Readers of last year’s retrospective will well remember a theme that introduced the interesting dichotomy of MEC in isolation and in juxtaposition with the marketplace in which we toil. We related our continued firm belief that, while the industry contracted, both metaphorically and in reality, relative to investment activity, we saw an opportunity. Voices of doom are only that – voices. Recall our reference to Buffett (Warren, not Jimmy) and his investment philosophy of “never bet against America” and ergo if market sentiment dictates a downcycle – that’s the time to be buying. We remain committed to the fundamentals of venture capital investing: First, we have the most vibrant, resilient, and innovative economy on the planet. Second, the science produced in America towers over the rest of the world. Third, assemble a top-level investment team and due diligence machine to identify and win the best projects. This is the context in which we ask you to consider the Medical Excellence Capital portfolio as a whole and via each individual company. As an organization, we are pleased to report that MEC’s 2023 performance can be viewed positively using well-established industry metrics. You will find these metrics in some detail in the recently published MEC 2023 Q4 newsletter available on LinkedIn or on the MEC website – www.medexcelcap.com.
2023 – The Life Sciences/BioTech Market and MEC Working Through It.
Or, as I put it – “When you are going through Hell, keep going” (It was really Winston Churchill…). Building momentum in a historic down year truly tests the thesis and selection abilities of fund managers. I will not for a moment downplay the considerable headwinds we experienced in 2023, not the least of which was finding willing syndicates to fund our promising portfolio. As a matter of fact, we had to unfortunately close one of our portfolio companies that produced only mediocre results in the lab. Mediocre does not cut it. In this market, and quite appropriately in our estimation, only exceptional and measurable results qualify for even minimal syndicate support. So goes the Darwinian Market of 2023. Interestingly, even exceptional companies are having issues finding new funding to propel promising science. This, we cannot understand and as a result call for change in the industry. Medical Excellence Capital remains steadfastly committed to true venture capital – that is, we take significant, well-researched risks in funding companies of high merit, fully expecting high rewards for success.
Normalization of the industry’s economic sentiment and activity seems to have been slowly evolving in the past few months and looks to a more promising 2024. Balanced venture methodologies and practices is critical to the long-term health of life sciences. It is not at all in the interest of the industry to engineer “irrational exuberance to despair” business cycles over relatively short periods of time. For example, poor projects with a wisp of good science could and were easily funded in 2020, whilst very good science in 2023 had a very tough time raising money at all. Cycles such as this are not a good way to remain the most resilient, innovative, and vibrant industry in the largest economy on the planet. A successful ecosystem for developing miraculous new medicines requires great science, many years of toil, a ton of smart, well-reasoned funding, and markets resistant to wild swings in sentiment. Staying power is a key component to a successful prosecution of new medicines. We hope the industry returns to its senses this year and syndicates again begin to collaborate in supporting great science in ever greater numbers.
Within this backdrop, I am quite pleased to report that, after 3 years into our investment process and making 10 investments, 9 MEC portfolio companies continue to produce promising science. That ratio is a very, very good one. I give my partners, Eric, Brian, Kim, and Joni full credit for building the business operations that enable strong portfolio selection. Equally, the management teams of MEC’s portfolio companies are outstanding examples of the steadfastness and toughness needed to drive strong science through roiling waters. Lastly, I want to make a point about the need for consistent, balanced support of strong of science and valuations. Valuations, for an extended period of time, became at least a bit excessive. We actually feel the downward valuation adjustments of the past 2.5 years are helpful to the industry in the long term. Moreover, in the short term, we believe we picked up some very nicely priced companies and believe we can continue to do so over the next few months.
We have lots of data supporting these notions for you to review in our recently published MEC Quarterly Newsletter.
Looking Ahead to 2024
MEC is most certainly a “glass half full” kind of venture capital firm. Our LPs pay us, however, to look at opportunities with withering clarity, and to peer around the corners for unseen or undue risk. This is why we have only made 10 investments while having a deal flow that numbers close to 900 companies. As noted earlier, we see 2024 as a very challenging time that also will present great opportunity. We have several very promising companies that will require greater funding because they have made significant scientific progress. This funding will require MEC to successfully catalyze or participate in syndicate financing. This was extremely challenging for the entire industry last year. And, despite the green shoots of early 2024, we note that the MEC team is working very hard to ensure our portfolio companies have the needed funding to aggressively progress their scientific and operations programs. This will continue to be a combination of both allocating reserves to fund our companies, as well as building like-minded investment syndicates. Regarding reserves, we have no issue whatsoever plowing forward with new funds from the MEC fund reserve pool to fund our best opportunities. One either believes in their programs or one does not. This confidence and leadership often engender others to wade in with us. With respect to syndicates, the MEC team has been expending considerable energy in building effective trusting relationships with high-quality venture capital investment houses. In addition, we are looking to our well-established family office network as potential investors in MEC portfolio companies. We think this would be a win-win scenario for MEC and our closely connected family offices to partner and fund high-quality life sciences companies.
We expect 2024 to be a strong year for the MEC portfolio companies. We very carefully selected our portfolio companies for their individual characteristics, while keeping in mind how they fit within a balanced portfolio. Basically, it is identical to making a very fine wine. Individually, one must select the right grapes, hand-picking and using the judgment of quality that comes with experience. But it is equally essential to craft the right blend to create the whole. This is the essence of our portfolio philosophy. Pick great individual companies, but build the balance needed to maximize return potential and minimize risk.
Many of our companies have very important milestones on the horizon. This is the glass half full. That said, much of these milestones are also contingent upon adequate funding to prosecute the opportunities successfully. This is the world we live in. Fortunately, the MEC investment team has, over the last 20 or so years, seen it all.
Medical Excellence Foundation, Inc. – A moment or two to reflect on the progress of The Medical Excellence Foundation’s MERIT program. Thanks to the generosity of several LPs and MEC team members, we were able to adequately finance a compelling charitable giving program for funding very early-stage experiments at the very best research institutes in the United States. The MEC team has reached out selectively to high-potential programs and conducted due diligence activities on many really great scientific programs. We are pleased to report solid engagement with Weil Cornell, Salk Institute, Cold Spring Harbor Laboratories, the Innovative Genomics Institute at Berkeley (Nobel Laureate Jennifer Doudna), Stanford, UC Davis, and The ALS Core at Columbia. Last year, the Foundation disbursed or committed funding specifically to The Precision Medicine Institute at Weill Cornell Medical College, Cold Spring Harbor Laboratories, and Columbia. We realize the unique and enduring value of using the MEC platform to direct and fund bleeding-edge science through the Foundation. Much more to come!
Those in the Trenches with MEC – We thank our LPs for believing in our vision and backing it with their hard-earned money. We work every day to build a successful fund as measured by returns and its effect on patient care. I know both are very important to you! Thanks to our incredibly prolific and world-class Scientific Advisory Board – Euan Ashley, Gregg Semenza, Olga Troyanskaya, Steve Tsang, and Doug Wallace. Great appreciation for the achievements of each of the team members within our portfolio companies. Working closely with you this past year has been an inspiration. Warm thanks to the dozens of contributors within the MEC Council. Your considerable experience and wise guidance provide the investment team with invaluable insight into our due diligence.
I generally close the introductory part of the MEC Annual Letter with some thoughts on the MEC team. John Kennedy famously said, “Happiness is the full use of one’s talents along lines of excellence.” We are then a happy team. On the surface, the daily grind of venture capital is just that, a grind, as evidenced by looking at over 900 companies to arrive at investing in 10. On the other hand, the opportunity to work with a cadre of the world’s finest medical research institutes, scientists, and entrepreneurs to build the next generation of meaningful medicines – what better pursuit of excellence? What better way to spend one’s time? This journey is shared with an outstanding, dedicated, and truly delightful team. It is a joy to work with a cast of characters each excellent in and of themselves. Greatest admiration and respect to colleagues Brain Halak, PhD., Eric Heil, Kim Kamdar, PhD., Joni Mancini, John Hornbostel, Esq., Olga Prufeta, and Annabel Stoddart.
2024 marks the 4th year of investment activity for the MEC Fund. Basically, middle age for a VC investment fund. I close this note with excitement and anticipation of the next year, fully realizing Winston Churchill’s quote “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”.
On to the next exciting phase and reaping what we sow!
Wishing you all a great year ahead!
Managing Partners – John Prufeta; Brian Halak; Eric Heil; Kim Kamdar; Joni Mancini
Key Contributors – Olga Prufeta; John Hornbostel; Annabel Stoddart
By Max Beyman, LinkedIn Bio
In Secrets of Sand Hill Road: Venture Capital and How to Get it, Scott Kupor writes, “If you invested in the median return VC firm, you would have tied up your money for a long time and have generated worse investment results than if you had just stuck your money in a Nasdaq or S&P 500 index fund”. The natural follow-up question to this then is “why should I invest in a VC firm?” Taking that question further, allow us to make the case for why someone would want to invest in a biotechnology VC fund, a sector that has been historically perceived as high-risk.
Power Law and Portfolio Performance
The answer to the first question lies in understanding that investment returns for VCs do not function like a normal bell-curve distribution as they might for a typical investment portfolio. Instead, they follow a power law curve, wherein a small number of the firm’s investments generate an outsized portion of the VC firm’s ultimate returns. In other words, if a VC firm makes ten investments throughout its fund’s life, it is looking for one or two investments to be hugely successful. Successful VC firms in any industry are effective at identifying investments with the greatest potential of generating the highest multiple on invested capital (MOIC) and actively work with those start-ups to ensure they can achieve that exit multiple.
Risk and Reward
Fundamental to the scientific process is the allowance to be wrong. Biology does not always behave as scientists expect, and figuring out why is integral to enhancing their understanding of biology and how to manipulate it better. A biotechnology start-up is, unfortunately, not exempt from this, and while developing a new therapeutic, the drug could fail (preferably early to gain as much information as possible while reducing capital exposure). Pammoli et al. (2020) found that the probability of a drug filing an NDA from pre-clinical studies is about 0.2%, and those that are able to advance to a phase I clinical trial still only have a 2% chance of filing an NDA, certainly stark numbers.
However, because of the high risks associated with investing in these biotechnology start-ups, the rewards are suitably matched. For example, in 2020 ACELYRIN’s series A raised $8M for 8M shares of the company; with the successful completion of their IPO three years later that stake was worth $144M, giving an MOIC of 18x.[i] While a level of success such as ACELYRIN is what every VC wants for all the start-ups in its portfolio, ACELYRIN is an outlier. That said, looking at returns across the industry shows that biotech investors made between 1.5-2x cash-on-cash over the past 3-5 years (admittedly, these were great years for biotech), giving an internal rate of return of 25-35%.[ii] To put that in perspective, the average VC and the S&P 500 have an internal rate of return of 19% and 11% respectively.[iii] While it is unlikely that biotech VCs continue to outperform the average VC to this degree, it certainly makes a compelling argument for the soundness of the investment relative to the sector’s risk.
Innovations and Impacts
Not only are there strong financial incentives for investing in a biotech VC firm, but there is also the greater impact these start-ups have on society. One major lesson to be learned from the COVID-19 pandemic is that there will always be a need for both the innovative ability and agility of small biotech. When the sequence of the virus was first made available on January 11th, Moderna was able to adapt its technology so fast that the first volunteer was given their vaccine on March 16th.[iv] They were able to do this because they had been working on the cutting-edge mRNA technology behind the vaccine for years prior.
We are hopeful for the future of our industry. Made possible by recent technological advancements, new and better treatments are actively being developed for various indications. We here at Medical Excellence Capital are proud to be a part of such an exciting time for innovation.
Sources:
Inclusion in this post of any quotes or references to material or opinions published by third parties does not imply or constitute any endorsement by MEC of the views of the authors of such material or opinions.
[i] Numbers sourced directly from Pitchbook
[ii] https://www.baybridgebio.com/blog/biotech-vc-crunch.html
[iii] https://gridline.co/knowledge-base/three-common-misconceptions-about-vc-investing/
[iv] https://www.cnbc.com/2021/07/03/how-moderna-made-its-mrna-covid-vaccine-so-quickly-noubar-afeyan.html
Disclaimer: This post was prepared in good faith by MEC in August 2023 based upon information from sources that are believed to be reliable. The contents herein may contain a description of an investment made by MEC. References to any investment included herein should not be construed as a recommendation of any particular investment or security. Specific investments identified or described as owned by MEC do not represent all of the investments completed by MEC, and the reader should not assume that the transactions discussed were or will be profitable. It should not be assumed that investments made in the future will be comparable in quality or performance to the investment described herein.
Inclusion in this post of any quotes or references to material or opinions published by third parties does not imply or constitute any endorsement by MEC of the views of the authors of such material or opinions.
By Kira Medish, LinkedIn Bio
Over the last half century, the field of biotechnology has transformed numerous industries—most notably healthcare, agriculture, and environmental conservation. With its incredible potential to address global challenges, it is no wonder that entrepreneurs and researchers alike are increasingly drawn to the idea of establishing their own biotechnology companies. In this post, we explore our perspectives on the key processes involved in launching and sustaining a biotech company creation.
Entrepreneurs and professionals in the life sciences industry face several career choices that demand a hard decision: entering the pharmaceutical industry, embracing a life in research, or risking a career in the biotechnology start-up environment with no promise for pay-off.
Biotech startups offer a potential for innovation and cutting-edge scientific advancement that potentially results in diagnostics, devices, or medicines entering the commercial world. Creating a biotech company can be an exciting and rewarding journey. It is one that requires detailed planning and due diligence, collaboration, as well as a deep understanding of industry dynamics. Identifying a niche, securing funding, navigating regulations, protecting IP, and forming strategic partnerships are key elements of success. By combining scientific advancements with entrepreneurial skills, biotech entrepreneurs can make a profound impact on both medicine and society.
Moreover, there are many professional and personal perks to working in a biotech startup. To list a few: greater opportunity for career development and accelerated trajectory for career advancement; a smaller, more streamlined, business model and thus less bureaucracy; and an unmatched potential for outsized financial returns. While biotech startups come with a number of inherent risks, successful ventures generally result in significant financial returns. As startups progress through research and development stages, fundraising, and shepherding products or therapies to market, the value of the company can increase substantially. Joining a promising startup early on can offer the opportunity to become a key stakeholder, and thus benefit from the financial rewards that come with growth and success.
We spoke with Erin Fleming, co-founder of biotech start-up ProJenX[1], to hear about what the “every day” looks like at a biotech as well as hear about her personal experience navigating the industry. Erin previously worked in the not-for-profit sector, making the switch to the start-up world only two years ago. While she did emphasize the demanding and often time-sensitive nature of the work, Fleming shared how “having a role in creating a company’s culture and how that company will grow” was a unique and alluring component of creating a new biotech venture.
While the biotech startup industry may offer a unique and rewarding career path, pursuing a career in the pharmaceutical industry may also offer advantages. Pharmaceutical companies often have access to significant financial resources, state-of-the-art laboratories, and established manufacturing facilities, allowing for efficient drug development and production. They also have established regulatory processes including strong relationships with regulatory agencies, ensuring smoother navigation through complex regulatory frameworks. Moreover, pharmaceutical companies have well-established distribution networks and global market presence, facilitating the commercialization and widespread distribution of drugs. Although a career in pharmaceuticals is dependable and often lucrative, there are some potential disadvantages associated with working in this sector. For example, the industry offers little scope in workstreams and skillsets; generally, has a larger company size with many layers of management; and frequently breeds a high-pressure corporate culture. Moreover, the larger company size calls for established processes which can make work and projects move more slowly because of corporate red tape; and, for a similar reason, career growth tends to be slower as well.
To gain better insight into the mental calculus that goes into an individual’s career decision, we had a conversation with a scientific researcher who has been working for a pharmaceutical biotechnology company for the last 8 years. He emphasized the financial security that working for a pharma company provides and noted that there are opportunities to change roles and be promoted within his company. He feels this would be less feasible within a biotech start-up. He shared that he could see himself joining a biotech start up “…if I trusted the scientific leadership and [the science itself] excited me….” Nevertheless, although the idea of a biotech start-up sounds and often looks attractive, there always remains the risk that science cannot support the concept which is a risk not everyone is willing to make. [2]
Deciding between the pharmaceutical industry and a biotech startup requires careful consideration of personal aspirations, risk tolerance, and desired work environment. The pharmaceutical industry offers stability, established infrastructure, and a wider range of career options. In contrast, biotech startups provide opportunities for innovation, impact, faster career development, and the potential for higher financial rewards. Moreover, Fleming noted that there is significant value to be gained by working at a very small company in your early career because one “learns on [their] feet” and gets a “holistic sense of how things operate.” Thankfully, the biotech ecosystem offers a very wide variety of career choices and opportunities. Ultimately, the choice depends on individual preferences, professional goals, and the desire to either work within an established system or shape the future through entrepreneurial ventures.
Sources:
[1] A clinical-stage biotechnology company developing novel, brain-penetrant, targeted therapies to address debilitating brain diseases, with an initial focus on ALS.
[2] Conversation between Jonathan Cruz, Principal Scientist at Regeneron, and Kira Medish. July 7th, 2023.
Disclaimer:
This post was prepared in good faith by MEC in August 2023 based on information from sources that are believed to be reliable. The contents herein contain a description of an investment made by MEC. References to any investment included herein should not be construed as a recommendation of any particular investment or security. Specific investments identified or described do not represent all of the investments completed by MEC, and the reader should not assume that the transactions discussed were or will be profitable. It should not be assumed that investments made in the future will be comparable in quality or performance to the investment described herein.