The Life Sciences Report: Can you describe your business model for me?
Ran Nussbaum: We are a simple venture capital (VC) operation based out of Herzelia, which is very near Tel Aviv, Israel. We run three funds and manage more than $200 million ($200M) in assets. We invest in private companies that have the potential to become public. When these companies do go public in the U.S., in Israel or in other places, we hold publicly tradable shares. All in all, it's a very simple model.
TLSR: You support these companies after they are public, right?
RN: Yes, but we are not buying shares at the market, or trading shares. We are trying to inject money into the companies, not take money out. These companies always need cash, so we look for private investment, for secondary offerings and for fundraising to support our investments.
TLSR: It strikes me that even after these companies go public, you still look at them as having an ultimate exit strategy, either by acquisition, with a big partnership or by licensing out a molecule. Is that right?
RN: Yes. Most of these companies are not going public as an exit strategy. The initial public offering (IPO) is a fundraising strategy, not the ultimate exit. As you know, it is very trendy to go public, and a lot of companies have gone that route recently. The IPO market is really hot right now in life sciences. But the biggest exits—the real value creation events—are to be bought out by a big pharma, to license out a drug, or to do a co-development project with a big pharma. That's when you see share price appreciation.
TLSR: Hearing you talk, I'm thinking that you are still very active and involved in these companies on an intimate basis even after they are public. Is that, in fact, the case?
RN: It's more than that. I don't see any difference between a public company and a private company as far as our involvement in them. Our involvement in public entities and private should be the same. The companies are still headquartered nearby, and they have missions. They need to generate clinical data and evidence to meet goals and continue business development. This is all execution, and it doesn't matter if it's done in a public or a private entity.
TLSR: Ran, do you think your view of these companies is different from that of VCs in the U.S., and maybe even in Europe? You said you see no difference between companies when they are public versus when they are still private. Do you think that American and European VCs look at the IPO as the exit strategy, versus the way you look at it?
RN: I hope there's a difference, because I want our model to be unique. Since a lot of our companies are going public on the Tel Aviv Stock Exchange, I don't think the valuation we're getting can constitute a real exit. It is a very different proposition than going public at a $250 million ($250M) fair market valuation on the NASDAQ.
"These companies always need cash, so we look for private investment, for secondary offerings and for fundraising to support our investments."
On the other hand, from a regulatory point of view, it's very difficult to be proactive in a publicly traded company in the U.S., whereas it is much easier with a public company trading on the Tel Aviv Stock Exchange. We are trying to structure our business model to add value to our companies, and we think we can do that by helping management and boards of directors structure that ultimate exit. The answer to your question in one word: Yes. We do see the exit strategy differently.
TLSR: Are your positions focused mostly in Israel?
RN: Yes. We have several American portfolio companies, but mostly we are in Israeli companies. Our biggest asset is to evaluate companies here at home because we can monitor them and control the process much more easily. We do work with a lot of American VCs and international pharma companies, but our biggest strength is to monitor Israel and find those diamonds in the rough right here.
TLSR: Ran, I'm noting that there were close to 1,000 life sciences companies in Israel. Considering the country's size, this is extraordinary. Are there incentives for science, medicine and technology companies to locate there?
RN: The ecosystem is right. The entire Israeli life sciences industry is located within a radius of 20 kilometers. It's all close. There is also a tradition of very good basic science at the institutions of higher learning in Israel. There are real advantages here in the local market.
TLSR: Ran, I know there is a lot of emigration to Israel, and many of these emigrants are people who are educated, and are professionals already, in many cases. That has to be part of the equation that produces so many life science businesses.
RN: About 1M people came here from Russia over the last decade, and many are very smart people. We have also seen good people come to Israel from very strong universities in the U.S. and England. We have seen many come from the U.S. with degrees from Ivy League institutions like Harvard, and others from Stanford University, the University of Pennsylvania and UCLA. Many emigrants completed their degrees in the States and have gotten nice jobs at pharmas and small biotech companies with great track records—and they are coming back to Israel. Many have brought in good ideas. These professionals are the strength of the entire industry.
TLSR: I was looking at a press release from a few years ago that said Roche Holding AG (RHHBY:OTCQX) was going to collaborate with your firm to fund development. It's certainly impressive to have a giant European drug developer involved with your company, but what was Roche's purpose? Was it to start a corporate VC program in Israel?
RN: It is not a corporate venture capital program. Our partnership with Roche is still very much alive and kicking. What we did was to try to find assets that might suit its pipeline for the future. Roche is a product player and we're an equity player, and there are a lot of companies with breakthrough technologies here in Israel. We took very early-stage compounds and ideas, and we built companies and got Roche some rights in the compounds. We are now advancing these programs.
TLSR: This is, in essence, a project development program, would that be right?
RN: Exactly. As a matter of fact, we have seen several successes so far. I think Roche has duplicated this model and is taking it to universities, CEOs and to other countries. I think it enjoys what we have provided as a local partner. I know that we enjoy Roche's professional skills.
TLSR: I'm certain the collaboration has probably been very beneficial for both sides.
RN: Yes, I think you are right. Roche is very smart, and as you know it fully owns Genentech, which is the biggest biotech company in the world. Now Roche is the biggest oncology franchise in the world.
"We are not looking for 'me-too' or a 'nice-to-have' or a 'next-generation' product. We try to find something that can change the world."
But our deal with the company is only one of several. We work with the entire pharma industry. We've signed deals with Pfizer Inc. (PFE:NYSE), Novartis AG (NVS:NYSE) and with GlaxoSmithKline (GSK:NYSE). There is also Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ), which is headquartered just 15 km from us and is one of our limited partners. But our relationship with Roche is unique. The company did something really smart. Roche is not thinking one quarter ahead; it thinks about the next decade.
TLSR: You have just said that your project development program with Roche was successful. Does that mean some compounds have moved into the clinic by this time?
RN: I can't disclose that because it falls under a confidentiality agreement. But I can say that at least two programs are looking very promising and might, in the near future, produce first-in-class drugs.
TLSR: As a venture capitalist, what do you look for in a life sciences company? Not all of your holdings are actual companies when you find them—you could find investigators in a university or other institution—but what do you look for when you are trying to develop a brand new company?
RN: I can tell you what I'm not looking for. I'm not looking for "me-too" or a "nice-to-have" or a "next-generation" product. We try to find something that can change the world. We are trying to find something that will have a huge impact; that offers a huge advantage over existing drugs. It could be about new targets or a new mode of action. If the therapy works, we want it to be a game changer in the current disease management paradigm.
TLSR: Ran, I'm looking at a Tel Aviv-based company called Alcobra Ltd. (ADHD:NASDAQ). It's not one of your companies, but you know this company very well. Could you address it? Also, tell me how you know the company.
RN: Alcobra is an Israeli company that just went public. We track it, and it is very close to us because its founder, CEO and CFO are doing business with us. We know its compound, MG01CI (metadoxine) for attention deficit hyperactivity disorder (ADHD), extremely well—and we also know the arena quite well. We think highly of this program. The jury is still out, but Alcobra's MG01CI, a non-stimulant agent, if approved, will be a game changer because the entire ADHD space is now becoming generic. I sent Alcobra to the central nervous system (CNS) companies—to Eli Lilly and Co. (LLY:NYSE), to Shire Plc (SHPGY:NASDAQ; SHP:LSE). If Alcobra presents good data from a nice pivotal trial of MG01CI, somebody will buy it.
TLSR: Psychiatrists, pediatricians and other physicians are using everything from stimulants to non-stimulants to antidepressants to antihypertensive agents to treat ADHD. I'm just wondering how difficult it is going to be to get clinicians to change their treatment plans for patients. They tend not to change their patterns easily, especially when all the generics on the market are so much easier on the pocketbooks of patients. Do the patients have to be nonresponsive to existing products before clinicians will switch meds?
RN: I would argue that over the past 50 years, every single ADHD drug has been rapidly adopted by patients and physicians, regardless of generic competition. In fact, new ADHD treatments have been penetrating rapidly and reaching blockbuster sales regardless of generic alternatives, and we don't expect this to be any different with MG01CI. I also think that physicians are fearful of giving Strattera (atomoxetine, an FDA-approved non-stimulant for children and adults; Eli Lilly & Co.) or stimulants like Adderall (amphetamine + dextroamphetamine; Shire Plc) to young people.
TLSR: Right now there is a growing adult market for ADHD management. I understand wanting to use a non-stimulant for children. Is Alcobra going for the child and student market, or is it looking at the adult market?
RN: It is looking at both as potential markets. In fact, Alcobra has done a couple of phase 2 trials (NCT01685281 and NCT01243242) testing MG01CI in adults. I think that a big pharma partner will have to design the right trial for the student market. As I see it, I think Alcobra is doing all the right things to capture interest from Eli Lilly and Shire.
TLSR: Could I hear another name you find interesting?
RN: Several nice ideas right now seem like hot trends, and we're trying to track the trends. Protalix Biotherapeutics Inc. (PLX:NYSE) is a company that we took public in the past. Today it has a market cap of about $476M. We've been with this company since it had only preclinical assets, but after some period of time venture capitalists normally exit the companies they've brought public, and we exited Protalix. Now the company is following a hot trend into the orphan disease market. It has a most appealing biosimilar technology, an advanced recombinant protein plant cell-expressed technology using carrot and tobacco cells.
"The IPO market is really hot right now in life sciences."
The company's enzyme replacement product, Elelyso (taliglucerase alfa), is approved by the FDA for Gaucher disease, a rare genetic lysosomal storage disorder. It is being marketed by Pfizer. Protalix is also trying to develop antibodies and fusion proteins, like a biosimilar of Enbrel (etanercept, Amgen Inc. [AMGN:NASDAQ] and Pfizer), which is an anti-tumor necrosis factor (TNF) product used in rheumatoid arthritis.
TLSR: Ran, what is Protalix doing to change the way medicine is practiced? What is the sweeping value driver?
RN: I think that the Holy Grail is to develop large proteins that can be consumed orally. Administration of life-saving drugs can be performed with ease if those drugs can be taken by mouth. Protalix is trying to approach this delivery system, and I'm crossing my fingers because it would help a lot of patients. It will ease up pressures on hospitals and payers, such as Medicare in the U.S. Protalix has a really nice platform.
TLSR: Of course, the problem with this route of administration is that proteins are normally digested in the gastrointestinal tract, and that's why they cannot be assimilated as an active protein into the blood stream. If Protalix can develop enzyme replacement products for lysosomal storage disorders like Gaucher and Fabry diseases, I understand your assertion that this is the Holy Grail of drug development. It would make complex protein drug administration much easier.
RN: This is precisely my point. The future of this kind of drug development is about enhancing the lives of these very young patients and their families, and easing the burden on the pockets of the payers.
TLSR: Genzyme (a unit of Sanofi SA [SNY:NYSE]) has developed enzyme replacement therapies for lysosomal storage disorders, and has done quite well. Could these products from Protalix be anywhere near as large as the Genzyme drugs were?
RN: If you look at Protalix's pipeline, you will see that it is tracking Genzyme's pipeline and product portfolio. It's very close. I know that Genzyme is developing an oral therapy for several disease indications, but it is generating a lot of cash with its great cluster of orphan drugs. It is expanding and, with Sanofi's help, moving into growing markets like Brazil, Russia, China and India. There is no real competition in this arena because Genzyme is the 500-pound gorilla in this space. I think that Protalix has learned that fact by now, and is trying to compete by coming up with a new technology with a new route of administration. Then the competition will be with a differentiated product line.
TLSR: You have a micro-cap company called Arno Therapeutics Inc. (ARNI:OTC.MKTS) in your portfolio. I'd love to hear about this one.
RN: Arno has licensed a very cool drug called onapristone from Bayer (BAYN:XETRA). Arno is attempting to develop this drug for two indications, prostate cancer and breast cancer, by defining the right population, a population that will fit an activated progesterone receptor (APR) profile. The team is looking to develop the product for APR+ cancer patients. Arno should be one of the stars at the American Society of Clinical Oncology (ASCO) annual meeting in June 2014.
TLSR: Ran, I'm thinking that the trend in breast cancer now is to develop products for triple-negative disease—for those patients who do not express HER2/neu, the estrogen receptor or the progesterone receptor. Currently, most breast cancer drugs target tumors that are either estrogen- or progesterone-positive. Isn't this market a little more crowded than the triple-negative market? Also, why could onapristone be a superior product?
RN: The breast cancer market is very crowded. I have to say that, when you're looking at this market, everybody is trying to develop PARP (poly[ADP-ribose] polymerase) inhibitors for triple-negative breast cancer. Having said that, it is not the case in the prostate cancer market, and I think that Arno will have a real nice chance at this one.
TLSR: Why is onapristone the value driver here? I see that the company has AR-42 in two clinical trials, AR-12 in a clinical trial and AR-67 progressed to a phase 2 trial. Why are we talking about a preclinical product?
RN: It's not about what the most advanced asset is. I'm looking at what the biggest asset is and why.
You'll see situations like this with a lot of companies. ArQule Inc. (ARQL:NASDAQ) is in phase 3 with the c-Met inhibitor tivantinib for cancer treatment, but I think the phase 1 trial of its AKT inhibitor, ARQ 092, in solid tumors, is more promising. We are talking about the market potential and how the product is differentiated from other agents.
Arno's onapristone is going into a trial first in men with APR+ prostate cancer, and we will have real proof of concept within one year for a new drug, a new entity. It might be something very big.
TLSR: Ran, with this tiny market valuation you could buy this company back for nothing, couldn't you?
RN: I don't think so. There are a lot of strong shareholders in Arno who will not sell their shares.
TLSR: Is there anything else you wanted to mention?
RN: I did want to tell you that we are looking at European companies that are not getting attention from American investors. I am talking about Genmab A/S (GEN:CO) from Copenhagen and MorphoSys (MPSYF:OTCPK) in Germany. These companies are developing exciting clusters of antibody therapies and have mid-cap market valuations. Both have great and very deep science. We appreciate both of these companies. We believe the lack of attention from American investors has caused a lot of opportunity to build up in these names. We really like Genmab and MorphoSys.
TLSR: It sounds to me like you want to move into monoclonal antibodies in a big way. Do you see this already successful drug class as a continuing huge market?
RN: Yes. Absolutely, especially in immunotherapeutics.
TLSR: I've enjoyed being with you very much, Ran. Thank you for taking the time.
RN: My pleasure. Thank you for talking with me.
Ran Nussbaum is a managing partner and co-founder of The Pontifax Group, which has established three funds with more $200M under management and more than 30 portfolio companies. Over the past nine years, Nussbaum has managed the group's activity alongside Tomer Kariv. He also served as CEO of Biomedix and was NasVax Ltd.'s chairman of the board. Nussbaum's work revolves around constant and active involvement in companies, providing them with strategic and business development oversight. Nussbaum serves as a board member of many of the Pontifax Group's portfolio companies, including cCam Biotherapuetics, TheraCoat, CollPlant Ltd., Quiet Therapeutics, Fusimab Ltd. and OCON Medical Ltd., where he is currently chairman of the board.
Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Ran Nussbaum: I or my family own shares of the following companies mentioned in this interview: Arno Therapeutics Inc., Genmab A/S, MorphoSys, ArQule Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.