Biotech Veteran Talks of Hedge Fund Investing, Boston Celtics, and Hot Companies

12/18/08

The first thing I noticed when I sat down in the office of biotech investor Rich Aldrich was a shelved paperback copy of Barbarians at the Gate, the book about the legendary leveraged buyout of R.J.R Nabisco. It reminded me that Aldrich is a main character in a somewhat similar book about the biotech industry, The Billion-Dollar Molecule. That book chronicles the formation and innovative strategy of Cambridge, MA-based biotech firm Vertex Pharmaceuticals (NASDAQ:VRTX), where Aldrich served as chief business officer and helped build the firm into a formidable force in the biotech industry. (Vertex has a significant presence in San Diego as well.)

In his office on the 15th floor of downtown Boston’s Prudential Tower, Aldrich looked to be living the dream. He sat back in a chair next to a framed Boston Celtics jersey. (Aldrich is part of the group that purchased the venerable NBA franchise in 2002, and, yes, he has the championship ring from last season to prove it.) Aldrich’s office is in the same suite as RA Capital Management, the biotech hedge fund he founded in 2001 after leaving Vertex, yet he has long turned over day-to-day management of the enterprise to managing member Peter Kolchinsky. (I wrote about Kolchinsky and the growth of RA Capital, which is a stockholder in San Diego-based diagnostics firm Sequenom (NASDAQ:SQNM), earlier this year.)

Aldrich, unlike in the intense days captured in Billion-Dollar Molecule, is no longer tied to one job or one company. He now lends his deal-making expertise to young biotechs; he is chairman of Cambridge startups Concert Pharmaceuticals and Alnara Pharmaceuticals, and serves as a director of several other companies. And Aldrich had front-row seats, as a director of Sirtris Pharmaceuticals, to that Cambridge-based firm’s sale to GlaxoSmithKline for $720 million in May 2008.

I spoke with Aldrich, who’s now 54, about life after Vertex and the state of the biotech industry in Boston and beyond:

Xconomy: Have you ever thought about going back to an operational role at a biotech company?

Aldrich: I have, occasionally. I guess I value too much the flexibility I have now to do more than one thing. I have total control over my schedule. When I worked for Vertex for nearly 12 years, I was working 90 hours a week—flat out. When I left Vertex, I pretty much made a conscious decision that I wasn’t going to take another operating role where I was constantly traveling and having to be places all the time. So I try to maintain my flexibility while doing challenging and exciting things. It’s worked out pretty well.

X: Which biotech companies—besides the ones where you are a director or an investor—do you think are the most exciting?

A: I think Alnylam is an exciting company. They’ve got a broad base [of technology in the field of RNA-interference], and they’ve been able to leverage that with some pretty big deals. So they are in a pretty strong position to capture the value.

X: Did you talk to Celtics guard Ray Allen after his son was diagnosed with diabetes during the championship series with the Los Angels Lakers this year?

A: I talked a little bit with his wife. They had a pretty tense time; it [happened] out in L.A. that they got the diagnosis, because [his son Walker] got very ill, very quickly. All I said to her was that it’s a good thing that he’s young and time is on his side. There are certainly current treatments and therapies that should keep him in good shape, and he should benefit from the many [treatments] under development in the years and decades ahead.

X: What are your thoughts about Sirtris CEO Christoph Westphal’s new position as senior vice president of Glaxo’s Center of Excellence for External Drug Discovery?

A: When GSK bought Sirtris, they were effectively buying two things. One was Sirtris’ technology and its pipeline, but the other thing they were buying was Christoph. He’s a uniquely talented entrepreneur who has a really good eye for science, and potentially valuable science. I think GSK’s been smart enough to realize that, and they put him in a position where he will not only continue to drive Sirtris ahead as an independent entity within [GSK], but at the same time he is going to be running what is a pretty substantial group within GSK that finds and invests in new technology. He’s been put in charge of that group, and I know he’s going to drive it with a lot of energy. Christoph also likes to work within the Boston area, so I think it’s going to be a good thing for Boston biotech. He believes, and I agree with him, that the best opportunities in biotech are in the Boston area. So I think it’s a great thing. It’ll be a great thing for GSK, and it should be fun for Christoph.

X: The Biotechnology Industry Organization (BIO) is lobbying Congress for what could amount to billions of dollars in tax breaks for the U.S. biotechnology industry. What’s your take on this effort?

A: Let’s just say that I’m not a big fan of all the bailouts that are being given and being proposed in Washington. It’s very scary to me when you think about the cost and how all this is going to be paid for. At the same time, when you look at what [the government] has done for various banks and investment banks, it’s very hard to argue against others that are seeking bailouts, particularly companies that produce products or better treatments. In principle, I’m not in favor of bailouts; I’d rather let the market decide. But under the circumstances and seeing what’s going on, it’s hard for me to argue against BIO trying to get its share. I think it will be a difficult sell, though.

X: One of our readers recently commented that Alnara Pharmaceuticals, the Cambridge, MA-based biotech startup that you helped found, might be behind the competition in oral delivery of protein drugs. What are your thoughts about that?

A: [Alnara] has a different angle than what people have historically done to orally deliver proteins. (Luke earlier this year wrote about the Alnara’s different approach to orally deliver protein drugs, which are typically injected into patients). There have been a lot of attempts at orally delivering proteins, and there have been failures. What Alnara is going after are metabolic diseases where you are treating the disease locally even if it’s a systemic disease. The molecules you’re looking to interact with are generally found in the gut. We’re not talking specifically about programs yet, so I don’t see how one could say that Alnara is behind the competition. I think the programs that we are going after, we feel that we are in a very good competitive position.

Many hedge funds aren’t expected to survive the recession. What makes you think RA Capital will make it?

A: I think one of the biggest things is that RA Capital doesn’t use leverage to drive returns. In recent years, many hedge funds used leverage, sometimes borrowing 20 to 30 times their equity, to amplify what was really a small return. In a rising market, a monkey could make great returns using that strategy. The problem is that when the underlying investments drop in value, your equity gets wiped out quickly. So you’re seeing a lot of people struggling. RA Captial uses very fundamental analysis to try and sort out what we see as the winners and losers amongst biotech companies, generally small- to mid-cap companies. It’s been a challenging year for everybody, but we’ve done pretty well and we’re actually still in positive territory for the year. Not many others are.

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