Find episode transcript below.
JENNY COLAPIETRO:
00:00:04:01 - 00:00:20:05 Welcome to the Next in Health Podcast. I'm Jenny Colapietro, PwC’s Vice Chair for Health Industries, working across pharmaceuticals, medtech, payers and providers. Today, we're diving into a hot topic. Navigating growth in the health industry, specifically for emerging companies. Understanding these rising stars is crucial for shaping the future of healthcare innovation. And joining me today are Holly Reeves and Christian Jester. They're Partners in our health industries and technology, media and telecommunications practices who lead our market efforts for non-public emerging companies. Welcome, Holly and Christian.
HOLLY REEVES:
00:00:41:10 - 00:00:43:06 Hey, Jenny. Happy to be here.
CHRISTIAN JESTER:
00:00:43:08 - 00:00:44:05 Likewise.
JENNY COLAPIETRO:
00:00:44:07 - 00:00:55:15 Great. So, let's get right into it. Holly, how would you define an emerging company in the health industry and what are some traits or milestones that make these companies stand out?
HOLLY REEVES:
00:00:55:17 - 00:01:10:07 Jenny, that's a great place to start. When we're talking about emerging companies in the health industry space, there are often very exciting companies that are driving a large portion of the newest innovations in both the life sciences and medical technology fields.
00:01:11:05 - 00:01:31:03 When I think about emerging growth, I really think private company. So not traded on a public exchange and this company has an idea or maybe a platform of ideas where they're generally leveraging intellectual property that they want to test out in the discovery or preclinical phase.
00:01:32:17 - 00:01:48:03 But the ultimate goal of getting a drug candidate into the clinic. One thing to remind our listeners on are there are many stages in the lifecycle of taking an idea into the clinic to an ultimate approved product that you can go off and commercialize.
00:01:49:05 - 00:02:10:05 And when I think about this and take it into the different stages, there's a lot of work that companies have to perform before they can even take the drug into the clinic. And in the biotech space, we typically call that early stage discovery or preclinical. And then once you get through that work, so the work ahead of getting into the clinic, there are three phases.
00:02:11.7 - 00:02:31:03 A phase one, a phase two, and a phase three. You have to get through each of those phases and they go in chronological order before you can get to a point where you can submit an application to the FDA to get approval. I'll touch a little bit more on the different clinical phases and the purposes of each of them as there is a difference.
00:02:31:05 - 00:02:48:07 The phase one is primarily focused on safety. Phase two is more focused on efficacy. When I think about efficacy, does the treatment work for the disease that a company is trying to solve for? And then in the phase three, it's really effectiveness of the drug.
00:02:52:08 - 00:03:18:04 When you think about this, it's, how does the drug work in relation to other approved therapies? Emerging growth companies may be relatively early on in their lifecycle before you get into the clinic. And then in the clinic that I just went through, we typically see emerging growth companies more in the discovery, preclinical or early stages of clinical trials.
00:03:20:01 - 00:03:40:01 They also probably don't yet have revenue and their focus is really on developing the latest and greatest technologies in medicines. So, I just went through kind of the typical product candidate or biotech lifecycle. Maybe now I'll touch on the medical device side as there is also a regulatory process there.
00:03:40:10 - 00:04:03:04 And similar, but it's called a 510(k) approval and there are a number of different stages that you have to go through before you can get that approval to be able to use the medical device. And typically, with emerging growth companies on the medical device side, we usually see them remain private or emerging growth until they've got some form of approval.
00:04:04:02 - 00:04:26:04 If I think about the differences on med device. You've usually gone through the lifecycle and obtained approval before you would try to access the public markets or go public. Whereas in the biotech side, we oftentimes see investors able to value drug products or product candidates earlier on ahead of having approval and being able to sell them.
00:04:27:18 - 00:04:48:08 I would say that both types of companies, whether it's biotech or medical device are really essential in our sector. And they drive innovation, and they challenge the norm. These companies’ agility and risk taking often lead to breakthroughs in drug discovery, in new medical devices, and usually they address unmet medical needs.
00:04:49:04 - 00:04:59:05 These companies also foster competition. They improve patient outcomes and really are attractive partners for large companies, fueling overall industry growth.
JENNY COLAPIETRO:
00:05:00:23 - 00:05:23:11 Thanks, Holly. That baseline understanding is super helpful. You mentioned that these are both private and pre-IPO companies. And when I think of emerging companies, I think of growth, whether that's through an IPO or another way. What is the typical journey for an emerging company? And can you share more about what the key stages and factors are that companies and investors should consider?
HOLLY REEVES:
00:05:23:12 - 00:05:43:10 Right now, I think the IPO excitement is coming back after an increase in IPOs in the first quarter this year. We saw the highest number of traditional IPOs since the fourth quarter of ‘21 and nearly half of these were in the pharmaceutical and life science sector. The market is still nowhere near the level of IPOs that we saw in 2021 and before.
00:05:43:12 - 00:05:57:01 Companies are still focused on growing in other ways. Before companies can even think about an IPO, their drug candidate platform technology or medical device needs to have developed enough to have value to investors.
00:05:58:00 - 00:06:20:15 So when the IPO markets have been challenging over the past couple of years, we're seeing fewer companies that are in earlier stages of development, like pre-clinical biotech companies being able to IPO. Before an IPO, these companies still need to raise capital, which is typically done through preferred stock financing or debt. Some of the considerations are still the same.
00:06:20:19 - 00:06:35:05 Investors want to know how the company is going to grow, become profitable, and ultimately provide a return on their investment. We're still seeing a good amount of venture capital activity, especially in the AI and machine learning space and a lot of the funding is going to later-stage companies.
00:06:35:08 - 00:06:47:10 More funding could free up, though, as VCs get a return on their investment as more IPO exits happen. Once companies are able to secure funding, they're going to need to spend it to continue to advance their development.
00:06:49:02 - 00:07:04:08 But they also need to do it in a smart way to preserve the capital, especially in the case of clinical or pre-clinical stage biotechs that don't yet have enough revenue to generate cash flow internally. This really makes the financial planning process important to make sure the capital matches up with the company's goals and timelines.
00:07:05:02 - 00:07:26:05 As again, investors want to know what their investment is going to amount to. Once companies have reached the right time to go public, they will want to refine their equity story. They will support the valuation of a company to have the most successful IPO. Along with that, they'll want to start thinking about putting the right people and processes in place to really thrive as a public company.
JENNY COLAPIETRO:
00:07:28:02 - 00:07:40:03 Thanks for laying that out, Holly. Christian let's get you into the conversation and maybe we can talk a little bit more about the opportunities and challenges that emerging companies and their management teams encounter as they grow.
00:07:39:07 - 00:07:50:01 How do they handle these challenges and what metrics and projections do they present to investors to maintain credibility and transparency in their fundraising efforts?
CHRISTIAN JESTER:
00:07:51:09 - 00:08:11:15 Jenny, thanks for the tee up there. And a lot of what I'll talk about plays a little bit into and off of what Holly was talking about around you think about growth, and how the vantage point we often see as a company is looking to achieve significant growth in the way their operations, right because they're working with novel technologies and processes and new ways of thinking about solving complex problems.
00:08:11:20 - 00:08:34:09 That needs to be the early stage priority and something the company’s focus on. But what we see is some of the biggest challenges from emerging companies. As you create that success, you effectively have a bit of a freight train running down the tracks that continues to get more complex in how you prioritize and manage scale and complexity across other areas of the business right outside of what you're trying to do with a product candidate or a new platform or something.
00:08:34:11 - 00:08:48:09 Well, what about how the finance and accounting organization or legal is integrating or other aspects of multinational operations that can come into play in things? A lot of challenges come with that, needing to mature in the growth that comes along and the complexity it's created.
00:08:50:06 - 00:09:11:06 And so maybe a little bit of a hit list of things that we've come across a lot and it depends in many cases, how many times a management team has been through a process or built a new company. But in a lot of cases, we see early stage entrepreneurs, incredibly brilliant people, really having to tackle a lot of things about maturing a business that are coming new to them.
00:09:12:05 - 00:09:21:01 When you think about how you actually build an organization to achieve some of that scale and whether that's entering the capital markets, going through more sophisticated diligence to raise the funding that Holly just alluded to.
00:09:22:05 - 00:09:36:00 Those things get more complex and intricate with time and there's more scale in the business. So, I always start thinking about, is there a good process in a real discussion around the management team with the board around how you're going to prioritize precious resources that are out there?
00:09:35:07 - 00:09:51:00 Whether that's capital or time and getting a real self-awareness of all the different types of things that are going to come onto the roadmap with scale and success, right, converting to revenues in growth, thinking about the organization and how it protects itself, quite frankly.
00:09:51:21 - 00:10:07:02 When you think about intellectual property and the way you're interfacing with more complex arrangements and how legal and taxes and other things kind of come into play. So, we see a lot of companies sometimes struggle with that prioritization, having to make up ground on some of these other complexities that grow over time.
00:10:08:03 - 00:10:27:06 A lot of that starts with always having your hand on the tiller around what do I need in my team and how am I thinking about building out and actually recruiting the right talent, the right capability, and volume of talent to handle an organization that needs to work across multiple facets all at once?
00:10:27:05 - 00:10:43:05 And that again, just changes with time, becomes more complex with success. We often see a lot of times where the inability to do that creates some of the bigger issues, whether it's getting into a fundraising process, handling customer volume that might come up depending on what your business model is, etc.
00:10:43:10 - 00:11:07:02 So we really say a team and the right people around the organization are really important when you get into, all right, how am I showing this business that's becoming more complex out into the markets. Once you are beyond just trading your technology or your innovation and actually translating that into a business, how does your financial planning and analysis functions come together?
00:11:08:00 - 00:11:24:01 Do you understand what your revenue recognition model might look like, where costs need to sit in the business? And are you looking at that from a lens that actually will be consistent, will be reliable, will be credible in the way you think about how you actually portray that business in ever more sophisticated environments?
00:11:25:02 - 00:11:48:03 And again, that's something we see can be a challenge along with the expectation setting and the credibility of how did I get the business translated into a certain look and feel when I think about it, let's say a financial model in portraying the business or what I'm going to achieve, milestone wise? We do see sometimes teams get out a little bit ahead themselves in sort of some of the overpromise under-deliver that can happen.
00:11:48:03 - 00:12:01:03 So we always try to think about how management teams can hedge, be credible and really set their expectation setting of not just, hey, this is where we're going to go, but here are some of the other things that we need to navigate and potentially right, some self-awareness around pitfalls.
00:12:02:08 - 00:12:22:06 We see information and communication across an organization get more difficult as you're starting to again, you're building that team and you have more functional capabilities coming together. Your operations through to what's happening with the legal side of the business, what's going on in HR, what's happening across the different other facets you have to manage from a regulatory and or reporting perspective to start to grow.
00:12:23:00 - 00:12:37:08 So, we do see companies struggle a little bit, putting together the cross connection so that actually information is flowing, common goals and objectives as the company gets more complex, are actually coming together.
00:12:38:11 - 00:12:59:11 A lot of that needs to sit on systems and infrastructure that needs to be put in place to manage and handle scale. So, we really see companies needing to focus on, what's my environment looking like? and how do I aim to look ahead to handle what I expect to be the complexity and volume and growth? And that can be the complexity of the arrangements and types of transactions to the volume of those.
00:12:59:13 - 00:13:21:10 There are a lot of great cloud solutions and things like that that are out there that are easy to procure, but sometimes hard to implement and sometimes actually make them work and use the full functionality of what's out there to business without some real focus. And there's still often a need for a lot of what I will call homegrown infrastructure or system that gets put in place or mapped into what the unique aspects of a business are.
00:13:21:12 - 00:13:37:06 So bottom line, a lot to start to think about that we readily see how that taxes early stage organizations and how they look to put everything together. And so, we really do like to try to help companies think about how do you focus on these things, manage them in practice. I mentioned a couple of times self-awareness.
00:13:37:09 - 00:13:56:06 So how do you look to actually. You can be the smartest person in the room, but does it mean you have all the experience and so the team you put around yourselves, listening to that team, engaging the right third-party support and professional advice where you need that, something that will tend to pay dividends pretty heavily.
00:13:57:06 - 00:14:06:11 When you do that consistently and make available all the ideas that are out there in effectively really the areas that you may not have as much experience with.
JENNY COLAPIETRO:
00:14:06:13 - 00:14:14:19 Thanks, Christian. That's a great list on what management teams should be thinking about as they grow. Holly, anything else you want to add from an industry perspective.
HOLLY REEVES:
00:14:14:21 - 00:14:28:03 I'll build upon some of the thing’s Christian talks about specifically around prioritization. Lately, we're seeing a number of companies needing to really prioritize programs in an effort to control spend, just given the current market environment.
00:14:30:00 - 00:14:48:08 So as I've been on the marketplace recently, I've been hearing how companies are using AI to determine which programs are most likely to succeed based on their intellectual property. Instead of spending a bunch of money on pre-clinical work and different phases that I just went through to see if an idea can actually get to market.
00:14:49:00 - 00:15:11:04 Companies are able to use AI to figure out which of their ideas have the best chances of succeeding, and then using that AI to prioritize the programs they want to move forward with, especially if they're stretched for cash. The other thing I'm hearing is about how AI is being used in clinical trial design, where companies take all the information they have.
00:15:12:08 - 00:15:30:02 Think word documents, PDFs that they're able to use to inform a better trial design, which could ultimately reduce costs and effort. From my perspective, AI in general is just fascinating and I really can't wait to see where it goes in our industry or elsewhere.
00:15:31:00 - 00:15:36:00 Those are just a couple tidbits. And what I've heard recently in our industry and being out in the marketplace
JENNY COLAPIETRO:
00:15:36:10 - 00:15:56:09 Thanks for sharing those perspectives. It's not surprising to hear that AI is helping to take a role in helping with the prioritization and acceleration for these emerging companies. That's great. Christian, given the crucial role investors play in an emerging company's growth, how do they effectively handle diverse investors and what common pitfalls do you see them facing in this area?
CHRISTIAN JESTER:
00:16:00:07 - 00:16:23:13 Picking up of what we were talking about before, surrounding yourself with the right talent, wisdom, experience, etcetera, I think is really critical for emerging enterprises as that complexity increases, one of the principal sources is clearly going to be your investors and the board, and that is an area that when you're going through, let's say, the fundraising process or looking at the way you're situating your business, obviously, above and beyond the funding itself
00:16:23:13 - 00:16:44:21 is a key consideration. And so, when you think about the complexity, that is an early stage board really is the insiders, it's the investors and the founders and management, executive management of the companies that tends to evolve and become more diverse and a bit more independent as you get towards things like going into the capital markets, becoming public, or something of that nature.
00:16:44:23 - 00:17:01:00 But in that early on stage getting the best and that wisdom and the connections and network from your investors obviously really important. Next to it though, what can sort of be a pitfall a little bit is not necessarily managing the diverse interests that also you get out of private company boards.
00:17:01:05 - 00:17:19:06 And again with that investor led sort of mindset and what we see in some cases that creates complexities for management teams is clearly a great set of investors. But is everybody aligned on what the biases or interests or the ways that that board is coming together and thinking about, hey, what's going to make me successful?
00:17:20:01 - 00:17:45:06 When they think about their funds and their PEs or where they expect liquidity and other types of actions and progress being made for a company. And so, I just think we've seen a lot of companies go through that kind of growth and maturity. And it might sound obvious, but having a real handle on the diverse capabilities of your board and the other stakeholders that are part of governing the organization and have the influence on your decisions are super important.
00:17:45:05 - 00:18:02:01 And maybe it comes as a surprise sometimes. How often we can see with the companies as they achieve success that those interests can become more complex, in some cases misaligned. So that kind of communication and really understanding where again, all the diverse interests that are at play with your business.
00:18:03:05 - 00:18:22:00 I think really important, along with we think about the expectation setting that goes around milestones or what the financial picture of the business might look like, really understanding and being a good listener with your board and the investors and other stakeholders is really important and thinking about all right, really, where are they coming from?
00:18:22:16 - 00:18:37:03 What am I learning from that? What can I employ? But what maybe do I need to manage in ensuring everybody is on the same page? And again, a lot of times you're dealing with diverse interests. So, the communication around that and translating what we see and what often can be complexity.
00:18:37:05 - 00:18:53:07 Management team being so close and passionate with their businesses can often struggle a bit to sort of translate some of what's happening or some of the vision they have and the complexity of that in ways that everybody is again aligning with, getting on the same page, or at least understanding.
JENNY COLAPIETRO:
00:18:54:19 - 00:19:03:03 Thanks, Christian. I appreciate that. Now, as we take it to wrap up, just Holly, are there any other topics that emerging companies should be thinking about?
HOLLY REEVES:
00:19:03:05 - 00:19:21:13 Well, I know Christian and I just covered a number of topics. Maybe I'll leave our listeners with two more things. The first is, as companies grow and become more complex and the needs of the business change, one thing to keep in mind are the financial systems that are being used and whether they meet the needs of the business.
00:19:21:18 - 00:19:36:07 Christian brought up some really good points around FP&A function and the importance of being able to have the right data available when needed. So, I do think it's good to keep your overall IT infrastructure on your radar screen as you grow.
00:19:37:05 - 00:19:55:00 And then, the second item is around the company’s tax structure. As companies become larger and more complex in thinking about international presence, there could be current tax or future implications that would be good to get ahead of early.
00:19:55:05 - 00:20:06:02 I would always say it's best to check in with advisors sooner rather than later when it comes to tax structuring. Those are kind of the final two that I would leave our listeners with, Jenny.
JENNY COLAPIETRO:
00:20:06:24 - 00:20:18:10 Excellent. Thanks, Holly. Holly, Christian, I want to thank you both very much for joining us today to do this deep dive into emerging companies that are shaping the future of healthcare innovation. So, thanks to both of you.
HOLLY REEVES:
00:20:18:12 - 00:20:20:06 Thanks, Jenny. Thanks for having us.
CHRISTIAN JESTER:
00:20:20:08 - 00:20:22:09 Yeah, thank you very much, Jenny.
JENNY COLAPIETRO:
00:20:22:11 - 00:20:47:11 For more on these topics and other health industry insights driven by policy, innovation, and care delivery changes, please subscribe to our podcast and visit us at pwc.com/us/nextinhealthpodcast until next time, this has been Next in Health.
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