Ep. 53 - Bob Nelsen on AI, China and the IRA

This is the BioCentury Show, brought to you by the Third East-West Biopharma Summit in Singapore. This March, explore how smart money is fueling the growth of the life sciences ecosystem and connect with key players across Asia's innovation arc, from India to Japan.

Hello, I'm Steve Usdin, Washington editor of BioCentury, with another conversation with an individual who's shaping the future of medicine: Bob Nelsen, co-founder and managing director of ARCH Venture Partners. Since 1986, Bob has played major roles in creating, financing, and developing over 150 companies. About a third of them have reached valuations of a billion dollars or more. More importantly, the companies Bob and ARCH have made possible have transformed millions of lives by advancing medicine: Illumina in genomics, Grail in screening and diagnostics, Alnylam creating a whole new modality, Juno in CAR-T, and many more. So, Bob, my impression of ARCH is that you go after the big challenges.

You find extraordinary people who have breakthrough ideas, you back them with a lot of money, and then you build teams that can execute on those ideas. That's really what I want to talk to you about today: how you go about doing all of that. So, let's start with the first one. What are the transformational ideas or technologies or science that you are really excited about today?

I think today, I mean, you have to, like, give a nod to AI and the potential of AI, with lots of caveats. But we live in a world that doesn't have a lot of data and has very, very low success rates and very, very low ability to figure out how everything kind of relates to each other in biology. And the promise of AI to, kind of, decode or even link some of the disparate types of data that we have into some kind of semblance of approximation of what biology is doing is super interesting.

Does that mean that you're interested in AI and large language models, presumably, as something that you're going to integrate into the companies that you're already funding? Or is it something separate, that you would be looking at AI companies, or both?

I think in both medicine and discovery, both of those things happen, right? So, in some sense, AI creates a set of tools that make the existing ways of doing things more efficient, more effective, more precise. And at the same time, the more interesting promise is, can you essentially create a language of biology? So, can you link all of these deterministic models that we have of chemistry and what happens with human data and what we propose about mechanism or function or genome together in some rational way to be able to ask harder questions like, 'Hey, make me a drug that treats what we call depression today'? Depression is defined on a 50-year-old questionnaire, right? That's our definition of depression.

So, is there a better way of looking, kind of, at the data more precisely? And whether it's transformer math, or the current kind of AI that people are approaching, or some other math that unifies these models, is the big question.

Embedded in that is something that's really interesting, I think, which is this idea of these tools being able to redefine disease. As you said, depression being defined as something that's 50 years old. And I guess that begs the question of whether you think there's a promise for, kind of, precision neuropsychiatric drugs, for example, precision neurological drugs coming out of AI.

I think all of the major diseases that are not precisely traceable to a point mutation are going to be approachable by these technologies. We haven't figured out how yet, but I think whether it's cardiovascular disease or metabolic disease or anything in the brain, any of the complex multigenic or multifactorial type of diseases. Clearly, depression is not what we define by the questionnaire, and your depression and my depression may be fundamentally different diseases. You could say the same thing about metabolic disease, and you could say the same thing about cardiovascular disease. And then that's not even thinking about prevention, right? We only think about pharmaceuticals as a reactive

kind of afterthought, "let's fix it," when really the realm of AI could easily take us into more preventive pharmaceuticals or intervening in pre-disease in a fundamentally different way. And our pharmaceutical industry is not built very well to ask those questions or answer them.

So you've centered your career really around these big public health challenges. And I know I've heard you talk in the past about it, and I'm wondering what your views are about Alzheimer's, which I think is one of the biggest ones. What do you think about the therapies that have been approved recently? Are they putting us on track to tackle the problem, to make the kind of transformational changes that you've really been passionate about, or do we need something else?

I think it's a start. And, um, so I think it's better to have things approved and then proven wrong and not paid for than it is to have them not approved at all. If there's a, you know, kind of a, a potential benefit. And I think, so we need to lean into, um, approving things, but we also need to lead into not paying for things that aren't effective. And so I actually think the current class of drugs should have been approved and should get approved and that we should be rigorous about the follow up studies to make sure that they're actually doing something. And I think it's just a version, you know, point zero one in the battle against Alzheimer's and and Once we have a better mechanistic handle on things, it may be that there are completely orthogonal ways of getting ahead of the neurodegeneration before it happens even, or treating things very early.

Our payer model doesn't react very well to that. So we have a model that wastes an incredible amount of money, trillions of dollars, on chasing disease and usually not curing or preventing it. I think diseases like Alzheimer's eventually will be treated well before you have any phenotype. And so we're going to need to figure out how to align the interests of society in a way that that gets paid for. Right now, those kind of drugs would be really hard to develop in the current system we have. But I do think there's promise in kind of decoding the brain with AI and decoding these complex networks that lead to diseases like Alzheimer's. And maybe Alzheimer's is kind of a point disease, and clearly you can see in the genetics that in certain cases of Alzheimer's, which is probably many diseases, it can be very, very precisely targeted.

We just don't know how to reverse it or when.

So you talked there about payers, and that brings up something I really wanted to talk to you about, which is the signals that are coming from payers now, and in particular, the Inflation Reduction Act. You've got the Congressional Budget Office, which says it's going to have negligible effect on innovation and drug development. I've talked to CEOs of pharma companies that say it's going to have an enormous impact, a negative impact, and they point to the nine-year threshold for small molecule drugs. Where do you see it and how do you navigate through that?

I mean, I think it does create some perverse incentives to move away from small-molecule drugs to biologics. I do think that, in general, when you start going after innovation accidentally, whether you intend to or not, um, you know, it will have kind of unintended consequences. So, I think right now there's—we're at an innovative environment that's going like this, so some of the impact gets lost in the noise of, of the innovation, right? And so, it's super hard to tease out the absolute effect other than, like, as an investor, you tend—you would tend to kind of lean more towards biologics than small molecules, all things equal. Right? And which probably isn't good for society. I think they're trying to go after kind of abuse by pharma in the later years, and kind of taking a sledgehammer to innovation at the same time.

And that's the problem with this is that, um, you know, they start with nine years and you can already see that they're—they want six years or four years, and then, you know, maybe we should do the same thing with biologics. So, it's a little bit like income tax, which is, you know, once you get it in there, you know, it's not going away, and, and it will be abused. So, I think that there's a reasonable chance that if there's a Democratic House and a Democratic Senate and a Democratic president, that they will really screw this up by pushing harder on the number of years and pushing it down, and really majorly impacting the U.S.'s competitive advantage in biotech and, frankly, negatively impacting all of the patients.

And I think I always thought that it would be fun to sit down with Senator Sanders and say, like, 'Hey, Senator Sanders, how are we going to cure Alzheimer's together? How are you going to do that? You said that you can't even talk to companies. Turns out that companies make drugs. Governments don't. So how are you going to do that? If you don't talk to the companies and you don't want to engage in the conversation, you're just screwing your constituents who are old.' And, and why, you know, why, why can't you engage in a fundamental conversation about how we should go cure Alzheimer's? Because that will save essentially equivalent to the defense budget in outlays, um, in 2050. I mean, a trillion dollars. Like, an Alzheimer's cure would be worth a lot of money, right? Somebody could get paid a lot of money if they saved

a trillion dollars, right? Senator Sanders, isn't that an okay thing? Like, shouldn't somebody, if you save a trillion, do you get a hundred billion? Um, that's net positive 900 billion dollars to the Treasury. So, uh, you know, maybe we can have like a, a, a meeting of the minds, but he doesn't actually want to engage in that conversation at all.

So yeah, you're referencing a conversation we had last week where I said, yeah, that Senator Sanders and his office have really declined to meet with companies that are developing drugs. He attacks them, but doesn't meet with them. What do you think would be the public policies that Senator Sanders or anyone in Washington should put in place to keep this kind of momentum going? Because we've had this explosion in your lifetime—and you've played a big part in it—of biomedical innovation. And I think it's because there was an accidental convergence of public policies that made it possible to advance science, to, to raise capital, and to commercialize drugs. All those things are under threat now.

What, what would you do to keep it going or to make it better?

You know, I think that you right now are playing defense, right? And I think the only way to get people to play offense a little bit is by pointing out that the U.S. is the leader and won't always be the leader if we decimate our innovative ecosystem and that other places will threaten our competitive advantage. If you do that, there are some Democrats in Congress that really understand that. And so I don't think I'm going to change Senator Sanders' mind, but I do think that it would be interesting to sit down probably in a closed session to say, like, 'How could we cure Alzheimer's, right?' More of a... more of an, in an, in the national interest, 'Senator Sanders, can you, uh, take it upon yourself to spend a weekend, you know, off the record trying to figure out, um, how not to bake in the current shitty system that we have that wastes 3.5 trillion a year on reactive health care...'

And, you know, incentivize a more proactive system, and a pill that cures Alzheimer's is worth a trillion dollars. Right. So, so I think—I don't know if that would go anywhere, but, but I think you have to try those kind of things. Because you may be able to convince people on the margin that we're in the most innovative time in history. It's accelerating, not decelerating. And we actually can move to a system that is more preventive, even with drugs, and more curative. And that's a cheaper system, a much, much cheaper system than big giant hospitals and a reactive system, and a system where, where essentially people are paid even if the outcome sucks. And so I think that there are some elements of common ground between the innovative industries and the idea that the system is broken.

I think baking in the existing system is what I worry about. My cat is visiting me.

The cat's welcome. The cat's in the conversation. But we are going to have to take a quick break. When we come back, what I want to talk to you about is something that's implied in what you said, which is that American preeminence in biotech isn't foreordained. And there is a lot of concern about that in Washington right now, especially about China, which you know a lot about. So we'll talk about that in just a moment.

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I'm back speaking with Bob Nelsen. Bob, you were one of the first biotech investors to work in China. And you're chairman of a Chinese pharma company called Hua Medicine, the first Chinese company, I think, to bring a drug from discovery to commercialization. You really helped to create that company in partnership with the founder of WuXi, Dr. Li. And there's all this tension now in Washington about China and the United States and biotech. You know, a few questions. Are you still investing in China? What do you think about members of Congress trying to drive Chinese biotechs like BGI and WuXi and others out of the United States? Do you see this as a zero-sum game, or is it something where everybody can benefit?

We're still investing cautiously. I think that, you know, I think we, like everybody else, look at the policy changes, and it gives us pause in some areas. But clearly, it's a huge market with a lot of unmet healthcare needs. It's also a very important place when it comes to emerging diseases, as we've already seen, right? You don't need a lesson in the fact that you can't ignore it. So I think, you know, putting your head in the sand because there's strategic tension is probably a bad idea. I've always thought that engagement is better than non-engagement. And even Armand Hammer was doing deals with Russia at the height of the Cold War. And so, you know, we do have common interests. At the same time, you know, there's

a lot of reason for concern. And so we're kind of watching, I guess, and thinking more than investing and acting. But I think engagement's better than kind of non-engagement on average. I also think that the U.S., the reason I helped to create Resilience was to create our own national manufacturing infrastructure. And, and I think the U.S., if there are threats or competition, our response isn't always to play defense. Sometimes it's to play really good offense, right? And frankly, you almost have to do both. But, you know, I don't think we should be worrying as much about, uh, China on the defense, and I think we should actually lean into playing offense and just winning. Um, now, winning means retaining your intellectual property, so there's a huge, uh, concern about making sure that, whether it's China or anywhere else,

Europe and other places have been known to, to be interested in our intellectual property. Um, you know, trying to defend it and maintain it is super important. Maintaining a strong patent system is super important, and making sure that, that you kind of enforce the laws is, is really important. So I'm kind of, uh—when I hear the nationalism, I get nationalistic, too, and say, "Hey, yeah, the U.S. should win." We should win by making sure that we have the best science and making sure that we take advantage of it and making sure that we invest in it and make sure that we don't hurt it. There's much more of a threat from over-regulating pricing in the biotech industry domestically than from China. We could screw ourselves much worse than China can screw us if we adopt Bernie Sanders' pricing policies and Ron Wyden's taxation policies.

China could have written both of them. And frankly, we'll do much more damage to ourselves by bad policy than we do from being afraid. America's never really been afraid and won. We tend to play offense and try to win. So I think we should be cautious, and we should play hard, and we should win.

And so, as part of that, building up our manufacturing capacity, is it possible for the United States to win, as you put it, in the life sciences if advanced technologies, advanced biologics, for example, are manufactured overseas? Or do we need to invest in creating that kind of capability in the United States, for example, doing something like the CHIPS Act where government would work with industry to facilitate investments in advanced manufacturing?

I think we need to create our own reimagining of biomanufacturing, not just an onshoring of the old technologies, but a reimagining of new technology to make a much more effective system, kind of like the semiconductor industry did. And they invested tons and tons of money in manufacturing. So I think you need everybody's help to do that. You need the government's help. You need leverage. And you need to essentially have some of the companies rethink and some of the strong American companies rethink what they're doing and make sure that they're willing to use their purchasing power to support U.S. companies that are building it up. And especially when you think about how good we are at manufacturing within some of our pharma companies, but how that's not necessarily available to a bunch of biotech companies.

It's not so obvious as just banning Chinese companies from the market. If you think about somebody like WuXi, WuXi is incredibly—it's a different case than BGI. WuXi is incredibly important to little biotech companies in the US and some pharmas in terms of getting stuff done. And I'd like all of that stuff to be done domestically. But we have to be really careful as we're legislating is to not have unintended effects on American competitiveness. And that's going to be a really interesting conversation in the next few months.

And it's really interesting you say that because you started and you've got a lot of money in an American company that's dedicated to advanced biology manufacturing. You mentioned it earlier, National Resilience. But you're also saying, look, if I'm understanding what you're saying correctly, you can't just kick out companies that are integrated into the American biotech ecosystem and expect to not have negative consequences.

Yeah, I think the law of unintended consequences could be extreme if it was somebody like WuXi. BGI, probably not. And I think they're very different companies. But I do think that you have to be thoughtful about your approach in those things. We should be encouraging US manufacturing. We should be encouraging the reimagining of manufacturing in biology to make it more efficient, more effective. And there's an opportunity for the US to win in that. We're not always ahead in that already.

And if you can imagine, if you can think of where there would be a transformational difference, for example, if the costs of manufacturing cell therapies and gene therapies were to go down exponentially like they did, for example, in monoclonal antibodies a generation ago, that would have an enormous difference on the accessibility of those therapies to patients and on the world.

Yeah, and I think that will happen, but it may not be as linear as you would like, and there's all kinds of policy impacts that could impact that as well. But you can see the trend, and the trend is those things are getting faster. Cell therapy is a great example. If you look at CAR-T therapy or some of these other things that we, we postulated when we started, you know, that, you know, maybe someday you could get these things down to a day or two and people thought we were crazy. And that's already happened. And I remember people thinking that's just absolutely ridiculous. And this is—even the scientists were saying no. So sometimes actually it's good not to listen to scientists because they won't set the goals as high as they might need to be to fundamentally change something.

Well, I'm sorry to interrupt. That gets me to something actually I wanted to ask you about, which is so you funded these companies to do these really big things. And I'm wondering, do you start with this kernel of, "Here's where the science is, and I'm going to build a company around that and build a team that can execute"? Or do you start with, "Here's the problem," and, and then you look for scientists who might be able to address it and build teams around it?

Both. So we do—we do both. So it could be like a Prime or a Beam or a company that we're incubating now in kind of RNA, where it's just a—it's an invention, right? It's an—it's a novel way of doing something better, um, or even just a novel way of doing something nobody could do or even could think of doing, um, and, um, and that's one way. And that's kind of a more linear in a way, even though there's still platforms, right? And it might have an A and a B and a C and an IPO, which those companies did. And there are ways to make that go faster probably in the current way we structure things. And then there are the things like Vir or Denali or other things that we're working on that are going after kind of large problems, large clinical problems.

And some of the things we've been doing like Nura, and they may have multiple companies within them. We may pull two or three companies together. In all of those cases, there were kind of multiple things that were incubating that were pulled into a bigger thing under hopefully a great management team. And then you have the ability of somebody like Ryan Watts to come into Denali and kill the lead project six months later and kill the lead product 18 months later and be just fine because he had a bunch of money. We did a very, very large Series A and he, you know, could apply a, a kind of higher bar to some degree than most biotechs because if you kill your lead product in most biotechs, you're in trouble. Um, so, so those kind of, uh, or they're, they're not really portfolios in the sense of trying to create a portfolio; they're trying to like apply rigorous science, and if there are multiple ways to do it, then you do it multiple ways. So Altos is very like that where there's

kind of a hypothesis, but but it's really to dig into the biology with multiple ideas and pursue all of it at the same time and have enough resources to do it. So if you need to kill something, you just kill it, and and there's not, um, the need to hang on to something just because it's your lead asset.

So all of those cases that you've mentioned, I think, I'm sure, they all center around an individual and a team that are tremendously talented. And as I said at the top of the show, one of the things that I think differentiates a lot of the companies that you've funded from others is that they execute. It's one thing to have an idea and it's another thing to execute. How do you find and how do you nurture talent?

It's something we think about a lot, and actually Kristina Burow, I think, really led that effort within ARCH to be more systematic about finding the best people. We don't actually hire search firms or anything like that to do it. Within companies we do, but as a firm, we've kind of found the self-assembly model is a good way of doing it. And I think we're in a place right now where people come to us when they have like big, crazy ideas or they're ready to do their last company. So I think the human capital aspect of what we do and getting better and better CEOs is probably the biggest thing that's changed over the last decade for us. As we've become more successful, we've been able to kind of

skip the two or three years of wasting money with a CEO that's suboptimal and go just straight to the great people. And what we've also found is that people think that actually we try to do big deals, and our biggest deals are usually created by cutting back a lot of people—so leaving a lot of money on the table, even though they're very large—but it's more about getting the best human capital as a CEO or as founding scientists together in one place with shareholders who are aligned with a long-term vision. And those shareholders have now a lot of money. Their minimum checks are pretty big, and it turns out the CEOs who have just sold their company for $7 or $11 billion don't really want to hang out with venture capitalists pitching a $20 million Series A deal.

They would rather get $250 million to do what they want because they know what they want to do. Some of these deals, not all, are better when they're capitalized with $250 million in an A round or even more in a seed round. And some of them are not. Some of them are much better with $3 million or $5 million or $25 million in the conventional model to reduce risk. And we have both flavors, but the human capital piece is where we're getting better as a firm and we're, I think, making better companies is by applying better people, more experienced people, more rigorous people to these really cool pools of technology to be able to figure out how to make drugs out of them, without betting at all on one single molecule.

So it's really kind of self-reinforcing. You're creating these companies. These companies have become extraordinarily successful. People that come out of that, then they want to do something bigger the next time, right? Bigger and better. And you're there for them to make that happen.

Yeah, and sometimes it's the same people. Sometimes it's new people coming to us, even if they've been funded by other venture funds, because they want somebody, and or at least a lead, or or to create a company, because we're creating most of our companies from scratch with others, right, um, in in a way that that they're thinking of five or ten years down the road. And the hardest thing for this industry to understand is sometimes thinking long-term and ignoring the possibility of return or anything else and not modeling stuff is actually the best way to increase short-term optionality, but you can't fake it. You kind of have to go for it. And so you go for it with a lot of money and decide to nucleate a company that's gonna go change things, and you get a great founder, and suddenly your short-term optionality increases

because people want to do business with you. They want to do deals with you. They want to give you money. They want to give you technology, or you can, you know, build the company more rapidly, even though you can't really start out by saying, 'I want to build the company more rapidly,' because you're going to let your short-term goals get in the way of the long-term goal. And I would say that a big problem with the industry is they tend to, especially in the kind of late-stage VC crossover realm, they kind of let the short-term goal get in the way of the long-term goal. And so you kind of need to ignore the short-term variations and always focus on the long term. But when you get short-term opportunities, you don't ignore those.

Right. So, it's—but you can't start by saying, 'I'm going to just focus on the short term and build a company.'

Well, that's really, really fascinating, and I'm sure we could continue. We've gone over the time that we had for this conversation, but I really appreciate it. Really appreciate your thoughts and your optimism.

Yeah, thank you. And I really enjoyed it. Thanks a lot.

Brought to you by the Third East-West Biopharma Summit in Singapore. This March, explore how smart money is fueling the growth of the life sciences ecosystem and connect with key players across Asia's innovation arc, from India to Japan.