Yihui Zhang

Funding for Cure: A Scoring Framework to Invest the best Science

June 12th 2021

Nearly four decades after the first biotech company applied primitive bioengineering techniques to bacteria as therapeutics, the magic of modern biotech has become increasingly evident, utilized to combat global pandemics and alter the future of human health. In a time of biotech evolution, it is particularly important for investors to develop a systematic framework to evaluate companies. Here I propose a scoring rule, with five components each worth 20 points, to try to have a 100 point scale for any biotechnology companies that are developing therapeutic treatments.

First is the quality of science. Second is the ability to survive given different capital an regulatory climates. Third is the strength and completeness of IP protection. Forth is the business plan. And the fifth is the ability of the particular management can execute on the plan.

Many good bio investors believe the primary difference between biotech and tech is the so called “Light switch moments”. As we know, drug discovery is similar a binary outcome events. Either the drug works and the product becomes extremely profitable or it doesn’t work and it is worth nothing. But it takes time and money to see the outcome. Drug development is capital intensive. Bringing a drug to market costs billions of dollars, while building a mobile app costs many orders of magnitudes less. Biotech used to be defined by lengthy experimentation and expensive, unlikely-to-success drug development processes. But slowly and surely, biotech has started to fuse our new understanding of molecular science with technologies such as computer science and artificial intelligence. All of this is extremely exciting and promising to be able to finally accelerate the drug development process. As a result, promising science is the key for translating research to beneficial human use. For investors, that means their first job is to identify and validate promising science.

The second score may be obvious but it is nonetheless important. As one of my favorite investor Lei Zhang mentioned, there are two rules for startup founders to always remember. First is to not die. And the second is to remember the first rule. I believe this is particularly true for biotech companies.

The third score is the strength and completeness of the company’s intellectual properties. It is often easy to overlook IP or misjudge the quality of an IP portfolio. The best teams often have developed a complete scientific asset that has a strong IP portfolio, in which all facets of the product, from molecule design, chemical composition, to manufacturing methodologies should all be protected. An incomplete IP is often a signal of lack of experience in the scientific founder.

The fourth score is the quality of the business plan. Depending on the stage, there are different things a biotech founder and operators should do to help bring down the risks, for the team and for investors. For example, in the early stage of a biotech project, often when it just got spun out from a university lab, it is important for the team to plan to validate and wry the fundamental risk out of projects early. Only experimental data, similar to A/B testing for retention to validate product market fit in a tech startup, will help the team to quickly either adapt new directions to survive or discard them and move on. After the initial stage (often take years) of systematic company building and risk reduction, the team then should focus on creating a business plan to maximize their chance for success. From partnering up with larger pharmaceuticals, collaborating data process and drug creation with AI drug discovery companies such as Insicilo or Atomwise, to finding VC with a track record of providing the best support to founders. I personally don’t think the ability to fundraise should be a big factor for founder evaluation, because the best founders should have the science to speak for itself and the best investors should be able to judge science with independent domain experts and placing bets in ambitious projects that way.

The fifth and last score is the specific team’s ability to execute. Due to a variety of factors—better understanding of biology, better tools to observe and control biology, the inventions of new modalities, the confluence of artificial intelligence and machine learning —we are now able to address many previously incurable diseases and do so with a higher probability of success. However, even with great science, success is no guarantee. Many professors fail to translate lab results into clinical successes due to inexperience in the pre-clinical development and clinical trials. As a result, a balanced team with both science, fundraising, and business backgrounds is paramount for long-term sustainability.

Now, we will use the new framework to evaluate a company. Take the therapeutic company AgeX for example. AgeX is a public company, and as a result, I was able to acquire a good amount of information online as well as through private channels. With regards to science, AgeX develops regenerative medicine in order to reverse aging through stem cell therapies and cellular reprogramming. It has two main approaches: first is to deliver differentiated progenitor cells that still have regenerative potential to degenerate old tissues, which then employs a biomimetic extracellular hydrogel matrix to eat the PureStem cells inside patients; second is to use iTR by reverting in-vivo aged cells back to an early, proliferative state. After reviewing the available scientific material, I believe AgeX’s cellular therapy and iTR are interesting approaches. But there are still questions remaining. For example, how can AgeX’s immunogenicity maintain high effectiveness without inducing cancer risk. This leads to the second score, the ability to survive given capital raised. AgeX currently has only 2M in assets and would require a lot more to reach clinical trials. While the team looks experienced in raising a large number of dollars, I would ask a lot of questions with regards to their plan of fundraising. For the third score, we look at AgeX’s patent portfolio. The portfolio highlights mechanisms to use progenitor cell line-generated exosomes to deliver regenerate tissue as well as tools to screen for cardiotoxicity. To give a qualified evaluation, I’d require the help of a patent lawyer. But from distance their patent portfolio looks complete especially given their acquired complementary technologies. Next, AgeX’s business plan includes three candidates – vascular progenitors, brown adipocytes, and NCE in hystem – that are all in the preclinical stages. AgeX’s approach is risky, because the targeted indications already have a number of clinical therapeutics. As a result, only best-in-class approaches can have chances to get an approval with essentially no chance of obtaining a fast-track review or breakthrough designation, compared to diseases with no current approvals. In addition, FDA has been very strict, for good reasons, towards approval for stem cell therapies. Therefore, my primary concern would be around its choices of indications. During due diligence, I would focus on asking what’s the reasoning for the selected indication areas and if there’s any ways to optimize the portfolio pipeline. Fourth score is the management team’s ability to execute. Led by veteran scientist Mike West, who has led successful biotech companies including Geron, Advanced Cell Technologies, and Biotime, AgeX seems well positioned to face different regulatory and capital challenges. This leads to the last score, the ability to survive given capital raised. Overall, I believe AgeX has strong science, strong IP protections, and a qualified team, but I would definitely need more answers on the business plan and funding side in order to be confident to invest.

Like AgeX, many many exciting companies are moving the needle for the future of human health with the support of incredible investors like the ones we learned in class. I deeply believe today’s biotech field is one of the most exciting developments in technology ever. Scientists, entrepreneurs, inventors and investors are now taking big leap borne of new knowledge, experience, capital, and capabilities. I hope this framework can help investors, and even founders themselves to better understand different biotech companies. Whether the Covid 19 pandemics, cancer, Alzheimer’s or other devastating disease afflicting human bodies, this is biotech’s moment to maximize its impact by overcoming conservatism and put money into the best science that will define the future of medicine.