When Red Tree Venture Capital put down roots in 2020, it faced a very different market than it does now.
Based in the San Francisco Bay Area, the fledgling firm pitched itself as a West Coast answer to deep-seeded biotechnology investment funds in Boston. Instead of drawing top-tier talent from Harvard and the Massachusetts Institute of Technology, it aimed to pull from institutions like Stanford and the University of California, Berkeley.
Now, it’s going nearly 500 miles further afield by expanding to San Diego, another biotech hub. Red Tree said Thursday it has tapped Jeremy Caldwell, a veteran of Versant Ventures and Third Rock Ventures, to join the young firm as a partner.
Co-founded by Stanford researcher Jennifer Cochran and life science veteran Heath Lukatch, Red Tree raised $272 million in its inaugural fund last year. The company pledged to deploy most of it to backing new drugmakers, with the rest going toward new medical devices companies.
BioPharma Dive spoke with Caldwell and Lukatch about their work and Red Tree’s investing philosophy. This conversation has been lightly edited and condensed for clarity.
BIOPHARMA DIVE: Why expand Red Tree to San Diego now?
HEATH LUKATCH: It's always been our plan to expand to San Diego because it is such a biotech hub and mecca. I've done multiple deals there over my venture career, and it was very opportunistic from the perspective of hiring [Caldwell.]
JEREMY CALDWELL: San Diego is home to some of the best, world-class research institutions: the University of California, San Diego, Scripps, Salk and so forth. There's been a steady stream of breakthrough biomedical research being done at those institutions, and others have created a rich vein to tap for new biotechs. There’s also a bunch of big biotechs and pharma companies that have created satellite, or larger, operations down here. That’s created a nice talent pipeline for building companies around here.
But even more than that, with some of those folks being in the area and the pharma companies having a presence, it leads to potential for partnerships and, ultimately, M&A. And that's actually the one of the strengths of the San Diego area for quite some time, in particular over the past five or six years. I think there have been about 60 exits in biotech. About three-quarters of those have actually been M&A by pharma and other companies.
Just this year Prometheus was acquired by Merck for $10.8 billion. DTx Pharma by Novartis for $1 billion dollars. That really speaks to the innovation that's happening here and the cluster of academia, pharma, and entrepreneurial science happening in the area.
In your eyes, what areas of biotech need more investment right now?
CALDWELL: In oncology there are ‘genetically, clinically relevant and validated targets’ that have just been difficult to drug. Folks that have ideas for drugging the undruggable are going to be participating in some of the future financings. As long as there's unmet need, there's going to be a solid investment thesis.
I think the same holds true in immunology and neurology. There are starting to become new ways of tackling these diseases now that we understand the mechanistic underpinnings of some of the autoimmune diseases. We are learning from existing drugs that happen to have a benefit on those diseases. We’re starting to figure out how we can tease apart the good parts of those drugs from the bad parts, and treat schizophrenia and other psychotic diseases.
Like in oncology and immunology, the precision with which you can understand which type of Alzheimer’s somebody has will allow us to develop much better drugs that treat that subset. Maybe not a panacea for all Alzheimer's, but we can begin to chip away in a significant and meaningful way now that we understand what we’re looking for.
The last thing that has obviously gotten a lot of attention is in cardiometabolic disease. While there have been many discoveries, and it's been a huge market with the GLP-1s out there, there's still meat on the bone, if you will, to chip further away at these diseases. You may begin to see more investment in those areas in and around the obesity field.
LUKATCH: When we think about the intersection between oncology and immunology, [we see] great progress there. [Neuroinflammation is at] the intersection between immunology and neurology ... and it's a big underlying cause for neurodegenerative diseases in some cases
Look at long COVID as a really good example of what we're seeing in the immune system interacting with the nervous system. That's definitely an area of strong interest for entry.
How does that affect your approach to deploying capital over the next year?
LUKATCH: To come back to our scientific advisory board, we've got a set of world leaders in these spaces. We liaise with these people to get their perspective as to what's interesting and exciting, not only from, obviously, the market opportunity potential, but from where the science is going. Skate to where the puck is going to be, not to where the puck is right now.
CALDWELL: The other thing is more of a focus on breakthrough assets versus breakthrough platforms. There’s a place for both of those, now and in the future, but given the amount of capital required to take a platform to the clinic, ultimately, you may begin to see more investment in assets or assets coupled with product engines than previously.
Red Tree was one of the first backers of Cargo Therapeutics, which priced its IPO earlier this month. How did that come together?
LUKATCH: We participated in the seed financing round back in 2021, and one of our scientific advisory board members, Crystal Mackall, is one of the founders of the company. We've had belief from day one, based on the work that [Mackall] had done with this technology when she was back at the National Cancer Institute.
The data is amazing in terms of the CD22 CAR-T, being able to essentially have durable complete responses in patients that have failed all other therapies. … Assuming that we can continue to show the types of data that has been shown previously with this product, we expect it will be a very large success, and most importantly, a real benefit to patients that have no other alternatives.
The XBI was down 7% in the two days preceding the IPO. So it was challenging, but I think it speaks to the strength of the Cargo story that it was able to get out in this market.
What are you predicting for the sector next year?
LUKATCH:We live in a cyclical market, right? I think everything was up and to the right for almost the past 10 years until we peaked in early 2021 in the biotech market and then saw a pretty precipitous decline. I do think that we've hit the nadir of the market. Obviously, there were a lot of companies that got public that probably should not have gotten public in in the last frothy cycle.
In the broadest sense, we're pretty bullish on biotech in general for a variety of reasons. Just looking at some of the macro drivers that get us excited: everything from demographics of an aging population in the developed world; to FDA approving more drugs in the last 10 years than they've done in the previous 10 years; to the big pharma patent cliff that we see right now.
Then you layer on top of that all kinds of scientific innovations: everything from the cost of sequencing a human genome, the ability to immune profile people, the ability to — and I'd say this is probably pretty nascent — to use AI to start designing and developing drugs.
We're bullish. We are long-term investors. We don't look at things on a quarterly basis. We think that we're probably at the bottom of this cycle.
Editor’s note: This story has been updated to clarify a quote from Heath Lukatch.