The Quality Growth Playbook for Biotech | David Ferreiro

Mirum Pharmaceuticals

• David Ferreiro, Ph.D. · TimesSquare Capital ManagementBullish

  Mirum's commercial rare-liver franchise is a real business; its pipeline is substantially discounted in the price.

  Mirum is a commercial-stage business with a rare liver disease franchise expected to sell about $700M+ this year, which gives a fallback if the pipeline fails. Management has built the business by acquiring under-invested assets from pharma and not overpaying, and the company has been beating and raising this year. Its pipeline adds upside: a PSC drug in phase 2/3 that could be the first treatment for a market of about 20,000 patients starting next year, PBC readouts with less clinical risk, and in-licensed assets such as an FOP drug bought for under $100M (milestones included) that was approved months later. Ferreiro says the fund holds it as a top-10-size position in a rare-disease, growing business, and that the market is underpricing the pipeline relative to the commercial business.

  “To some extent, I'd make that argument right now with [Mirum]... we could see what's happening with the commercial business, but we think we're getting a pretty substantial discount on the pipeline that they've built.”at 26:19

Revolution Medicines

Across the shows: 1 speaker in other episodes, 1 bullish and 0 bearish calls, past 30 days

• David Ferreiro, Ph.D. · TimesSquare Capital ManagementBullish

  Revolution Medicines has large upside from its pancreatic cancer approval and pipeline expansion.

  The drug is small-molecule therapy for cancer that was approved for pancreatic cancer, a disease with little surgical option and short survival. Clinical trial data in refractory pancreatic cancer showed overall survival roughly doubled. First-quarter sales beat street estimates by a wide margin, although the stock fell on the print. The upside case depends on moving the drug into frontline treatment, capturing most of that market, and expanding into other indications using related compounds already developed. Asked whether it could reach a $100 billion market cap from about $40 billion, he said that was not impossible, citing Vertex as a precedent for a mid-cap that grew with a franchise.

  “So I think there's a lot of upside. There's a lot of potential for a company like Revolution Medicine.”at 55:38

Axogen

• David Ferreiro, Ph.D. · TimesSquare Capital ManagementBullish

  AxoGen is a high-tech medtech growth business with regulatory moats and little competition; his firm is buying.

  His team has been leaning into high-tech medtech companies that have deep regulatory moats and resemble biotech, with more visibility into revenue. AxoGen is named as one of these companies. He describes it, along with Vericel and Glaukos, as a great growth business with not much competition and the regulatory protections of biotech.

  “we've been really leaning into those types of companies names like AxoGen, Vericel, [Glaukos] that are, you know, great growth businesses with not a lot of competition”at 1:03:30

Vericel

• David Ferreiro, Ph.D. · TimesSquare Capital ManagementBullish

  Vericel is a high-tech medtech growth business with regulatory moats and little competition; his firm is buying.

  His team has been leaning into high-tech medtech companies with deep regulatory moats, more revenue visibility and biotech-like characteristics. Vericel is named as one of these. He calls it a great growth business with not much competition and the regulatory protections of biotech.

  “we've been really leaning into those types of companies names like AxoGen, Vericel, [Glaukos] that are, you know, great growth businesses with not a lot of competition”at 1:03:30

Glaukos

• David Ferreiro, Ph.D. · TimesSquare Capital ManagementBullish

  Glaukos is a high-tech medtech growth business with regulatory moats and little competition; his firm is buying.

  His team has been leaning into high-tech medtech companies with deep regulatory moats, more revenue visibility and biotech-like characteristics. Glaukos is named as one of these. He calls it a great growth business with not much competition and the regulatory protections of biotech.

  “we've been really leaning into those types of companies names like AxoGen, Vericel, [Glaukos] that are, you know, great growth businesses with not a lot of competition”at 1:03:30

Pharma & biotech

• Jake Taylor · Farnam Street Investments / The Acquirers Podcast

  Biotech mispricing stems from investors disliking uncertainty, so the odds on offer get mispriced.

  Jake's explanation for why biotech stocks stay mispriced is that people do not like holding uncertainty. Because of that, the odds implied by prices can diverge from what the business could become, which leaves room for outsized returns. He is working from the price backward to the possible outcome, and treats the ambiguity as the source of the mispricing.

  “I think it's just maybe the, people don't like to hold uncertainty, and therefore, things can get mispriced.”at 17:20

• David Ferreiro, Ph.D. · TimesSquare Capital Management

  Higher yields pressure long-duration biotech, and commercial-stage companies should be favoured over developmental ones.

  Biotech and other high-tech sectors hold long-duration assets whose value is far out in the future, so they are inversely correlated with yields. As the cost of capital rises, these assets come under more pressure. Ferreiro sees a bifurcation: in a higher-rate environment, commercial-stage biotechs with cash flows are favoured over developmental-stage companies, while binary trial outcomes move stocks idiosyncratically regardless of the 10-year yield.

  “So as you see the cost of capital go up, there's a little bit more pressure on those types of assets.”at 23:38

• David Ferreiro, Ph.D. · TimesSquare Capital Management

  Clinical trial costs are high because of monitoring, multi-site and multi-country logistics, drug manufacturing and auditable data.

  Running trials is expensive for several reasons. Sites must be set up and patients monitored on frequent schedules with blood tests and scans, which can cost tens of thousands of dollars per patient per year. Long trials such as Alzheimer's or cardiovascular outcomes studies can run three or more years with thousands of patients, costing more than $10,000 per patient per year. Trials need many hospitals and often several countries. Drug manufacturing is a pure cost with no offset. The biggest driver is producing a full, auditable data set. He suggests AI could cut costs by selecting the right patient population, which would allow smaller sample sizes because outcomes are cleaner.

  “So a lot of that gets rolled into it. But I think a lot of it is making sure that when the trial is complete, that you have a full and auditable set of data. And that's just not cheap.”at 48:31

• David Ferreiro, Ph.D. · TimesSquare Capital Management

  Biotech assets that get acquired have clean data, unmet need, novel mechanisms and strong management.

  Acquired biotech assets tend to share clean data packages, areas of unmet medical need, novel compounds, or truly groundbreaking technology with a real market. In immunology, for example, an acquired anti-inflammatory is usually not a 'me-too' drug but a new modality or target that expands the market or beats existing therapies. Many acquired names in his portfolio are first-in-category medicines. Management quality matters as well, because a strong asset can still be lost if the company cannot navigate the development pathway. He says this is a high-level pattern because healthcare is varied.

  “the things that these investments tend to share from an asset standpoint are clean data packages, areas of unmet medical need, novel compounds, or truly groundbreaking technology where there is actually a market.”at 52:02

• David Ferreiro, Ph.D. · TimesSquare Capital Management

  Medtech was cheap after GLP-1 fears; high-tech device makers with regulatory moats now look attractive.

  Small and mid-cap medtech fell out of favour for a long time. Investors feared GLP-1 drugs would shrink the need for cardiovascular devices, joint replacements (because GLP-1s were said to ease joint pain) and sleep apnea devices. He thinks those fears have worn away, and that cardiovascular disease and other conditions still need treatment. Medtech traded at historical valuation levels, so his team has leaned into it. Public medtech companies generally have real revenue, which quality investors value. He prefers high-tech device makers with deep regulatory moats and revenue visibility, which resemble good biotech companies.

  “real interest in leaning into the med tech side just because they were at historical valuation levels.”at 1:02:41

AI bubble & tech valuations

• David Ferreiro, Ph.D. · TimesSquare Capital Management

  Fears about AI build-out spending are pulling money out of other sectors into healthcare as a safe haven.

  Rising rates have coincided with fears about AI infrastructure and spending. Those fears have caused money to leave other areas, and healthcare has been one of the safe havens that received inflows, giving it a reprieve. Ferreiro presents this as a mechanism behind recent healthcare performance rather than a forecast.

  “We've seen rates go up recently, it's also coincided with some fears around, I guess the AI build out, AI spend. So it's caused money to come flying out of other areas. And one of the safe havens would be to move in healthcare.”at 23:56

AI: overall outlook

• David Ferreiro, Ph.D. · TimesSquare Capital Management

  AI has sped up drug design and phase 1-to-2 success, but has not improved phase 2-to-3 biology outcomes yet.

  AI has produced real efficiency in drug discovery: candidate molecules reach the clinic faster (some companies get to a development candidate in about 17 months) and papers show AI raised success rates from phase 1 to phase 2. But the phase 2 to phase 3 success rate, which is the first real proof that a drug affects the disease, has not improved for AI-generated drugs. Ferreiro therefore sees AI as efficient at producing better-binding molecules but not yet at improving the biology. He also notes AI helps with patient selection and enrolment, which causes many phase 2/3 halts, and that most of Sanofi's roughly 13.5-year development timeline sits outside preclinical work, so clinical speed-up is still needed.

  “There's been some papers written on this that have shown AI has driven success rates up going from phase one to phase two. But what we haven't seen is the success rates from phase two to phase three improve with those drugs.”at 28:35