Stephanie Sirota - RTW Investments - Part 3

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Intro - 00:00:20: Welcome to the Biotech Startups Podcast by Excedr. Join us as we speak with first-time founders, serial entrepreneurs, and experienced investors about the challenges and triumphs of running a biotech startup from pre-seed to IPO with your host, Jon Chee. In our last episode, we spoke with Stephanie Sirota about her time at Lehman Brothers, her move to Valhalla Capital Management, and her initial exposure to the biotech sector. If you missed it, be sure to go back and give part two a listen. In part three, we talk about RTW's evolution from startup to major player in the life sciences industry, the firm's approach to building an investment thesis, and the importance of transparency and trust between investors and founders. 

Jon - 00:01:14: And so I'm thinking about like the RTW journey from a team with a sublease, you know, kind of very startup vibes. And what was the product set at that point in time? And what have you layered in up till now?

Stephanie - 00:01:27: Yeah. So at the time, it was really just our flagship fund. And it was mostly, you know, public equities. And we had made a couple of private investments and had co-invested alongside members of our friends and our core syndicate. We invested in some early stage companies. And then a few years in, we had probably grown to about maybe $400 million of assets. And it was very clear that there was an emerging sort of part of the market, the crossover round, that there was an opportunity for specialists like ourselves to back some of these companies who were growing. You know, one round away from going public. And our story was pretty simple. It was, you know, a VC or, you know, private only player is going to look at this investment and six months after your IPO, like they're out, right? That's their model. They've got a vintage. They have to make distributions to their clients. Underlying investors, that is not our model because our business is actually investing in the public markets. That's where the major value creation gets recognized deep into the public market. So, you know, with the average IPO market cap of like 500 million to exit a company that you still believe in and at or around that time is crazy. If you think they're really going to be developing some blockbuster multibillion dollar drug company could be worth 10x. But in this shift, we, together with maybe, you know, a few other firms, really kind of built that crossover ecosystem and helped companies sort of validate, you know, and it sort of became a real thing. And the more sophisticated companies actually wanted someone like RTW leading their crossover round, because that was also going to help them when they IP or end in like subsequent capital races in the public capital markets. So we were instrumental in fostering that whole crossover ecosystem. And that was around maybe 2014, 2015. Another thing that we decided to try our hand at was we had done a deep dive into. In gene therapy. And, you know, Rod said that he really felt like gene therapy was back and after a pretty long hiatus. And by the way, he was at Penn when Jesse Gelsinger was treated in 1999. And then, you know, there was just ground to a halt, right? That first generation of gene therapy. But we did a pretty deep dive. And, you know, at the time, like there were a handful of publicly listed companies, maybe combined market cap was like single digit billion. There were like two dozen or so private companies and we looked at everything. And this was part of, you know, why we were also excited about being able to write private checks to late stage companies, because these private companies, they're not going to let you into their data room and poke around unless they think that you're potentially like a check writer. So it made a lot of sense. We said, sure, like we're interested in investing, we'd like to see what you're doing. We ended up making an investment in Avexib in its crossover round. And that, you know, valuation was a $500 billion valuation. The company went public. In early 2016, and then was under tremendous pressure because it was election year and biotech got killed. And then, of course, all of the private investors excited, you know, post a six months lockup. We kept buying this because, you know, we hadn't seen the data. We were very, very convicted that this was going to work or had a high probability of working. And then within two years, you know, they were sold to Novartis for like almost $9 billion. So that was something that we thought, OK, you know what? There is incredible value to be able to write private checks and to get the kind of information that you can from private companies and then also to start to build those relationships with the management teams. And then we decided to take it one step further. We did all this work in G-therapy and we saw that, you know, so much of this innovation was happening at academic centers that needed entrepreneurs with capital and skills to actually take them forward and advance some of these programs. And so. You know, we thought, all right, well, why don't we start a venture fund and like build a whole bunch of gene therapy companies? And then we thought to ourselves, like, you know what, that is a terrible idea. Because part of the beauty of what we do is actually having some of this like flexibility, but not saying like, all right, we're going to build like 10 companies over the course of the next like two, three years in our deployment period. I mean, that is extraordinary. Let's say you're building a handful of companies. You've got to find a handful of CEOs. You have to help them sort of build a handful of great management teams. How many great managers are there out there? I mean, that's a really heavy burden, which would be something that wouldn't be possible to do this without taking our eye off the ball. So what we decided was, listen, we're going to build one company and we're going to put as many high probability programs under a single umbrella. It also enabled us to really sell this story because we could say we hired Gaurav Shah, who was ex-Novartis, ran their cell and gene therapy division. And we said to him, like, we're not going to start a competing company to this company, as we called our company Rocket Pharma. And we said, you have access to us, like our balance sheet. We are here for you. We're not going to let you fail. And so, you know, we built one of the first, like, platform companies. And, you know, today, I mean, Rocket Pharma is public. It's one of the largest gene therapy companies out there. They've got five or six programs in development. So you know, that company building, that company creation aspect also is another incredible layer of for even a public investor like we are, because if you think you know a disease area or you think you understand a modality better than the next guy, you really don't know anything until you're running and operating a business. And so that gives us an incredible sort of deep lens into gene therapy and all of the aspects of it from manufacturing to quality control to everything, you know, and we think, and we have thought very hard about what to do about manufacturing. So we said, we're going to commit to, you know, building our own manufacturing facility. We thought long and hard about target selection and what programs like we really want to build. And so you take that knowledge and that's not inside information. It's not going to necessarily impact any other company, but when we look at targets that don't make sense, where maybe, you know, the risk benefit is not favorable, we can easily sort of spot things that make a company uninvestable. So I think having a business that we helped operate and we don't operate it anymore, but we're still there supporting from a governance perspective, certainly continuing from a capital perspective, you know, that's helped make us better investors.

Jon - 00:08:34: Interesting. So it sounds like it started off as like a public equity strategy, branched into a kind of crossover. And before continuing on, during the crossover kind of like initiative, would that be like around, you know, what we would call like a series B, series C ish stage? And you mentioned going all the way to academia, but instead of making an actual venture fund, it was almost kind of more focused. And so is that to this day, where you'll go as early as academia to see the lay of the land, and you guys have a thesis on a specific modality, or whatever it may be, you have a thesis, and you kind of do a survey. And then once you find it is like, oh, this checks the box, this checks the box. That's when you're like, we're in. And you support it all the way.

Stephanie - 00:09:20: That's right. And so company creation doesn't necessarily have to go all the way back to academia. So we did start another company. It's a Chinese operating company. We've got about 100 people that are maybe 80 in Shanghai and 20 odd people in Beijing. And this began as sort of the licensing model. So taking late stage assets from Western companies and then licensing them, developing and then commercializing them in the Chinese market. Today, that company, Jixing, is still private. We own the majority of the company. We have syndicated since the C round and we're continuing to work on that business. We're trying to actually accelerate, which we'll get to do with our D round when we complete that, bringing in a strategic partner. But the idea wasn't super early stage like academic or basic science that was already slightly more mature assets that were way into their clinical life. And then we were just going to try to end that and move into the commercialization period. So the opportunity, though, was bringing a whole group of drugs that were not really tapping into the Chinese commercial market. And a lot of companies, actually a lot of Chinese VCs have been doing this with cancer companies. And we decided that we'd focus on cardiovascular and ophthalmology. So I think when it comes to company building, we have to have a thesis. We've got to be sort of a first or one of the early movers in this. We need to see that there is blue sky ahead, that by virtue of bringing this and creating something, we're actually creating value.

Jon - 00:10:59: Totally. And we've been talking about like having a thesis and conviction, and this kind of gets to like the firm building and how the firm works and How do you guys build your thesis and gain conviction at RTW? Because this sounds like pretty serious commitment, right? And taking something commercial, especially overseas, is a serious business. So how does RTW get there? And how does it form the thesis to begin with?

Stephanie - 00:11:25: Yeah, we've got a very sort of repeatable approach to screening and evaluation. And the depth of our research is really designed to put us in a place where we are almost ready to make something akin to a permanent capital commitment. Now, we don't make permanent commitments. We have the flexibility of exiting an investment. But the idea is that we're going to run a moderately concentrated portfolio of names that we believe can go the distance and have assets that are in development that have not been recognized by the broader market and then, as of yet, are therefore undervalued based on what we think they can achieve. So we are looking for those key disruptors and we're prepared to go the distance with those companies. So we're not thinking about like, all right, we're going to stay invested until phase three. Two, and then we're out. Like, no, we want to be there for phase two. We want to be there for all of the important inflection points that a company is going to go through. You know, that's kind of what we're trying to underwrite. We're trying to underwrite the risk on multiple key inflection points. And that's where budgeting for loss and sizing the position is incredibly important because we don't want to have something that is going to necessarily kick us out of a name like we want to be wrong. And then we want to be in a position to add more capital. And that sort of is art. Sometimes, you know, we're wrong and we sort of accept and, you know, take a beating and then we are out. But then other times we still have faith that, you know, look, drug development is not a linear process. So the idea that sometimes a company just needs the opportunity to have a second life or a second shot on goal. And if we're there with the capital, then we're providing that opportunity for them.

Jon - 00:13:25: Totally. And part of this, right, is building conviction and your thesis and being there for the journey, like the whole journey. I understand that you also have to get your LPs to understand this and buy in. And I know, and correct me if I'm wrong, but you lead the charge on a lot of these relationships with LPs. And starting from a $30 million fund, you mentioned $400 million and now far larger. How did you early days that get them to say yes? Yes. 

Stephanie - 00:13:58: Yeah. So, I mean, the LP education process, because it was really an education process. No one was selling anything to anyone. It was really just talking about our belief that, you know, this area of innovation, scientific innovation is incredibly important. We believe that a huge amount of enterprise value is going to be created across a number of different disease areas. And now, you know, there are also many different modalities that can address diseases that have never been able to sort of address in the same way before, right? So the untargetable has become targetable. And I think we're living in this very exciting era. Now, of course, there have been LPs that have said, you know what, I have no way of knowing whether what you're saying is right or not. I have no way of assessing the work that the team is doing. So the only way to kind of get these investors comfortable with that is to really show them and talk about our process, talk about capabilities that some of our specialists and our research analysts bring, talk about the engagement that we have with companies at the medical conference. You know, we used to go to all these conferences and take pictures of the posters and risk getting in trouble because you weren't allowed to do that. I think that the collection of data and organizing that data in a very meticulous way and ensuring that our team has access to information and can go back and say like, actually, what did we think about, was this disease solvable three years ago? So it's all at our fingertips. And over time, we've added more individuals with very sort of specific like domain expertise, whether in certain disease areas like oncology or CNS and other folks that have sort of more expertise of a specialization and like a modality, right? Like gene therapy or next generation, the FCRN or protein degraders. Like we end up having someone that takes, call it the intellectual lead on something, but then can work in collaboration with other members of the team. And we go through the screening and the shallow dive and there are questions that need to be asked and answered in order to progress to the next level. So it's a very intense process oriented journey to go from identification to like portfolio name. And that is, I think, how we've convinced people to trust us. What we do, we repeat it, we try to refine it. We try to add as much as we can, whether it's like individual personal specialization or whether it's technology, but we have a very, very large library of primary scientific data. And we spend a lot of time going deep on diseases. So science is really what we're trying to solve first. And then If we get that right, the performance will follow. And we audit ourselves and we track our returns and we look at our hit rate every year. We look at our slugging. The early days, it took a while to convince people to come on board, but they trusted us. I think we also didn't oversell it. We said, listen, we expect to be wrong a good amount of time. And we are wrong a fair amount of time. But our sort of long-term batting average is somewhere in the low 60s. And we make twice as much when we are right than we lose when we're wrong. So that's what's been the basis of getting to a $5 billion fund.

Jon - 00:17:39: And that is a statistic I would take every time of 60% success rate. I would roll that every time.

Stephanie - 00:17:46: Yeah, that's right. I think the one tricky thing, though, is you know, in good times, that batting average, look, in a bull market, companies, even with media over data might get rewarded. Whereas that same data in a bear market will get punished, or even good data in a bear market will get punished because people use it for liquidity. That long term, like average is really a blend of it looks better in good times. And then people say, well, you're obviously getting smarter. And we hope we're getting smarter. But we say, like, you know, you've got to go through cycles before you actually say like, yeah, our batting average is going to be 80% every year from now on. And then it drops to, you know, 50% or below 50%. And that's the challenge of managing like multiple parts of this business. And I think we've been able to keep investors happy long enough through transparency, ongoing dialogue. But I think transparency and trust, you know, at the end of the day, like, We're all human beings. And I think that, you know, people just, if you talk to them and if you're rational, they're going to be rational too.

Jon - 00:18:50: Absolutely. And I think that's important for a lot of our listeners who are contemplating even raising their first fund. And I know raising the first fund is always a hard one. And your thoughts on and insights on process, going deep, and transparency is incredibly important and not overselling. And I think it also really resonated with me, when times are really good, you're perhaps not as good as you thought you were. And when times are bad, you're also probably not as bad as you really think you are. You're somewhere in the middle. And as long as you're well-adjusted, it makes for a more repeatable over the long-term horizon, a more repeatable up and to the right. It's going to net out to be positive. And as we're looking at the next year or two for RTW, and I know you might be working at Lehman in the UK. I know RTW has a presence in the UK as well. But what is in store? I know you've done the full cycle investing and you talked a little bit about the process, but what's in store for the next year or two, both here in the United States and abroad?

Stephanie - 00:19:53: Yeah. So look, as tough as this environment has been, we're still here. We have really wonderful investors who have been dead fast and have lived through this tough time with us. And I say with us because the partners of our firm, we're fully aligned with our investors. So we feel the pain as much as they do with the XBI dipping below $70. It first reached this valuation in early 2015. That is an eight and a half year round trip. In the face of incredible value creation, like real value creation, real innovation, drugs on the market, like important drugs on the market, and M&A also, where that value is irreversible. And yet the benchmarks have returned to where they were like over eight years ago. So this is the Berkshire Hathaway Inc. Hathaway moment. This is the Warren Buffett moment of like identifying incredible value in our space to back tomorrow's extraordinary drugs that are going to be delivered to patients. So first of all, we're very, very encouraged and enthusiastic about what is yet to come. A lot of people have asked us about whether we've been involved with investing in the GLP-1s. No. And those have really substantially come out of big pharma, which is not necessarily our bailiwick. We look at kind of smaller, innovative biotech companies that are sub $20 billion. But the next generation of what is coming and what we see in metabolic disease is very exciting. And that is all coming out of biotech. So I think there's a new space for us to really dig deep into. And it has broad metabolic disease is wider than just weight loss. So there's broad applicability, which a lot of the drugs in the next generation, drugs that we're seeing and we expect to come. So that's very exciting. There are some incredible breakthroughs or new modality. There's so much going on that we're just very excited that our business is stable. Our team is stable. We have the capital that we need. And so we're just going to put it to work. These are actually very, very interesting times. Like if you're in a position of strength, this is one of those once in a lifetime opportunities to capture some extraordinary innovations early and cheaply.  

Jon - 00:22:29: Totally. And I've always thought that the long-term horizon is a true edge because like you said, kind of like the generalist disperse, the pH in their stomach has turned, like they're gone, but it all comes back from like the conviction in the science and what we're seeing and, you know, whatever the market says, but having the conviction and also the psychological patience, but also having everyone else have that patience too. Exactly. You said kind of like a Berkshire Hathaway Inc. moment where they're just, you know, building up massive cash piles. And I think one of the funny mongerisms was like, We're going elephant hunting, except for the elephant is on roller skates. And so you need to be able to move fast and move big and move quickly. And I find that really fascinating because I try to remind my team, hey, don't get hung up on the news cycle. Don't get hung up on what the tickers are going at any given day. Let's get back to first principles and really think about where is the science at? And then maybe just let's think about the economic cycle as well. Are people depressed or are people overly enthused? And then layer that on top. Because I think you can easily just like exactly what you said. And when you see broader life sciences just getting kicked in the teeth, it can almost make you want to just call quits. But when you go back and you're like, no, things actually have not been better. It is not 2015. So I'm incredibly optimistic too. And I'm seeing all my colleagues who are kind of in the in the lab still and seeing the work that they're doing, I'm getting incredibly pumped up. 

Stephanie - 00:24:09: That is exactly it. Like, it's not like science had stopped. Every lab and every company, you know, forget what the ticker tape says and forget what their market cap is. People are still going to work every day. They're in their labs and they're working. Nothing has stopped and nothing has changed other than the pH in the generalist's stomach. And they have all gone and they have no interest in this, but they will come roaring back when the sector proves itself. But again, and this is sort of what I feel like I've been trained for is, you know, how to win from when you're down. We're not going to give up. And it's our job. Like, it's our duty. We have all this money. We are that. First dollar into these companies because they can't rely on the generalists. They cannot rely on kind of the broad public capital market. They have to rely on the investor they know and trust. And so this has also been an extraordinary time to develop relationships with companies and their leadership. And we like what we see. I mean, They're changing the world. That's happening. That's not going to stop.

Jon - 00:25:18: Totally. I think you really start to see who your true business partners are when things get tough and you see who's still around. At Excedr, we preach the same thing. We're here through thick and thin, and we're here to support you throughout. Because we ultimately want to see your success for the success of humanity. And I know that kind of sounds overly grandiose, but it really is the truth. And again, it gets back to being in the life sciences. And as a kind of rounding things out a place I'd like to end with like two kinds of like traditional closing questions. So first is, you know, looking back, would you like to give any shout outs to anyone who has supported you through your career?

Stephanie - 00:25:53: Yeah. I mean, look, there have been a lot of people along the way. It wasn't always obvious at the time that, you know, I was getting the support that I was getting. But I recently actually connected with a tennis coach who is sort of still at IMG. And he was there in the days of Nick Volatary. His nickname is Red. And it was very special to connect with him. And actually, my son went and was playing tennis there this summer. And I asked him if he still yells at the TES players. And he still does yell. Today was years ago. But we had this wonderful conversation. And I just remember how he really toughened me up. And then there was another coach named Fritz, who was very important in my development as a tennis player and a human being. I think my parents, because of and in spite of have helped me get here. I think the managing director that I worked for at Lehman Brothers in England, he runs his own private equity shop, John Spain. Brian Fiedler, who ran Valhalla, for giving me the opportunity to learn about the business of a hedge fund, was a really important person who gave me a really critical opportunity because that set me on the path and gave me a taste of the business of hedge funds. And then finally, it is Rod Wong, who We were young and we didn't No. Anything. Well, we knew something, but we didn't know what we know now. I am incredibly grateful to Rod for giving me this opportunity and letting me also, in some ways, he let me roam free. He let me bring him ideas. He knocked down a lot of those ideas. But I have such an incredible respect for him. And our partnership is really special. And we have created something that is more than just a hedge fund. We built a community. We're like a family. So yeah, a huge shout out to Rod.

Jon - 00:27:53: That rings true for us here too. We think about how the Excedr team, it really is like a family. And especially when things get tough, it's your team that's going to ride it out with you. Hopefully, you know, your team would. And that stems from the strong connection you're fostering. And my last closing question, if you can give advice to your 21-year-old self, what would it be?

Stephanie - 00:28:16: You know, I think the advice to my 21-year-old self. So the path that I took was circuitous. And I did a lot of things. And I think I worried at every step because I was like, oh, you know, I shouldn't be doing this. I failed at this. Or now I'm injured. Or I've been downsized. Or this is not the right fit. Or I should be studying. Or I should not be studying. Right? I think the advice to myself would be like, build your experiences and you will live and thrive upon the richness and the variety of those experiences. And let that be your goal post. Have your goal post multiple steps ahead. Just don't be afraid to live in the future. Don't just think narrowly about what is immediately ahead because that richness, conventional or unconventional, can serve you in ways that you don't necessarily have to see or know now. 

Jon - 00:29:11: That's amazing. And I think that's like a lovely place to cap things out. Steph, you've been so generous with your time. Thank you again for coming on the podcast. And hopefully maybe another time we can double click on any of the cool modalities that you guys are investigating and what's going on at RTW. So thanks again. 

Stephanie - 00:29:27: Definitely. Thank you so much, John. It was really fun chatting.

Outro - 00:29:33: That's all for this episode of the Biotech Startups Podcast. We hope you enjoyed our three-part series with Stephanie Sirota. Be sure to tune into our next series where we chat with Jeff Kim, co-founder and CEO at Slingshot Biosciences. Slingshot designs and manufactures synthetic cells for R&D, clinical diagnostics, and engineered cell therapies, aiming to overcome supply chain and cost barriers that restrict access to advanced diagnostics and therapeutics. Jeff is a serial entrepreneur, having co-founded and run multiple successful companies, including Radiant Genomics, which was eventually acquired by Zymogen. His deep insights into creating successful biotech startups offers much for founders to learn from. The Biotech Startups Podcast is produced by Excedr. Don't want to miss an episode? Search for the Biotech Startups Podcast wherever you get your podcasts and click subscribe. Excedr provides research labs with equipment leases on founder-friendly terms to support paths to exceptional outcomes. To learn more, visit our website, www.excedr.com. On behalf of the team here at Excedr, thanks for listening. The Biotech Startups Podcast provides general insights into the life science sector through the experiences of its guests. The use of information on this podcast or materials linked from the podcast is at the user's own risk. The views expressed by the participants are their own and are not the views of Excedr or sponsors. No reference to any product, service or company in the podcast is an endorsement by Excedr or its guests.