RA Capital's Tess Cameron: biotech stocks rose on EO because market sees it as trade lever, not price control

guest about uh the the latest executive order around drug pricing. And we'd love to just get your a little bit of your introduction and then how you are processing the news today and what's going on in the market and just kind of your high level take. Absolutely. So, uh, thanks so much for having me on.

So, my name is Tess Cameron. I'm a principal at RA Capital Management and, uh, RA is a leading life sciences investment fund. We make investments, uh, across all stages from seeding and building new companies all the way through to investing in, uh, later stage companies in the public markets.

And I think, um, this whole concept of most favored nation for um, you know, drug pricing, it is not something new. Uh it is something that we saw in the first Trump administration actually several times in 2018.

It came back in 2020 if first in one executive order then in another executive order and then in a rule from uh the center for Medicare and Medic uh you know center for Medicare and Medicaid um a rule that ultimately did not get uh implemented uh because the rule was actually uh you know knocked down in court uh because they didn't follow um you know certain procedures that were required from an administrative procedures act standpoint in order to get the rule through.

Um so I think that broadly um there had been some rumors um among the uh you know biotech investment community that this is something that was coming back right Trump had made some statements about it's not fair that we are paying uh you know so much more than these other countries and so I think investors were um you know anticipating that there might be something was it can break out oh sorry please jump do you think it was priced in in some way because the so right now the the NASDAQ biotech index is following the overall NASDAQ.

Yeah. And everyone last night, at least the peanut gallery, myself included, were predicting blood bath in the biotech markets that didn't happen. Um, are we just really stupid or did we get something wrong? I am totally with you.

Um so yeah I think this just shows the value of predictions in this kind of market where um but I I think it's I I think it's for fundamental reasons that uh you know biotech stocks were like biotech and pharma stocks were like actually up this morning. So like my goodness like why the heck is that?

Um, and I think the reason is because the executive order and particularly uh the administration's language around the executive order was actually much more positive than I think people were anticipating. This doesn't necessarily mean that it will be positive, right? But I think it's being interpreted positively.

Um, and I say that for a couple reasons.

one is that um you know I think the uh you know Trump made it very clear like the focus is on other countries that aren't paying right and the focus is more on those countries than the companies and I have to say as a biotech investor um you know I think all of us are like totally behind that statement right like you know the fact that the UK and you know a lot of Europe benefit from these like super low drug prices um like that isn't, you know, they should be paying a lot more.

Um, there's actually a study that came out just a couple days ago that looks at the ways that a lot of these European countries set price, which is through these health technology assessments where they basically, you know, say that patients lives aren't worth particularly much and they very narrowly value um, you know, the the uh, you know, the benefits of these drugs in a way that uh, you know, undervalues the societal benefit of medicines by like more than 90%.

Right?

So, Um these are not uh you know I think I think what was really positive to hear is uh you know hey the focus on getting other countries to pay more um you know someone said I I can't I think it was Trump actually who said you know hey if you want to sell your cars here you have to buy you know our medicines at a you know at like market price right and in the US like we do have a competitive market um I think also as a biotech investor key thing is like we want to keep that market compet competition going in the US.

That is what drives drug prices down over time is like generic entry. It's like more branded competition much much much better than like importing foreign price controls that essentially are based on math that like undervalues human life, right?

So good trade stuff but like bad if it results in like importing foreign price controls. Are those and I think the weight of those changed uh based on the language that we heard this morning. Sure. Sure.

Are those are those they're the effectively the price controls that they have already are those happening at the EU level or country by country?

It is country by country and um it's a very nuanced and very complicated process but essentially like when a drug gets approved US is almost always the first launch right so 85% of new medicines launched anywhere in the world those are available in the US and then it's a question of what other markets do you go to and it's really complicated because all of these different many of the different countries they reference price each other right so you don't want to like start in a country that like is reference pricing another country and it's like oh no like now like you know our pricing is all you know messed up.

So typically what companies do is they start with Germany right maybe they consider Japan and then you know after they get pricing in one of those markets then they go to these other markets.

So this is why like these countries are so staggered and they don't get the benefit of these medicines like nearly as soon as the US does. They're usually delayed several years. Um, but it's a very country bycountry uh, you know, decision-making process. And it's not really, uh, a decision-making process.

It's kind of a take it or leave it, right? Like drug company, do you want to launch in this market or not? If you do, like, here's your price. Take it or leave it. Um, and so actually having the US government step in and say like, hey, you're not just negotiating with the drug company.

You're negotiating with the US government now. And like, if you want to sell your cars in our country, you're going to have to pay the price that I want you to pay.

Like that becomes a more powerful statement where like now companies can actually be in a position where they can you know start you know seeing the benefit of uh you know more uh you know more deliberate um you know trade negotiation by the US in favor of you know getting other countries to pay their share of uh research and development.

US has seen 75% of like you know drug biioarma research and development um is is what the US funds which is just incredible. It's like defense right? It's like similar to the NATO uh similar to the NATO issue. Yeah.

Um is there is there something at the political level that the biotech community broadly both the large pharma companies and maybe even the the the more startup focused companies um agree on in terms of changing regulation or how the government interfaces with the biotech community?

Like for example, we I mean we cover tech a lot and there's been a lot of rumblings about uh the the government blocking acquisitions. In general, big tech companies want to acquire startups. Startups want to sell themselves to big tech. And so tech as a whole has been pretty against the blocking of acquisitions.

But is there an analogy there to uh how the biotech community broadly thinks about um the their list of priorities in Washington? And is this anywhere on that list?

I would say like across the board um for you know uh big pharma companies and like little biotechs alike it is all about like let us compete right like market competition is like such a great force for access and innovation and um you know bringing prices down in the US like let us compete and you know enable that and I think we have uh you know I think we see it in our access to medicines it is because of the dynamic US market and market competition that we have so much access is because of US market competition that when generics come in uh you know prices will go down sometimes like 98% right like Medicare pays 30 cents for like you know or even less I think it's 3 cents actually for like each like Lipore pillow um and so that's great right and so let us compete let us compete you know there should be government mechanisms uh you know we think for drugs to actually go generic on time Right.

So like yeah, you don't want like drugs hanging out for 20 years like on patent. That isn't really uh you know part of the deal, right?

But when we think about like you know what makes the US so dynamic and what brings patients a lot of benefit, it's like it's having that innovation and ensuring that that innovation is driven by market competition rather than government price controls actually helps like instill more natural mechanisms for prices coming down.

more branded competition, more generic competition. If the US government just comes in and sets price, guess what's going to happen?

You're not gonna have, you know, a second tomarket branded product that's launching three years later, you know, coming to market and, you know, competing against this price set one because they're like, I'm not going to compete against the US government, right?

Like US government is going to get, you know, going to get what it wants. Um, so I think that is somewhere where, uh, you know, uh, bioarma as a whole, big company, small company, I think all aligned on that.

Um we had the inflation reduction act right which uh is essentially instituted price controls in uh the Medicare market and uh you know the big inefficiency there was setting price for small molecule drugs at 9 years. Um biologics are at 13 years.

Usually as investors we're counting on like 14 years of exclusivity before a drug grows generic and uh drops off obviously dependent on the quality of that patent. That's a price control that we don't want.

um you know that's that's already had an impact unfortunately on small molecule innovation um so pills instead of you know shots um and uh you know we don't think that's good uh you know for Medicare beneficiaries um and we don't want to see more price controls uh you know coming into this market because you know it could really cause something very special where you know America leads which is biomedical innovation to um you know have a lot more uh you know challenges and less investment.

So, uh, in generally the our last guest was was, uh, sort of disappointed with with the the EO. He thought it was going to have, you know, negative implications, but generally felt fair, you know, he seemed somewhat unfased. Can you talk about investor sentiment in biotech right now?

the industry has had, you know, a rough few years and uh in many ways, you know, you could kind of just shrug this off and just say, "All right, you know, just got to get through it.

" Um, but I'm curious, uh, you know, from your point of view, uh, are there what what are the sort of positive outlooks right now from from your standpoint? And, um, what should people be paying attention to outside of this EO? Yeah, absolutely.

Um so I mean I think the reaction you see it in the stocks right I think that um you know there's there's optimism that the uh impact of this policy may be a lot lower than people thought um and indeed I think some of that is just hey it looks like this is going to happen through rulem instead of through um you know some other uh kind of implementation that might be more top down and that you know may impact the probability of actually getting something that is like super broad-based and like bringing pharma, you know, prices down across the board that that may lower the probability.

So, I think that's kind of what we're seeing in stocks. Um, you know, I think in terms of just the sector, there's a lot of like amazing stuff happening fundamentally, right?

And that's why as investors, um, when we see periods of volatility like this, it's very exciting from an opportunity set perspective because you have companies that have made incredible scientific progress.

Um you have companies that have uh you know that are launching uh you know transformative medicines that are making really good progress and we're seeing some real disconnects uh you know across the board uh for many uh you know for many companies and uh that that you know that's a great set of opportunities for investors and um you know ultimately I think uh America does really value biomedical innovation and uh you know we'll will be rewarded for um you know companies that make fundamental progress.

Can you talk a little bit about the life cycle of a new drug or new B company? Uh, comparing it to tech.

Again, it feels like there's companies older than us that are still private because the nature of the tech market is that there are venture capital firms that are set up to do $5 billion injections at a hundred billion dollar valuation.

And yet it feels like in biotech there's been a long history of going public at a much lower uh market cap uh the the stock moving based on FDA trials very early before revenue years on the market pre-revenue.

Uh is there some sort of fundamental reason why companies in biotech go public earlier or is that life cycle changing? Do I even have that that characterization? You are so right. No, you were absolutely right. So it is a very different life cycle.

I mean it, you know, it can take like you know 10 years for a drug to get to market like you know even when you've gotten into the clinic 90% or more of you know what you're working on is going to fail. Um so it is a really it is a really tough sector.

Um you know we're talking numbers in the billions like you know on a probability adjusted basis it's like you know over two and a half billion to actually get a drug to market. So, we're talking big investment, very high risk. Um, and you know, as a result, yeah, so you're like, why is anyone doing this?

You would think it would be the opposite. You would think, you would think high burn, high capex, uh, high risk, leave that in the private markets, but then Stripe, which has been making tons of revenue for a decade, get them in the public markets. And yet, it's the opposite in America. I'm curious.

I'm curious if there's any type of disconnect between the public and the private markets in the sense that hey, you can buy shares of a private company that has zero dollars in revenue at X valuation or you can buy shares of a company that's public that has drugs and that has, you know, that that are in market that has revenue.

Can you talk about that? You know, is that is that is that correct? Uh incorrect. Typically what we see is that, you know, it's very unusual for any drug company that has a commercial product that is like marketed. Very rare for those companies to be private, right? It exists in a few spaces, but like very very unusual.

They're almost always public. And the reason that biotech companies tend to go public so early is because you know it takes so long to develop these drugs and the depth of the uh you know capital markets for the uh you know biotech market. It's just deeper on the public side, right?

There's a lot of investors who are like, "Hey, we do like public market investing and maybe they do like a little tiny bit of like private market investing, but like the pools of capital on the public side are just much larger. " Um, and so you see a lot of these companies going public very early.

Um, and uh, the private company valuations um, they tend to on a legged basis follow the public markets somewhat.

you know, curious if that also happens in tech, but it might be that after you see like a real draw down in the XBI, like six months later, if the XBI is still low, like private companies will be like, hm, you know, maybe that step up isn't going to be as big or like maybe I have to be like a little more flexible on like valuation.

Um, so it usually takes some time, but like everyone is usually looking at that because that is the exit typically before an M&A.

there is um you know certainly uh you know strategic M&A activity that happens for private companies um but usually it's after they've raised enough money to get to a point that you know a strategic is like cool like I think this drug is going to work I'm going to take that risk now um and usually the company would like to be public to be able to raise the money to get to that point where they can be bought so um you know it's a it's an interesting dynamic and and certainly different I think than than the tech world can you talk about the longevity market from your point of view.

In in our world, uh every sing once somebody has at least a billion dollars of paper returns, they become very obsessed with longevity living living forever.

And so in tech, the companies that get attention, we had we had the the uh one of the co-founders of New Limit on last week, which was an exciting conversation, but I'm curious from your point of view, more at a high level, how you know, give us kind of kind of a broad overview of of the longevity market, which I'm sure is just one area that you guys invest.

Absolutely. Yeah. So, the longevity market can mean many, many different things. Oh, yeah.

every every drug every drug every drug if you're threatening right yeah exactly and also with many different levels of scientific validation um so RA Capital we are uh like a very datadriven uh like we're a very datadriven organization right a lot of the people who work at RA Capital are like PhDs or you know uh former uh physicians or sometimes even current physicians um and so very scientifically rigorous um but you know I think we're developing and you know have developed a lot of like really really interesting research on um you know scientifically oriented ways of extending like not just lifespan but health span right so when we think about uh longevity we tend to think about it not in terms of like hey do you want to be um like you know hanging out on a couch like not really able to move but you're like I'm alive I'm alive like you know ideally as long as my neural link plugs in I'm As long as I can use the internet at 150 as a vegetable, I'm good.

You're like, you're like, that's probably not my jam. Just being able to like use a I mean, using a computer with your eyes at 150 would still be pretty cool, but like if you could do more, that would be even more fantastic, right?

And so our focus has actually been more on like the health span side of things and really thinking through like, you know, we actually think that there's a lot of like existing technologies and existing, you know, it's not it's also not just about like treatment.

It's about, you know, prevention and how do you identify, how do you diagnose, how do you uh kind of manage risk factors like very very early. Um, and so a lot of that involves having like algorithms for identification, having algorithms for like you know disease prevention.

Um, and identifying where there's a lot of like existing stuff that you can put to work in combination with like uh you know novel uh you know novel agents to really improve health span. Um so that is an area that we're very excited about and and certainly doing uh you know certainly doing a lot of work in.

What does dealflow look like for you?

I know a lot of the best biotech companies it seems like they there's some tech transfer point out of a university lab and then uh I've seen like flagship pioneering is like incubating stuff and modern came out of that and the there's just so many different has an incubation arm too. Yeah. Yeah.

There's so many different formats that you don't you don't see a lot of like oh you know kid in the garage said you know what I have a problem and I'm going to solve it myself. It's a very different pattern of entrepreneurship. So uh what does the life cycle look like for you these days? It is very different.

I will tell you I would actually love to see more like garage biotechs because I think like there's you know some more like I think that there's actually um you know in some ways like the entrepreneurial process for biotech has been a little too like institutionalized. Sure. Right.

But let's let's talk about it because um you know the deal flow for biotech and like how companies get formed can be in a number of different ways. Um academia, right? Ideas coming out of academia is like a big one. Um ideas coming out of uh you know venture funds is another big one, right?

Um and then you have like you know business people often people who've like you know they've worked for a company, that company got sold and they're like hey I want to come back and do another one. here is like these other areas and other problems to solve, right?

Or maybe someone's coming out of big pharma with like an idea that they couldn't prosecute in their big pharma company because they were too riskaverse and they want to start something new.

Um but because biotech is like so high risk and requires so much capital that process for like getting a company started is often um you know I'd say there's like a bit more like institutional like process around that than I think you see in tech because it just like takes a lot of money to like go from hey I have this idea to like oh I even want to like test this in animal models and like try and get a drug out of this like that is like millions of dollars.

Um so I think that is something that is actually a real challenge for the uh and that we at RA think is like a real challenge for like the biopharm ecosystem is um you know look like we have to you know find ways that we can be more uh you know be more efficient and like try and get to some of these answers more quickly.

Um because when uh you know when you when you look at um you know when you look at the pace of of innovation that is coming out of China which is really uh you know pretty astonishing for biomedical innovation it's like that is a fundamentally different cost base and fundamentally different pace of iteration and uh we you know there's a lot of work that I think we need to consider for our biotech ecosystem here to adapt.

Can we do a quick round of like overrated, underrated? I'd love to know. Uh, artificial intelligence broadly, is it speeding up drug development? Is it overhyped? In Silicon Valley, everyone says, "Oh, we're just going to, you know, ask Chat GPT to cure cancer. It's going to happen next year. " It's a convenient line.

If you need to raise 30 billion yourself, but but what what is the mood in the real industry from the folks? Okay. I would say that AI is like it's overhyped in the sense that like AI itself is like not like discovering and developing drugs.

It is underhyped in the sense that like oh my gosh like what a powerful tool like we absolutely use it. Every single company worth their salt is using AI in their drug discovery process, right? So it's a little bit of both.

Usually when someone is talking about themselves as an AI company, you should approach with like how different is this really and like but if a company is like no we don't use AI for anything.

I would also be like huh sense uh what about uh mRNA broadly Moerna Stefan Belle was on a TED talk saying before COVID saying mRNA is going to be a cancer cure. Uh the stock's kind of gone up gone back down.

uh is mRNA a technology that we're going to be seeing more of in the future in different applications or should we be thinking about Maderna really just as like a uh a pandemic frontline defense firm.

So let me talk about RNA therapeutics more broadly because actually mRNA therapeutics are like one flavor of uh RNA therapies and I would say like RNA therapeutics overall like huge huge potential right huge opportunity. Um I think that uh the challenge has been delivery, right?

How do you actually get these to the right biological target um and there's a lot of really awesome work uh being done that can hopefully improve on that. Yeah, that makes a ton of sense. What about uh GLP1s?

Uh I feel like everyone has heralded them as like a cure for everything from uh diabetes to obesity to gambling to just anything being lazy. I guess it cures it seems to cure everything. uh uh overhyped, underhyped, uh overrated, underrated or kind of underhyped, underhyped, phenomenal drugs, phenomenal drugs.

Um lots of problems to solve, right? The market isn't rewarding a lot of that now, but I think the market will in future. So, lots of problems to solve. Need to improve on accessibility, right? So, how do we get like pills and patches instead of needles? Um and how do we improve uh tolerability, right?

So, that people are actually staying on these drugs. And you know a big part of that is insurance coverage as well. Uh last one for me. Are you worried uh pharma IRRs on average have been uh low? Uh our last guest was talking about how uh if you look at average returns that are below the cost of capital today.

Are you worried about net new investment in early stage biotech funds? Obviously, if if there's less investment, you could imagine the returns actually going up because there's less competition for for deals. Uh maybe, but um what what's your kind of high level take on um incremental investment in early stage biotech?

Um you know, my take is that there is a lot of uh you know, there's a lot of great work to be done from a fundamental standpoint, but we need the incentives in place, right? So, we've got to have a functioning market. we've got to have uh you know um you know competition um in order to incentivize that.

So you know I think that's the best that's the best thing that the government can do um is ensure that there's uh you know strong market competition for pharmaceuticals and uh you know loved hearing this morning that there's a real appetite for trying to get other countries to incentivize that innovation as well. Yeah.

Do you think biotechnology process is overall accelerating or are we heading into a period of of kind of rebuilding and stagnation? What's your overall optimism on the the industry broadly? My view is accelerating uh because we have to, right? We have to and we have better tools too.

The thing that causes biotech to take such an enormous amount of time is clinical trials and like the clinical trial system in the US is just like clogged, right? everyone's trying to recruit the same patients at the same hospitals.

Um, so I think we need uh different ways of doing things, but I think that we have a lot of the tools to actually accelerate some of that innovation. That's exciting. Awesome. Well, thank you so much for joining us. Yeah. Yeah. Leaving on a high note. Thank you so much. Uh, this was really enjoyable. Thank you, Tess.

Well, the market's up, so we have to celebrate. Yeah, it's a white suit day. Great to see you both. Yeah. Thanks for coming on. Cheers. Thanks so much. Uh that was great. I I feel like I'm learning a ton from these interviews. Yeah, we've been meaning to have a biotech day. This is kind of the informal biotech day.

Uh yeah, kind of triggered it. But I'd love to go deeper here because there's it's such a ri every answer is something where I'm like I've never heard this particular take before. I'm learning a lot. So it a lot of uh it's interesting that cremude what didn't bring up the price controls in the European market, right?

Because that does feel like a factor. He was saying that, you know, European countries or that the pharma companies are selling at the rate in which the profit maximizing rate and it sounds like there might be some other