphor for a firm seeking to build value by improving the structure of a biotech.
Nodelman is on the road about half the time. He asks two key questions: What's the quality of the science? And is the company asking the right questions?
"I'm agnostic about situations," he said. "I don't fall in love with an asset."
However, he is a strong advocate of building relationships and began crafting his J.P. Morgan itinerary in November. "Everyone in the world who does anything in health care is here this week," Nodelman observed. Although he tries to attend some breakout sessions, his main objective is to meet with as many companies as possible – particularly those located outside California.
The payoff was obvious as Nodelman was greeted every few minutes throughout the day – in hallways and on sidewalks – by acquaintances wishing his company success. At J.P. Morgan, he saw 50 companies in four days in addition to informal chats. "The hardest thing is to turn down a meeting with a great company," he admitted. "When Kellee ramps up, we'll be able to cover twice as much territory."
9 a.m. I sat out Nodelman's meeting with representatives from a pharma venture firm. "They only come to the West Coast several times a year and want to stay in stealth mode," he explained.
10 a.m. We reconvened at the Handlery Hotel with a Canadian biopharma in the cancer space. In addition to Kim, we were joined by a long-time friend and medical consultant who's helping to vet oncology assets. The company's chief medical officer (CMO) – also an acquaintance of Nodelman's – walked the group through the product profile, mechanisms of action, clinical development plan and four potential indications. The market is large, intellectual property is sound and targets are well validated, but there are questions about the response rate that suggest formulation struggles. Those questions likely will be answered this year, according to the CMO, but Nodelman is doubtful. "They're not there yet," he said.
10:30 a.m. We walked to Il Caffe on the Square, where we had coffee and met with the portfolio manager of a global health care investment group. Talk turned to the U.S. and global markets, M&A activity and valuations of recent biotech initial public offerings. "What do you think about orphan indications?" Nodelman asked. "I think they'll trundle along," came the reply, "but the data are not there yet." Nonetheless, several rare disease biotechs were presenting at J.P. Morgan, including Alexion Pharmaceuticals Inc. in the Grand Ballroom on opening day, he added, "so that's an indication of something."
Noon: After a short break for Nodelman to check email and return phone calls, we met at the Sir Francis Drake with a small U.S. infectious disease firm. Nodelman was excited about that company, which has brought in a respected team he's known for many years. He fired away with questions. What assets might the firm acquire, and who's in charge of looking for them? How much cash does the firm have? What's the company's burn rate? Is it hiring? What value can be created from the programs? Can he be helpful in any way?
"No one's been looking at this company," he observed as we left. "But they have some interesting assets, and they might need to raise some money."
1 p.m. Next stop, the Hotel Monaco, to meet with the chief operating officer and management team of a seasoned biotech focused on therapeutics with a unique mechanism of action. Thankfully, they offered us a light lunch. The company has an extensive pipeline in a handful of disease states, including orphan indications, and recently inked a major deal. Now, other pharmas are knocking on its door. The firm wants deals that provide up-front cash and research funding but has little leverage. Its lead product hasn't reached the goal line, and the stock has lagged.
"What's your perspective for 2013?" Nodelman asked "Is there a dose-dependent, clinically meaningful response or are you simply seeing trends? When will new studies start?"
He congratulated the team on "a brilliant deal," but if their drug isn't approved, "what's the cash gap?" he asked. Approval will allow the company to hold onto more of its pipeline "a little longer" and to be opportunistic, he's told.
In contrast to most partnering discussions in small suites, that meeting was held in a large board room with a long conference table. And, with another analyst in the room, the conversation dragged. Still, it's clear some wheels were turning.
"I've known this company forever, and they do great work," Nodelman said. "But they also spend a lot of money, and that's somewhat troubling to investors."
2 p.m. Up one flight of stairs, we met the highly energized team of a European firm developing peptide drugs. "You guys have a busy dance card," Nodelman said. "Can you bring me up to date?" They discussed finances before turning to the clinical portfolio. He asked about a competing compound at a big pharma partner and its impact on their partnered candidate. "If it's good for them, it's good for us," said their investor relations rep, provided the FDA looks favorably at the other drug. "What's your royalty rate?" Nodelman added, applauding a deal that starts in double digits and moves up in sync with product sales, which could exceed $600 million in three years.
Still, the strategic value of the company exceeds the cash flow, according to the CEO. Approval is likely for the partnered drug, but there are no guarantees. The company has earlier-stage drugs – including two that are unpartnered – representing additional shots on goal. One is in Phase I, and safety and tolerability data could report in the first half of the year. The company also is fiscally conservative. "We don't spend money we don't have," said the chief financial officer (CFO).
For Nodelman, the $64,000 question was, instead, the $3 billion question. "What will get you there?" he asked. Perhaps by adding pearls on as string or structuring innovative risk-sharing deals with pharmas facing a patent cliff. "We can do the early part much faster and cheaper than pharma," the CFO said. "That would provide a soup-to-nuts approach, but we need more than 15 percent if we're leveraging the strengths of both sides."
"They're a great company," Nodelman said as he rushed to meet privately with a board member. And his type of company – out of the limelight.
3:30 p.m. Back at the Handlery, we met another European firm with a diversified structure that includes a variety of outsourcing options in addition to therapeutic development. "I would like to uncharacteristically just listen for the next 30 minutes," Nodelman said.
After reducing costs, the company has enjoyed three years of double-digit growth and moved from losses to profitability, including a steady royalty stream. Its standalone screening business doesn't generate sexy margins, "but it's long-term business," the chief operating officer (COO) explained. The company can perform drug discovery more quickly and inexpensively than pharma, for milestones and a share of the profits. For now, product development is focused mainly on helping academic institutions and foundations.
"But if somebody buys you, they're not going to pay you for those royalties," Nodelman cautioned. "Can you preserve that value – for example, separating the assets and monetizing the service part of your company?" The possibility exists, the COO acknowledged. "We're at a crossroads," he admitted.
4:00 p.m. It's the last formal meeting of the day with another Boston oncology firm that is facing the FDA this year. Nodelman's oncology consultant applauds the elegant trial design. "Most drugs are compared to placebo but you've used an active comparator," she said.
What's the downside scenario? Nodelman asked. The company has a good cash position, and "we have levers to pull," said the CFO. But if the FDA asks for another study, "we'd have to think hard," he admitted. The biotech could look to another indication, and it would immediately cut costs. On the other hand, a postmarketing study "would not be the end of the world for us," the CFO added.
Nodelman peppered the team with questions. What's their global commercialization deal? Can it be converted to a royalty? Will they receive milestones for approval? How much cash do they need to launch? Is the market overlooking any value? Could the company do an outcomes-based deal? "Any way we can be helpful to you guys?" he asked.
"Stay close," the CFO replied.
"They're a great team," Nodelman lamented as he broke away to meet a venture investor back at the Four Seasons. "They were once very popular, but they've been written off by Wall Street."
5:30 p.m. At a table tucked away in the back of Urban Tavern, Nodelman sparred with the CEO of a respected California biotech with a growing pipeline and rising share prices more as friend, ally and confidante than a conventional investment prospect. The questions were the same but the tone different. Are your expenses staying the same? Why not buy back your stock? Are you looking at other assets? How would you drive to $3 billion? Am I missing anything here?
"Oleg comes to biotech with a view that a lot of dysfunctional companies invest too much in assets that are failing or no longer relevant," the CEO said. "We have a similar mindset because we've rescued distressed assets."
"I would do a deal with them any day," Nodelman responded.
On that note, we shook hands and Nodelman left for an evening of invite-only pharma receptions and a late-night Texas hold'em game.
But that wasn't the end of the story. The next afternoon, as I was rushing between meetings, he texted, "Not the same without you today." With relationships like these, who couldn't love the biotech world?
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