MPM Capital: The Perfect Storm in Healthcare




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Video title: MPM Capital: The Perfect Storm in Healthcare
Released on: October 06, 2009. © PharmaVentures Ltd
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In this interview, filmed at BioPharm in San Francisco, Dr Fintan Walton speaks with Vaughn Kailian, Managing Director at MPM Capital, one of the world's largest life science-dedicated venture investors.

They discuss:

• why 2009 has been a landmark year for the biotech industry
• survival in the current financial crisis
• healthcare reform and the politcs involved
• how the best ideas will still find funding
• recovery
• combating risk in funding in the US Biotech sector
Why 2009 has been a landmark year for the biotech industry
Fintan Walton:
Hello and welcome to PharmaTelevision news review here in San Francisco at BioPharm America. On this show I have Vaughn Kailian, who is Managing Director at MPM Capital based in Boston, welcome to the show.
Vaughn Kailian:
Thank you. Thank you very much.
Fintan Walton:
Vaughn Kailian, you've got a long history in the pharmaceutical and in as a venture capitalist, you've worked in the pharmaceutical industry you've at board level and at chair level in companies like Millennium, you are currently serve as a board member with a company called NicOx in Europe. So you have a very broad view of what's going on in the pharmaceutical and biotech industry. 2009 is a land mark year for our industry, it's undergoing huge changes independent of any economic crisis, but within economic crisis the biotech industry is facing new challenges. Vaughn what do you see with your experience to-date? What's actually happening in 2009 within our industry?
Vaughn Kailian:
Well I think it was a confluence of several factors as you pointed out that have hit the industry at a, at a very critical time. It was the, the obvious financial crisis which soft [ph] up liquidity very quickly in the life blood of our businesses having access to capital, that was number one, that was then exacerbated by the, the nervousness around healthcare reform in the United States which increased the perceived risk in our business which then has an effect on the returns that our investors, for instance in venture capital markets, the financial crisis then little back on the pharmaceutical companies and the pharmaceutical companies found themselves in a more constrained environment. So it was almost a perfect storm in healthcare that occurred in 2009. The difference between this perfect storm and the one on the movie that you are familiar with is, I think people are gonna survive this one, the boats won't be lost at sea.
Healthcare reform and the politics involved.
Fintan Walton:
Good. But as you mentioned there are several factors occurring simultaneously, if you where to look at each of those lets say for an example healthcare reform, within this perfect storm that you described how important is that healthcare reform in changing the attitudes of both investors in biotech as well as the mind sets of those in the pharmaceutical industry?
Vaughn Kailian:
The fundamental problem is people don't like uncertainty. There is enough risk involved in just a biology the work that we do everyday that adding another layer of uncertainty or financial risk questions about reimbursement is just makes life more difficult. The problem we have in the United States is we have too many smart people. Too many smart people have too many ideas. And the issue with healthcare reform there 85% of the people in the United States have healthcare insurance and coverage. There I don't really believe in, you see the results of the polls that say they are satisfied with their healthcare, what they are terrified of is losing that, losing their job and losing their healthcare coverage that terrifies people. So someway or another we have to find a way of providing them protection in case they lose their job and they lose their coverage. The other 15% of the people in the United States don't have coverage and we have to find a way of providing them a (indiscernable) of coverage that provides them the security that when they go to bed at night they know that at least that basic need of basic healthcare is provided for some places other than a hospital emergency room which is where they have to go. If you, if you reduce the problem down to that I think all those bright people can focus on that without trying to make it a bigger more complex issue.
Combating risk in funding in the US Biotech sector.
Fintan Walton:
But of course healthcare is always a political issue and it's back into the hands of politicians to set the, the landscape in which healthcare can be delivered to individuals ultimately, whether they keep their hands off or put their hands on is still a decision by politicians to do that. So from your perspective looking at the industry both from a historical point of view with your participation in that and seeing the issues, what would you recommend the US starts, just leave it alone?
Vaughn Kailian:
Oh no, no I would do the two things I've said, find a way to provide protection for the people in case they lose their job and for those that don't have coverage today find the mechanism where by you can provide them coverage without trying to go in and change everything about the system by declaring it you know terminal right now, which is what people are saying. We are spending 15 to 16% of our dollars GDP on healthcare and on the panel that I led this morning somebody said what's the matter with that and my question is where do we spending the other 85% of the healthcare, of our dollars on in the United States?
Survival in the current financial crisis.
Fintan Walton:
Sure, sure. Let's just go back to the storm that we were looking at. And the other part of the storm is this economic crisis or the financial crisis, credit crunch whatever people like to describe it, getting access to capital for biotech companies has been an issue for ever, even in the good old days it was still tough to get access to that money, with the crisis that we've just gone through or we going through and hopefully we will get out of, what are we gone be left with in terms of how a entrepreneurial biotech company can get suitable funding and what business model will evolve that is?
Vaughn Kailian:
Well it's a big Darwinian unfortunately survival of the fittest. And the best ideas will find funding. That we are coming out of the cycle by the way, there is no question , we just have to work through the process, I believe that the back half of this year you will see the biotech, IPO market start to show greater signs of life so that in the first half of next year that will start picking up. The minute that the IPO markets picks up venture capitalists like myself think well there is a good place, this is the time to get back in more aggressively than we have in the past, I would dare say that most venture capitals over the last six months have been protecting their own in another words taking care of the investments they've already made.
Fintan Walton:
Sure.
Vaughn Kailian:
And not going too far outside of that with new investments. I think you will see that in the, the last quarter of this year and early next year you will see people venturing out and making more new investments. So I think it will come back. It just won't be all the way back to where it was if people are expecting to be, where it was 24 months ago, no, no, no. The pendulum is not swinging there.
How the best ideas will still find funding.
Fintan Walton:
Right I mean obviously an IPO is one form of X the other is of course acquisition by a pharmaceutical company. In some ways strategic acquirers or investors we can call them an acquiring but pharmaceutical company can often pay them better premium than going through an IPO, so isn't that always still the preferred exit for a venture capitalist?
Vaughn Kailian:
Well its preferred in that you get all your cash right away. And everybody likes getting new cash what at a certain level, likes getting new cash
Fintan Walton:
Sure.
Vaughn Kailian:
Right away.
Fintan Walton:
Sure.
Vaughn Kailian:
If you go through an IPO by definition all of the current investors are locked up for six months. We have to worry about how much stock you put on the market to get liquidity later on. And so your return comes over time, hopefully the company is growing in that periods so that your returns still stay, stay very healthy. Obviously going to a pharmaceutical company is another type of return and a more immediate return and we heard this morning pharmaceutical companies are looking at early innovative ideas as well.
Fintan Walton:
So in some ways with all the acquisitions that pharmaceutical companies do are doing at the moment we still should be recently optimistic about biotech?
Vaughn Kailian:
If they weren't down sizing at the same time, the answer is yes. There is a lot of I don't want to say not invented here, but there is a lot of protection of existing programs in the big pharmaceutical companies. And now you are seeing a new generation of leadership in the new pharmacy in the big pharma companies who are willing to look at research, almost in a Japanese way of outsourcing some of their R&D to the biotech companies which is effectively what they've been doing over time, like companies such as J&J have actually put the R of R&D and out license or in-licensing under the same person. So it's a matter of how they deploy their assets inside or outside of the house that gives them the flexibility to deploy their, deploy their resources the way they want. So that's the new model. The new model is that the pharmaceutical company, the big pharma company becomes more downstream and the biotech company becomes the feed stock at the earliest stage.
Fintan Walton:
But in order to do that biotech companies have to be robust, they have to have the infrastructure that gives the security to the pharmaceutical company that it's a good place to keep shopping?
Vaughn Kailian:
Yes, for just leave it to yes you have to be robust, but your definition of robust, my definition for robust and Pfizer's definition of robust is different and
Fintan Walton:
Well, I suppose in the sense where I am coming from is obviously the intellectual property has to be pretty safe, the management has to be pretty good and has to be to reasonally well financed, because or even though pharmaceutical companies are very happy to put money into, into biotech companies on occasion it's still like other people taking that risk profile and will take on that risk and that's back to MPM Capital.
Vaughn Kailian:
They want to make sure there is enough money in the biotech company to achieve their objective.
Fintan Walton:
Exactly.
Vaughn Kailian:
Fundamentally, it's understandable, it's an understandable motivation. They're gone take care of themselves first, so as long their program is funded through the end points that they want.
Fintan Walton:
Right.
Vaughn Kailian:
I think they are gonna be very happy, where somebody like MPM Capital comes in is that a lot of time say do not want to necessarily put that capital up there, risk capital up. We are more than willing to stand in alongside of pharmaceutical company provide the risk capital that goes along with the pharmaceutical companies transaction to support that product all the way through it's launch.
Fintan Walton:
So that's a change in some ways, that's one of the changes as it goes lot are better collaborations between pharmaceutical companies and venture capital?
Vaughn Kailian:
There, we are seeing that an offer like that, we the nature of that we assured commercial at MPM is that we have a very fully integrated almost a mini pharmaceutical company in terms of management as part of our managing director group. So when they come to us they know that we are looking at the programs the same way they are looking at the programs interested, we have a financial incentive and they have a commercial incentive to move them forward.
Recovery
Fintan Walton:
Another component to this storm that you've described right at the very beginning is the risk of taking a drug to market and there are things that are changing everyday within and within that risk profile, there is the change at the FDA level, it's much more difficult to get a drug through the FDA, there is the continued drive of pricing which is again related to healthcare reform, so the chances of getting a drug through from early stage through launched is diminishing, so we have the potential phenomenon that in the future will be less drugs, what's your view on that?
Vaughn Kailian:
One would think that if you did it once you should quit, because the probability of doing it twice in a row is pretty slim, I did it once. I took a company a product from no compound all the way through FDA approval and launch, and competed with Merck, Lilly, J&J and survived and then sold the company. Over that period of time three mornings I woke up with half of the market cap I had the night before when I went to sleep because of either something happened clinically, something happened in the market. It's, it's deja vu all over again as they say, you know there is nothing different about today on that when you wake up in the morning and face your challenges there is nothing different today than what was there 10 or 15-years ago the challenges are the same, biology, scientific risk, clinical risk, regulatory risk, commercial risk and then finally we had the feed stock the capital to get you there. Those challenges with tweaks for each of them remain the same and what you need to do is find the right team of people and the right compound to thread your way through there.
Fintan Walton:
Isn't one of the problems is the approach that we take to getting a drug to market, isn't it, we have investors enough into how we can discover drugs faster, we can be more sure at the various Phases of taking a drug through to market, that we have a better idea of when to reject drugs. So isn't there, we don't just need healthcare reform; we need to have a total reform in way drugs are discovered within, within our society?
Vaughn Kailian:
10-years ago I heard this was the age of increase productivity.
Fintan Walton:
Yes.
Vaughn Kailian:
God forbid we should say that again, because productivity halved it didn't double, right? it went the wrong direction because at the same time that people where thinking they were being more (indiscernable) in picking compounds the FDA got more critical about safety
Fintan Walton:
Yeah.
Vaughn Kailian:
Which caused you to spend more money. So is there any answer? Don't forget you know we are trying to do in 10-years in drug discovery, what evolution has been working on for million years.
Fintan Walton:
Sure.
Vaughn Kailian:
What sort of ego things that you are gonna solve that problem in 10-years, this is a difficult high risk business.
Fintan Walton:
So when you look at our industry in the way we've just gone through it, where do you end up in terms of feeling whether where in 10-years time or 20-years time we got a an industry, a society that can actually cure itself of illness?
Vaughn Kailian:
No. I've not met anybody yet who has beaten the game here, right? 115-year old lady just passed away, the oldest women. Okay, so that's the high water mark, but those are the notwithstanding. We are not going to beat it, I think what we are trying to do is to get as much high quality years out of our time here as we possibly can. And the part what we are trying to do is prevent catastrophic illness from taking you too soon and provide palliative therapy to keep your life here of the highest possible quantity while you are here. Lets not think that we were gonna cure everything, is craziness. I mean there maybe somebody who says that from a some place I don't wanna politicize this, but that ain't the way it's going to be.
Fintan Walton:
Okay. And in 10, 15-years time, 20-years time MPM Capital will be investing in biotech?
Vaughn Kailian:
MPM Capital only invests in healthcare, so before here that's what we were doing.
Fintan Walton:
Vaughn Kailian, thank you very much indeed for coming on the show.
Vaughn Kailian:
My pleasure. Thank you very much.
Vaughn Kailian
Managing Director
Vaughn Kailian joined MPM's Boston office in 2005 and brought to MPM unparalleled success in the stewardship of commercial biotech and pharmaceutical companies. From 2002 - 2004, he served as vice chair of the Board of Directors of Millennium Pharmaceuticals, Inc.; and was head of the Millennium commercial organization.. From 1990 - 2002, Mr. Vaughn Kailian served as CEO, president and director of COR Therapeutics, Inc. He became the CEO of COR shortly after the company was founded, took the company public in 1991, raised almost $1 billion in public market capital, and led the $2 billion merger with Millennium in 2002. Earlier in his career, Mr. Vaughn Kailian held various international and U.S. general management, marketing and sales positions at Marion Merrell Dow, Inc. and its predecessor companies including president and general manager, Merrell Dow USA; and corporate vice president of Global Commercial Development, Marion Merrell Dow, Inc. He earned his B.A. degree at Tufts University. Mr. Vaughn Kailian is also a member of the board of BIO Ventures for Global Health and the New England Healthcare Institute.
MPM Capital
MPM Capital is a private equity firm focused on venture capital investments in early stage companies across a range of sectors in the healthcare industry including biotechnology, specialty pharma and medical technology. The firm, which is based in Boston, Massachusetts, was founded in 1996. The company has raised approximately $2.8 billion since inception across four private equity funds and a public equities fund.