When examining the latest major acquisitions in the pharmaceutical industry and the emergence of new biotech companies, a striking pattern emerges: many of the innovative drugs central to these transactions were initially developed in China. For instance, the portfolio of Foresite Capital, a prominent venture capital firm, includes numerous such drugs, stemming from the firm’s consistent engagement with the Chinese market since 2019. A significant change from the past is the increasing competition for these valuable assets, highlighting a more dynamic and competitive landscape.
According to Foresite Managing Director Michael Rome, China is a hotbed of promising scientific advancements, particularly in fields like oncology and immunology. However, the competitive landscape for acquiring these assets has evolved, with not only other venture capital firms and biotech companies as contenders, but also major players in pharmaceuticals. This shift underscores the importance of staying ahead in identifying and securing innovative technologies from the region.
Foresite has strategically integrated Chinese innovation into its investment and company formation strategy. By sourcing cutting-edge science from China, Foresite nurtures these assets in its incubator, where an advanced artificial intelligence technology platform leverages genomic data to pinpoint drug targets and optimize indication selection. This method not only accelerates the development process but also enhances the potential for successful outcomes.
In the previous year, Foresite successfully closed its sixth fund, amassing $900 million designated for investments in startups across various stages of development. During the recent J.P. Morgan Healthcare Conference in San Francisco, Rome elaborated on the firm’s innovative investment strategy, the surge of scientific advancements emerging from China, and the research areas he considers most promising. The following Q&A has been carefully edited for brevity and clarity.
MedCity News: Can you elaborate on the operations of Foresite Capital?
Michael Rome: Our investment portfolio is evenly divided between early-stage and later-stage opportunities, with approximately 78-80% of our investments concentrated in private companies. The remainder is allocated to public companies. We operate an incubator known as Foresite Labs, where we cultivate new companies and concepts. Successful ventures may progress to receive investment from our main fund syndication.
We cover a wide array of therapeutic areas, including significant commitments to oncology and autoimmunity. Additionally, we invest in neuroscience and platform companies. Our talented team members work across both early-stage and later-stage investments, allowing us to initiate companies, participate in syndicated Series A rounds, and contribute to later-stage Series B investments, including crossover rounds. We also actively support our portfolio companies through IPOs and beyond, showcasing our comprehensive approach to investment.
MCN: What are your thoughts on company creation? Are there specific areas or types of companies you’re focusing on, and where does the scientific innovation originate?
MR: At Foresite Labs, we are incubating three distinct types of companies. The first category includes larger platform companies that utilize an AI/machine learning-driven approach. A prime example is Xaira Therapeutics, which raised a remarkable $1 billion last year, focusing on drug discovery using AI as its primary tool. This AI/ML-enabled strategy is a growing area of interest for us.
Secondly, we are heavily engaged in asset-centric plays, having initiated our exploration of China in 2019. Our strategy involves licensing assets from Chinese companies or executing M&A deals to secure these valuable resources. Once acquired, we incubate these assets within a Foresite Labs company, often collaborating closely with entrepreneurs to identify and develop promising innovations.
MCN: Do you have personnel stationed in China, or is your approach primarily travel-based?
MR: (Laughs) We certainly travel frequently to China. In addition, we employ two full-time consultants based there. Our team visited Shanghai just four months ago, and we have members proficient in Chinese, enabling us to maintain a strong presence and effective communication within the region.
Our efforts at Foresite Labs are primarily focused on AI-driven drug discovery ventures and asset-centric collaborations with entrepreneurs. We are also actively engaged in identifying experienced entrepreneurs to pave the way for new company formations. Many successful companies we’ve established are rooted in partnerships with individuals we trust and respect. Our team plays an integral role in building these companies, leveraging our industry knowledge, closely monitoring conferences, and documenting therapeutic area trends to fuel our platform companies at Labs.
MCN: I’ve observed numerous companies in the AI space. Is there a specific application of AI or machine learning that characterizes a typical Foresite company?
MR: Absolutely. There are two prominent methodologies we utilize. The first involves harnessing large-scale genomic data to identify and validate drug targets. For example, the drug discovery field includes a target known as PCSK9, which has proven effective in lowering LDL cholesterol levels and mitigating an important protein called LP(a), both of which are critical factors in heart disease. This discovery was made possible through large-scale genomic analysis.
Another notable example is Latigo Biotherapeutics, one of our portfolio companies that focuses on a NAV1.8 inhibitor. Population genetics research revealed that eliminating NAV1.8 alters pain perception, leading to reduced pain responses. This ion channel operates in the periphery, effectively diminishing pain sensations. We’re engaged in similar initiatives, mining extensive genomic datasets to inform our research and target identification processes.
Additionally, our portfolio companies frequently approach us with inquiries about potential drug targets and indications. We utilize our Labs platform to provide insights that can expedite their drug discovery processes, ensuring that we remain at the forefront of the industry.
MCN: What therapeutic areas are capturing your interest currently?
MR: Our primary focus remains on oncology and autoimmunity, which are our two most significant therapeutic categories. Through the Labs platform, we have identified several targets related to autoimmune conditions, such as lupus, which presents a complex spectrum of challenges. We are actively searching for specific genetic signatures that may correlate with responses to various drugs, enhancing our ability to tailor treatments effectively.
MCN: Are you looking at existing therapies that are already available?
MR: Yes, we are indeed exploring existing therapies.
MCN: Would this involve drug repurposing?
MR: Precisely. One area of growing interest involves T cell engagers, which are being repurposed from oncology applications to address autoimmune conditions. A significant aspect of this process is identifying the right patient populations through genetic analysis. A prime example is Candid Therapeutics, a company we established in collaboration with entrepreneur Ken Song, who previously sold his company, RayzeBio.
We recognized the potential within the autoimmune sector, spurred by promising data from Georg Schett in Germany demonstrating complete remissions in lupus and other autoimmune disorders through cell therapy. While cell therapy poses challenges for personalization, T cell engagers replicate a similar function by binding to specific targets while directing T cells to these targets. We were early adopters of this trend, identifying two assets in China and collaborating with another organization led by Third Rock Ventures to secure an additional asset. This collaboration resulted in three distinct T cell engagers, with Ken successfully raising $370 million last year—one of the most substantial financings in the sector. Currently, we have two products undergoing clinical trials, all of which originated from assets sourced in China.
MCN: What are the factors contributing to China‘s booming biotech landscape? I’ve been hearing about numerous deals in oncology and autoimmunity where the assets stem from Chinese companies.
MR: Several elements contribute to this trend. Firstly, over the past decade, China has witnessed a remarkable influx of funding, with government initiatives playing a role in launching biotech ventures by subsidizing early-stage research. This fostered a fertile environment for entrepreneurial growth.
Moreover, brilliant scientists have emerged as leaders in the Chinese biotech scene, leveraging the country’s innovations to establish their own companies. Running a biotech operation in China is significantly more cost-effective compared to the U.S., resulting in a surge of innovation over the past five years.
A pivotal moment occurred around 2020 or 2021 when the Chinese IPO market stagnated for early-stage biotech firms, creating a backlog of assets and a fertile ground for business development opportunities. Since our initial ventures in China in 2019, we have successfully sourced numerous assets, including a notable company that eventually became a public entity called Alumis, marking one of our earliest deals in the region.
MCN: How do deals in China differ from those in the U.S. or Europe?
MR: There are indeed notable differences, many of which are unique to China. Variations in tax structures often necessitate restructuring companies from China to Cayman Islands entities, which adds complexity to transactions. Moreover, acquiring assets in China tends to be more economical, while still maintaining high scientific standards. We were early movers in this trend, and as the pharmaceutical sector’s interest in China has grown, we’ve observed increased competition. Recently, we attended a meeting with a leading M&A firm, where they indicated that pharmaceutical companies now make regular trips to China to scout for assets. Interestingly, as competition escalates, we often find ourselves outbid for deals not by other VC firms, but by large pharmaceutical companies.
MCN: Given the recent changes in political administration, particularly President Trump’s remarks regarding China, what implications might this have for future deal-making?
MR: While I cannot predict specific outcomes, if President Trump is primarily focused on tariffs, it may not significantly affect our industry. However, increased regulatory scrutiny on transactions could potentially prolong deal closures. Thus far, we have not encountered any significant changes, but we are closely monitoring the situation. It would be unfortunate if political tensions hinder the ongoing innovation and collaboration occurring between the two nations, as we are witnessing numerous synergies and partnerships at this exciting juncture.
MCN: Beyond Foresite, are there therapeutic areas you believe are currently trending? I’ve noticed a surge in activity surrounding obesity drugs and wonder if the market is becoming oversaturated.
MR: Certainly, the GLP-1 class of drugs has gained significant traction. We are now observing the emergence of next-generation GLP-1 medications. Initially, we saw breakthrough treatments like Ozempic from Novo Nordisk, which achieved notable weight loss results. The subsequent wave includes drugs targeting other receptors within the same family, such as Mounjaro from Eli Lilly, which demonstrates nearly double the efficacy for weight loss and improved tolerability.
Looking ahead, the next generation will focus on targeting the amylin receptor, with dual GLP-1/amylin-targeted drugs on the horizon. Future innovations may include drugs that help preserve or enhance muscle mass. One of the challenges associated with GLP-1s is their tendency to reduce both fat and muscle mass. Emerging therapies in the TGF-beta space are showing promise in muscle preservation, appealing to individuals seeking aesthetic improvements or addressing age-related muscle loss. As such, we anticipate the development of dual GLP-1 agents that offer muscle preservation or enhancement benefits.
MCN: What is the status of oral formulations?
MR: Currently, oral formulations present certain challenges, with oral GLP-1s being the primary options soon to hit the market. As a patient, one might prioritize weight loss and thus lean towards a medication like Mounjaro that delivers more significant results compared to oral alternatives. Nonetheless, patient preference for oral medications remains strong, suggesting that these formulations will play a vital role in the market. As venture capitalists, we are focused on identifying the next generation of oral combinations, such as oral GLP-1/GIP agonists or antagonists, and oral GLP-1/amylin combinations.
MCN: The metabolic/obesity sector appears highly active, but is it genuinely investable given its saturation? If it is, what criteria do you prioritize?
MR: We are actively evaluating opportunities, particularly within China, where similar drugs are emerging repeatedly. We are steering clear of “me-too” products in the obesity space due to the high costs associated with clinical trials, and unless a clear acquirer exists, profitability may prove difficult. Many pharmaceutical companies have already made their investments in initial GLP-1 drugs, while others remain hesitant. For us, differentiation is essential when considering new investments.
MCN: Does this differentiation primarily revolve around oral formulations or superior weight loss outcomes?
MR: Yes, it encompasses all those aspects—oral formulations, superior weight loss results, enhanced tolerability, and next-generation capabilities for muscle preservation. These are the areas we are keen to explore.
MCN: I’ve noticed a growing number of deals in the immunology sector.
MR: Indeed, we are currently placing a strong emphasis on immunology. This focus stems from the innovation witnessed over the past five years. In oncology, we experienced a surge in precision medicine that targets specific patient populations based on genetic mutations contributing to cancer. This precision approach is now transitioning into immunology. In conditions like lupus, understanding the specific mutations involved is crucial for treatment. Our strategy involves identifying the right drug tailored for distinct patient populations.
MCN: Just as identifying the right patient population is critical in oncology, will it similarly apply in immunology as therapies evolve from oncology to immunology?
MR: Absolutely. In other words, we are now beginning to comprehend the complexities of immunology and its underlying mechanisms on a deeper level. There has been considerable trial-and-error in determining which drugs are effective and which are not. This improved understanding has led to a significant expansion of the field, with vast patient populations available. For instance, Humira, currently the highest-selling drug, falls within the immunology category. Unlike oncology, where treatments are often short-term, immunology drugs are typically prescribed for extended durations, thus increasing market potential.
MCN: However, the safety profiles of these treatments differ when comparing oncology and immunology.
MR: Correct. The margin for error in immunology is significantly tighter. In my opinion, I would prioritize therapeutic areas as follows: first, cardiovascular due to its extensive patient base requiring stringent safety profiles, followed by autoimmune conditions, which, while severe, allow for a bit more flexibility regarding safety. In contrast, oncology treatments may tolerate higher toxicity levels given the grave nature of the conditions being addressed.
MCN: Is there anything we haven’t covered that warrants discussion?
MR: One notable trend we are observing is the proliferation of similar drug developments. We approach this situation with caution.
MCN: Are you referring to the concentration of companies targeting the same indication, such as the obesity market?
MR: Precisely. While there may be some overlap in targets within autoimmunity where several companies pursue the same goal, distinctions may exist, such as variations in drug formulation or duration of action. These scenarios often present safer investment opportunities, as investors are reassured of the likelihood of success. However, the question remains about the degree of innovation introduced by the fifth or sixth entrant in a specific category. We are dedicated to identifying initiatives that possess solid biological validation and represent first-in-class mechanisms, dedicating significant time and resources to these endeavors.
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