#117 - Rod Wong: Biotech Innovation, Real Outcomes

0:05Rod Wong:Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry, investment, and market insights. We define insights as concepts that are counterintuitive, widely misunderstood, or underappreciated. In other words, unique ideas that you probably won't hear elsewhere. I'm Alex Shahidi, the host of the podcast and co-CIO of Evoke Advisors, at leading investment advisory firm. Learn more about our show at insightfulinvestor.org.

0:38Rod Wong:Today, I'm joined by Dr. Roderick Wong, founder and CIO of RTW, a life sciences investment and innovation firm focused on building and investing in companies that aim to transform patients' lives. Dr. Wong trained as a physician and then built his career as an investor at the intersection of science, medicine, and capital. And today we're going to talk about how he thinks about long-term biotech investing, the collaboration between investors, entrepreneurs, and scientists, and where he sees the most meaningful innovation and value creation ahead. Welcome to the show, Rod. Thanks for having me, Alex.

1:16Rod Wong:Well, you have an MD and a deep grounding in science, yet you eventually chose to build your career on the investing side. When you look back, what were the key moments or realizations that push you toward becoming an investor rather than a practicing physician? So I really figured it out, I think, when I was going through school. So I did do medical school and have an MBA as well. And in med school, yeah, I really, I love science. I love learning about innovation. And then when I got to the part where you spend time in the clinic, I enjoyed it. But I could tell relative to my classmates who are really passionate about clinical medicine that that wasn't me.

1:59So I started exploring other ways to express the interest in science. Good thing was that business school was part of the plan. And I interviewed for, honestly, everything. And it was really when I met what became my first bosses. It was an equity research team at Cowan. They covered biotech. It was like going on incredible first date where it just felt like you're looking at and meeting people that just really understood you. And then from there, my path was relatively linear. I kind of found my place in the world and my career in investing was kind of straightforward after that.

2:43Rod Wong:Love at first sight. Yeah. So when you launched RTW, what was the core problem you were trying to solve in the ecosystem? And how different is a firm today from what you originally had in mind? Yeah, sure. So to put it in context a little bit, I've been doing this for a while now. I got that first job back in 2003, so a couple dozen years ago now. And to rewind back to that time, the way money was managed in healthcare was primarily by non-scientific or specialist background folks. Most portfolio managers were generalist portfolio managers. And so when I started RTW, and I started it relatively young, I was a portfolio manager when I was, I think, 27 was my first job.

3:28And then I started RTW a few years after that. That was the environment I kind of started the business in. And so I would say the thing that we were solving holistically was bringing kind of specialist knowledge, specialist background into money management of the sector. And then I would say beyond that, you know, I really aspired to kind of do it thoughtfully, right? So to think about managing money in a structured way, underwriting for odds of success for whether science would work or not, commercially forecasting in a robust and repeatable way. So in short, kind of, you know, really being deeply fundamental and structured in the approach to investing in the space.

4:18Now, I would characterize that as probably the first third of our journey. You know, we're able to add value as investors with that simple, basic kind of foundation. And then since then, the firm has gone through probably two other major evolutions. One was we made a decision about a third of the way into our existence to try to be part of this small group of investors that were trying to converge public and private investing. Today, that's, you know, kind of widely accepted as the crossover ecosystem for folks that know how investing in biotech is done. But back then, it was a new thing. Public markets investors and venture capitalists were very, very separate ecosystems.

5:00That was a very consequential decision to do that. Looking back on it, there are clearly a lot of value that you can get from being a private markets investor in terms of improving the quality of your decision-making. In those same companies when they progress and become public companies, that's both from a data access and analysis perspective, as well as getting comfortable with the leadership or management teams of those businesses. And in our sector, companies go public very, very young, right? Basically, when there's still science experiments, generally early in development. And so being one of the firms that kind of led that convergence was a very important and valuable decision that we made.

5:48That was kind of the middle third of our existence. And then I would characterize the last third, which has brought us to what we are today, is really kind of the scaling up and institutionalization of what we do. And the reason we decided to do that was really first, a direct consequence of what we're seeing with science. you know we're seeing science accelerate innovation increase quite significantly and we said to ourselves if we really want to stay aspiring to be the experts in the room right we're going to need to have a much larger team and that team is going to have to sub-specialize otherwise there's no way to be expert across all these diseases across these emerging number of new exciting technologies or modalities that you can create drugs from And so we said, okay, we have to do that.

6:43And also it turned out that innovation broadened geographically as well. I think most people know now China has hit the scene in the last handful of years and become the second most important source of innovation. So that decision positioned us well for that as well. When you do that, it's not just about having a bigger team and having subspecialize, we also had to find a way for that to work where you still make high quality, holistic investment decisions, right? So we said, okay, you also have to build a team that really values collaboration. Easy to say for a lot of businesses, but that's not really kind of how people think of classic investment businesses.

7:28There tends to be a lot of silos and kind of individual-based work. And so we had to restructure the firm to really value that. And so those were a couple of the biggest challenges that we faced. Looking back on it, it was the right thing to do for us. We think we've been successful at institutionalizing. And now, most importantly, I think it positions us well for the future in a couple key ways. One is the one I've already mentioned, that we're in this world of accelerating, expanding innovation, which is super exciting. We believe that we can tackle that challenge. But two, we're also in a world where there's now a dramatic change, for example, in data science, in technology, and then of course, ultimately with AI.

8:18And that's going to obviously have a major impact on the way we do our research as well. And so as a firm that's institutionalized with competent management and strong leadership, we can throw resources at those things and make sure we're staying on the cutting edge for the future as well.

8:36Rod Wong:I know RTW describes itself as a life sciences investment and innovation firm, which you just touched on, not just an investment firm. What does innovation firm mean to you? Yeah, I think it means a couple different things. To me personally, I mean, first and foremost is that we do have a mission, right? We're not just here to generate returns, but we have a mission that's beyond that, which is to support innovation and specifically innovation that has the potential to transform the lives of patients. And so even within the scope of being a healthcare investor, we are specifically focused on finding and supporting those kinds of businesses that fit with that mission.

9:19I think innovation also has a second meaning to us, which is that, of course, first and foremost, investors provide capital. And that's a huge part of the value that we're trying to offer to companies that we're partnering with. But that's not all. So we also complement that with other things that we can bring to companies. And that ranges from the relatively informal in terms of expressing our opinions and offering our advice, but all the way to the very formal where we're deeply involved in the operations and governance of a business. You see that especially on the private side of our investing, especially with the early stage venture capital that we do on the company creation side.

10:05But you also see it expressed in the creative dealmaking and transactions that we do to help companies solve whatever capital and operational problems that they have. Right.

10:16Rod Wong:Because I know you started your career more as a stock picker and you focused on asymmetric opportunities. And there you're in many ways a passive investor. And over time, you saw the value in helping companies build and helping shape their futures. Would you talk about that a little bit more? Absolutely. I personally have gotten gratification from that evolution exactly, as you said, to not just picking ideas and supporting them passively, but also getting involved operationally and from a governance perspective. In terms of how it's impacted how we approach investing, I think it's also been very enlightening.

10:59Number one, I mentioned a key point already, which is that when you really get under the hood and you're working side by side with companies and helping to build them, you get a depth of experience, whether it's in a disease or a technology area or in a functional expertise like manufacturing, right? A kind of depth that you cannot get as a public markets investor. And that's very valuable to doing a better job as a public markets investor. And then on specific investments, I mentioned already that you get to know management teams, their boards in a way that you wouldn't otherwise have the opportunity to do, and you get closer to the data.

11:42The reality is the way public markets are regulated is that there's a lot of information that doesn't have to be revealed once a company becomes public, which is available to private markets investors. And that information can be helpful far beyond the private part of the lifecycle of a company. And so that's been valuable. And then, you know, finally, I think just from a opportunity set perspective, you have this flexibility, right, as a full lifecycle investor and across the capital structure investor in that we can skate to where we see the greatest opportunity, right? Sometimes it will be in small cap public markets, sometimes slightly larger companies, and sometimes the best will obviously be in private earlier stage companies.

12:29And so we have the ability to kind of emphasize one or the other, depending on where the greatest opportunity at any point in the cycle happens to be.

12:37Rod Wong:You talked earlier about backing companies that will make a major difference in patients' lives and your goal of supporting them with both your capital and potentially your expertise. how did that become your core north star i think at the end of the day certainly for me but i think it's um also very true for many of the folks if not most all the folks that work at our firm which is that many of us come from scientific or medical backgrounds you know health care touching our lives beyond the jobs that we're doing. And for many people, and if you're to say, what are the top three or four reasons you work in this particular job or work for our firm, it's because they care about that mission.

13:26We all want to do well and have wonderful careers, but we also all want to have an impact and be doing meaningful work. And so that's a big part of our lives, I think, for the folks at the firm. is that, hey, why wouldn't you want to be able to spend your life identifying and then supporting things that you know are going to help other people, specifically patients, right? Often with very high unmet needs. That's really exciting. Some of the most memorable moments in my career are being there for part of the journey when, you know, a medicine ends up being transformational for patients and then watching the impact that that has.

14:08Rod Wong:In many ways, it becomes part of your culture. And you have this unifying mission that brings everybody together because it's hard work doing what you do. And when you're all rowing in that same direction, trying to achieve some of those objectives and the gratification that comes from getting there, it can keep people going and pushing them even beyond their limits. Yeah, I think you said that really well. That's exactly right. And every job has its hard times. Every industry has its ups and downs. And so when you care about something or you have some guiding principle that is beyond making money or having a good job, it just makes it that much better, especially for the hard times.

14:53Rod Wong:Are there any common traits you see in the companies that truly live up to that mission? That is a great question. And sometimes we get asked this question, what makes a great biotech executive or a great biotech executive team? And I would just say it's really remarkable what these companies, drug development companies have to do if you think about it. So at the beginning of the process, you have to have that brilliant scientific discovery. And so you have to have that phenotype of person that allows you to have some kind of breakthrough medicine be identified. Which by definition is low odds, right?

15:38Right, exactly right. And if you think about that kind of person, these are your classic creative, out-of-the-box thinkers, right? And that's a certain phenotype of talent that you need to be successful. But then once you have that, the development of a medicine, as you know, is a very long process. It can be on average, call it a decade long. And it is one of the human pursuits that truly takes a village and not just a village of any kind of folks, of super experts in many, many different disciplines, right? People describe successfully developing medicine like landing a spaceship on the moon.

16:24It's an incredibly difficult task. And so there, for that phase of a business, you need extraordinarily competent management and leadership that really has the ability then to guide all of these super experts in different disciplines, right? To execute on the goal of successfully developing a medicine. And then if you're lucky enough and talented enough to get through that, the final phase is of course, then building a true business in terms of if you get to the finish line, getting that medicine then in the hands of patients and that commercial execution. So if you think broadly about those three phases of any drug discovery, development, commercialization business, it is extraordinarily challenging.

17:17And finding that kind of managerial and leadership talent that can shepherd through the entire process is an extraordinarily difficult thing to do. So the way I kind of think of it is you really maximize your odds if not only do you work with, of course, talented management and leadership teams, but you try to contribute as an investor ecosystem as well. And then so you really are all working together to try to maximize the odds that you can navigate that really challenging process.

17:52Rod Wong:So if we just take a step back, do you feel we're currently in the largest innovation wave that biotech and life sciences has ever experienced? Yeah, that is a very, very important point because I've been doing this, as I mentioned, for a couple dozen years now. And it is the most exciting time in drug discovery in that time that I've had the job. I've been following the industry. The way I like to describe it is the following. In the early years of my career, there's actually not that much innovation. It was rare. It was tough to find. And honestly, some of the innovation that you did find was incremental, right?

18:39And then a couple key things happened that started improving that picture and increasing innovation. One is you started getting cheaper, impactful information. A big piece of that was the genome, right? It was first sequenced over a dozen years ago, but it really became cheap so that it enabled drug discovery in a major way, call it a decade ago. And then number two, about 10 years ago, there started to be a wave of new technologies or what we call modalities that you can develop drugs from. Many of these people are now quite familiar with. People have heard about mRNA, just as one example. Everyone's heard about gene therapy, cell therapy.

19:21There are many others that get a little bit less airtime, but things like antibody drug conjugates or bispecifics or protein degraders. The bottom line is that the toolkit that you have to develop drugs from has at least tripled in the last decade. And then the combination of those two things, right? Cheap information, the addition of these new modalities, has now unleashed this innovation boom. And for the folks that have followed the space closely, and you know what I just described very well, then you probably also know that that boom in the last, call it half dozen years, was very much an early stage science boom.

20:02A lot of these things emerged. And then, you know, there were some disappointments along the way that kind of explains the bear market that biotech went through in the last few years. But a very, very exciting point that I want to make about this particular moment in time is that now a lot of that exciting science is actually maturing, right? A good chunk is make it to the finish line. And you're seeing now an increasing number of transformational medicines that are actually getting in the hands of patients, right, are becoming commercially available and not just commercially available, but are becoming the foundation of a new wave or a new generation of commercially successful biotech companies.

20:44So I think that's going to be a big part of the story for the next decade, right? Which is that you're going to have this now wave of new commercially successful biotech companies really of the size that we haven't seen ever in the history of the industry. So that to me in particular is really exciting.

21:05Rod Wong:It may be helpful for people who are not scientists if you could describe the journey of a drug from an idea in a lab to something that's actually in patients' hands and where the biggest value inflection points really are? I kind of break it into actually the key buckets that we're kind of talking about a little bit when it comes to management and leadership or what it takes. So there's obviously the preclinical phase historically that's taken as long as six to seven years, right? To get that light bulb moment. And then an additional two to three years to run all the preclinical experiments that you need to be able to show to a regulator to say, hey, I think this is safe.

21:47Let me start exploring this in patients, right? Now, that part, the discovery and preclinical development phase is becoming faster and more efficient thanks to a lot of the progress innovation that I mentioned. And the odds are getting higher and the quality of the outputs or the drug candidates that you're seeing is also going up. That's all very exciting. Then there's the clinical development phase. historically, that's also an additional six to seven years. And that progresses from small to large clinical trials. First, just kind of testing things, trying to get to proof of concept, right? And then trying to really confirm efficacy, right?

22:30To see if you have something that has meaningful efficacy that's impactful to patients with an acceptable safety profile. When you have a robust data set, that then again, you then take to regulators and say, listen, And I think this is something that should be approved and available for patients and their physicians to consider, right, as an option for treatment. That's another key point, of course. And then it doesn't end there. For a lot of folks, getting to that point is so rare that they often don't think about the life after that. But as I mentioned, that's becoming increasingly important for biotech investors as more and more drugs are making it that far.

23:08Then it's really, is this a significant enough unmet need that it represents something that can really support a thriving and growing business, right? Which ultimately is critical if you're really serious about being an investor in this space. And that has become an increasingly important skill set that actually a lot of biotech investors don't have or fully developed in their toolkit. it. That is something we've focused a lot of energy on since our early days.

23:40Rod Wong:Where do you see the biggest gap between headline hype and what the data actually supports today across the big themes, such as gene therapy, cell therapy, mRNA, and GLP ones? Maybe starting with the last one with glyphs. So there's no hype in glyphs. They are the absolute real deal. You know, I think it goes without saying that everybody knows that people, right, patients are super excited about GLIPS because they make you feel better, they make you look better, right? And they love the health benefits that they can feel and experience. But in addition to that, if you think about the major unmet needs in Western society, the number one killer, Number one cause of mortality is still cardiovascular disease, right?

24:31And the glyphs are having the biggest impact on that of any medicine in a long time. So it reduces cardiovascular mortality by probably somewhere in the zip code of 20 % to 30 % for the average patient. So it's a huge step forward in terms of the health, the future health and longevity of Western society. So I think, you know, I don't need to tell really any audience about the fact that this is the largest commercial opportunity. You know, it's still in early innings of that process. But what I would point out is that the story of Glypse still has many chapters left to be written, right? If you kind of think about what we have right now, what is the state of the art is that you have weekly injectable drugs that are pretty potent, right?

25:20You lose a fair amount of weight on them, but they are injectables. They're relatively inconvenient, and they don't have perfect safety profiles in terms of a lot of people have to come off the medicines because they don't tolerate the GI side effects, things like nausea and vomiting, for example. So when you think about it that way, there's still a lot of unmet need and a lot of opportunity to come up with better products. And that's what people should expect over the next handful of years. You're going to see even more potent injectables. You're going to see ones that require less frequent injections.

25:56This is actually the year that you see the first oral drugs that really can be manufactured at scale and at lower cost, which will significantly improve accessibility of those medicines. And then also you're going to have brand new mechanisms that aren't even glit-based in the next handful of years as well. So I think if you fast forward a handful of years from now, it's going to be an even more exciting menu of options for patients and a better selection of products. Some of the other things you mentioned, I can give quick status updates of where those technologies are. I describe gene and cell therapy as they are nichier products right now because of the limitations, the current limitations of those technologies.

26:48So they can absolutely be life-changing in the case of gene therapy for severe genetic diseases, in the case of cell therapy for some refractory cancer types. But there are challenges, especially for gene therapy in terms of their safety profile. There's a lot to be optimized in terms of the safety of those products. And they both suffer from significant manufacturing challenges that make them expensive and make them pretty inconvenient as medicines for patients to take. So I think the challenge for both of those fields is to continue to incrementally innovate so that you can broaden the applicability of those technologies.