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LIFESCIENCELEADER.COM APRIL 2014 40 leaders ROUNDTABLE treat these patients; all drugs currently treating the condition are used off-label. And three, would there be a company that would have interest in partnering with us? We did no press release on the fund-raise; we really wanted to stay under the radar screen. We just filed a Form D [Notice of Exempt Offering of Securities, U.S. Securities and Exchange Commission], and someone in the press did a write-up about this, saying this "stealth biotech" came out of nowhere, raised $30 million, and got really marquee firms to invest in it. We still haven't disclosed publicly what we are working on. (Everyone laughs.) But we've had companies contact us, ask for diligence decks [company slideshows], and nonconfidential presentations. We plan to be in Phase 2 this year. It gave me hope that anything is possible these days. (Laughter.) This is the right opportu- nity, and we have, of course, a really good team. I have worked and closed on other start-ups like Elevation Pharmaceuticals, partnerships, and acquisitions, and my cofounder and chair, Mahendra Shah, has founded and sold four other companies. KOBERSTEIN: That was an interesting case. WILLIAM MARTH: I'm rather new to this forum, so if you think I can top not having a drug or a rationale and raise money then . . . (Everyone laughs.) SHAH: I think it's more about your 12+ years at Teva and growing the American companies from $2 billion to $12 billion. MARTH: I've had some experiences, and I've found the science is important but the strategy is critical. If there isn't a strategy, grow very large for a company based on such expectations, but when problems arise, say, with safety in the follow-up trials, the valuation can fall quickly. PURCELL: Well, that's why some of those companies have a very high price to yearnings! (All laugh.) KENNETH MOCH: If you look at the theo- ry of the capital asset pricing model, stock prices are the present value of future earnings, discounted for risk. If you proj- ect what you believe are relevant future earnings, you have to include the exog- enous discount rate of the markets, right? At least to some extent, you can watch the water rise and fall based on those internal and external factors, and it kind of makes sense. But nobody can really predict the future earnings of a product that's not yet marketed, so the whole thing is a series of judgment calls. That's the way valuations have evolved — with judgment a key aspect of it all. Somebody said to me recently, "There's no such thing as behavioral economics; all economics are behavioral." So the pricing model fits into the capital asset model, as well. KOBERSTEIN: How different is valuation for life sciences companies versus companies in other sectors, then? Is it more subjective or less subjective than in other sectors? JAISIM SHAH: I can speak to fundraising in innovation, including the judgment aspect, because we raised $30 million Series A less than six months ago. We had no angel funding. We actually had no product. (Everyone laughs.) We had an idea, to address a hot topic raging through the country: the compounding mess, which had led to about 700 fungal disease infections and 100+ deaths from a New England pharmacy and other compounding pharmacies. We decided to focus on chronic back pain, and to come up with a formulation that will address all the issues causing pharmacies to compound. We talked to only a few venture funds, and they gave us a term sheet. There were only three things that anyone wanted to know: One, can you price this product and get reimbursement? Two, was there a clinical rationale? That was a challenge, because there are no drugs approved to if you cannot articulate what it is you're trying to do and how you're trying to do it, and what the endpoint is, it is very difficult to get investors. I started in the early days at Teva, back when we were $350 million here in the U.S., and we grew it to $10.5 billion here and $22 billion globally by the time I retired last year. We started out talking to a lot of people who really didn't want to listen to us in the beginning, but we had a strategy, and people understood the strategy. We could articulate it, they could understand it, and so those who invested in us did very well. And those who didn't, wished they'd invested. But it's really critical; science needs to be linked with the strategy, above all other factors. KOBERSTEIN: Is there a process of critiquing the strategy? When you have a strategy, do you typically encounter people who are skepti- cal and try to take it apart? MOCH: The investors can talk to that better than the company side. Our job is to create the vision, and their job is to tell us why it's wrong. (Laughter.) KOBERSTEIN: Good point. MOCH: That's the ying and the yang of the business, of investing and creating, right? It's about trying to define the inflection point between the overt optimism of the CEOs and the "I've been through this before and lost money" pessimism, which is not illogical, for the investors. Some people say, "Okay, I see your vision at this price, because that's where I think I can make money." Dennis can certainly speak to the process. Everybody comes in with a billion-dollar idea, and your job is to say, "I've seen this before." I always look at interesting facts about a company, something that others may overlook. J A C O B G U Z M A N Corporate Client Group Director at Morgan Stanley THE ART OF OPTIMIZING SMALL BIOTECH MARKET CAPS— FROM SCIENTIFIC DREAMS TO STRATEGIC REALITY By W. Koberstein B i o _ I n v e s t o r _ F o r u m . i n d d 6 Bio_Investor_Forum.indd 6 3 / 2 4 / 2 0 1 4 3 : 5 7 : 5 9 P M 3/24/2014 3:57:59 PM