McGuireWoods partner Kevin Madagan offers private equity investors a window into the future of the life sciences industry in this wide-ranging conversation with partner and host Geoff Cockrell.

From the FDA’s new Advisory Committee for Digital Health to the controversial Biosecure Act, which could open avenues for investors in the life sciences sector, Kevin suggests news for investors to monitor. He highlights the growth of radiopharmaceuticals, driven by increased partnerships between contract development and manufacturing organizations and Big Pharma.

Connect and Learn More

☑️ Kevin Madagan | LinkedIn

☑️ Geoff Cockrell | LinkedIn

☑️ McGuireWoods | LinkedIn | Facebook | Instagram | X

☑️ Subscribe Apple Podcasts | Spotify | Amazon Music

This podcast was recorded and is being made available by McGuireWoods for informational purposes only. By accessing this podcast, you acknowledge that McGuireWoods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in the podcast. The views, information, or opinions expressed during this podcast series are solely those of the individuals involved and do not necessarily reflect those of McGuireWoods. This podcast should not be used as a substitute for competent legal advice from a licensed professional attorney in your state and should not be construed as an offer to make or consider any investment or course of action.

This is The Corner Series, a McGuire Woods series, exploring business and legal issues prevalent in today's private equity industry. Tune in with McGuire Woods partner Geoff Cockrell, as he and specialists share real-world insight to help enhance your knowledge.

Thank you for joining another episode of The Corner Series. I'm your host, Geoff Cockrell. Here at The Corner Series, we try to bring together dealmakers and thought leaders at the intersection of private equity investing and healthcare and life sciences. Today, I'm thrilled to be joined by my partner Kevin Madagan in our healthcare and life sciences group, where Kevin focuses on FDA matters and related investment opportunities. But Kevin, maybe if you could give a quick introduction of yourself and your background before we jump into some questions.

Yeah, yeah, sure. Absolutely. Geoff, it's a pleasure to be here, highly regard the podcast, and it's nice to join. I've spent the last 18 years in private practice advising on legal issues affecting the life sciences industry. Much of this involves counseling clients on regulatory issues associated with the development, manufacturing, distribution, and sale of FDA-regulated products. It ranges from drugs to devices to laboratories to ancillary service providers who are in some way affected either directly or indirectly by FDA oversight. I have a bit of a specialty in clinical trials and product development, supply chain logistics, commercialization activities, and regulatory compliance and enforcement. And I've developed a bit of a specialty practice in radiopharmaceuticals over the last few years, having served for years as outside counsel to some of the largest privately held radiopharmaceuticals in the country. And then, as should be expected, part of my practice also involves serving on teams that support financing and securities transactions and domestic and international M&A in the life sciences space. So that's sort of a summary of who I am.

Kevin, we're recording this on election day. By the time it's published, the election will be fully resolved hopefully, and we'll know more answers. But from where we sit today, there's some developments that regardless of who wins the election, of things coming down the pike that could impact life science investors, maybe outline a couple of those.

Yeah. One that's top of mind that we've gotten questions as this year, we've gone around to a few cities and done some meetings with private equity investors and the like. And we've gotten a few questions on the Biosecure Act, and that's one that I think is kind of been interesting to watch is the House passed the bill, the Senate has moved it for a vote, but they did not recently tie it to the National Defense Authorization Act. Now, for those of you who aren't aware of the Biosecure Act, it would prohibit executive agencies from contracting with any entity where the biotechnology equipment or services of a "biotechnology company of concern" would be used in the performance of the contract. So essentially, a biotechnology company of concern is a tech company that's headquartered in or subject to the jurisdiction of a foreign adversaries government and poses a threat to national security.

Now, the controversy around this bill is that it specifically names five companies based in China, and one of those companies is one of the largest CDMOs for at least 23 US biotechs, and they flagged it on their securities filings and other notices that they may have ties to this entity. So whatever may happen to the bill, it may go through at least post-election during a lame-duck session, get negotiated when the House and the Senate start talking about how to finalize that Defense Authorization Act. It could get tagged onto another and must approve legislation during that period. But I think safe to say that the House voted overwhelmingly in support of it, the Senate is arguably in support of it in a number of ways, and the opposition to it I think can be resolved, meaning some Senators and House members who voted against it were upset about specifically naming out these five companies and not allowing any sort of due process. But needless to say, I think that this is going to move in some way, whether it's passed in a lame-duck session or next year.

And maybe describe what the impact of the passage of this might be for life science companies.

Yeah, the impact is interesting because I mean, you already have some of these US biotechs looking at other avenues, and you have these... One of the five named entities, and again, this would be the biologics company in China that they are, they've already sold or put up for sale their operations in Philly, which is their cell and gene therapy operations. And they're looking at potentially selling other assets as well outside the US, directly in relation to, okay, well if this is going to come to pass, then we need to get out of this space. And so, obviously that opens up a whole new avenue for investors both in the US and outside the US.

And it's just those five or does it apply more categorically to other things?

It is just those five, at least initially. However, the legislation calls for an ongoing review that can add additional entities that would be considered problematic entities or be considered biotechnology companies of concern.

Yes, it's certainly interesting, as in a number of contexts, the US's posture with respect to foreign powers is impacting investing, whether it's discussions around tariffs or other things like the Biosecure Act. It becomes another variable that investors have to take into account, both from a threat perspective and then also from in some instances an opportunity perspective, but certainly an evolving arena. Anything else coming down the pike?

Oh, gosh. Well, I think on the FDA front, something that I find somewhat fascinating or interesting is FDA recently stood up its Digital Health Advisory Committee, that they announced formal members of it earlier this year, a few months ago, but notably, they're having their first meeting at the end of the month. What is it on November, 20th or 21st, in Maryland, and why is this important? In this case, the first meeting, or let me explain what it is. The Advisory Committee for Digital Health, it's a new group. It's going to advise FDA about complex scientific and technical issues related to digital health technologies. So that can include AI, augmented reality, virtual reality, digital therapeutics, remote patient monitoring, and just software more broadly, that is somewhat complex and where FDA wants to have additional outside guidance, the committee itself has nine voting members. The standing committee, they're filled with academic experts, and then there's an input from a roster of leaders from the private sector, including folks from MedTronic, Boston Scientific, Johnson & Johnson.

And so, it's an extremely knowledgeable group. And again, their first thing that they're going to tackle is generative AI and generative AI enabled devices. Why is that important? Well, of the 150 devices that FDA has approved to date or cleared to date that include some aspect of AI, it's not generative AI. It's a set data set that's been created and the final data set has been locked, and then the product goes on the market. Generative AI, it opens up a whole host of additional issues and concerns, and you can see that in some of the questions that FDA is asking initially, but then also in some of the commentary to the docket before the meeting. So coming out of that meeting, it'll be interesting to hear what FDA has to say. It's a new development that AI is increasingly going to be integrated into both product development issues, but then also clinical decision making and actually doing diagnoses and the like.

From an investment perspective, is it your intuition that the work of that committee is going to be restrictive and kind of closing down areas of advancement out of the concerns around those areas? Or is your intuition that some clarity around the rules of the road might actually open up investment pathways? Did you view it as opening or closing?

I think it's more opening, at least it'll give us a sense that the public and investors and the likes where FDA is likely going to be going with respect to regulating and looking at the risk benefit profile and the lifecycle of these AI devices. One thing, for example, that FDA has raised as a concern is the foundational system that an AI system rely upon, that data set. However, that foundational system has been developed and does not necessarily need to be an FDA regulated device, right? Similar to FDA's position on off-the-shelf software, you can incorporate off-the-shelf software into your medical device or your system, you just need to understand the specs of that off-the-shelf software. But in the AI space, if you have an underlying foundational system and you don't have insight into how it was validated or the risk profile of it, when you have an overlapping AI system on top of it, and when it's actually out in the market, you're trying to manage that.

If I'm a service provider, if I'm in the pharma services space and I'm looking at these types of AI systems, well, I'm going to want to pay attention to what these experts on this advisory committee are saying about a system that I may in fact be developing that's not going to be ready to launch for another three or four years. At least, this meeting in November is a place to have your voice initially.

One of the questions that often comes up as it relates to AI and generative AI in particular is questions around whether or not that technology is going to be incremental or massively disruptive to existing processes. What's your intuition as it relates to either pharmaceutical development or device development of the impact of some of these technologies?

Yeah, I think it's going to be incremental. I mean, you're seeing it. It's going to be incremental and it's going to affect the vast majority of aspects of clinical research, for example, for drug endpoints, for any, I guess, combination products with device software that has constituent parts or remote data acquisition that includes AI or even if you have a, this is more on the provider side, but you have a chat bot that is going to help to simplify record keeping by a practitioner and do the summaries of whatever was discussed during the meeting. I mean, those types of things are already out there, but I do think it's going to affect many, many spaces and actually make things, frankly, more efficient and better over time.

Let's turn the conversation a little bit towards, you mentioned your background and expertise in radiopharmaceuticals. That's in some respects a narrower area, but also a very lucrative and expanding one. What are some of the drivers of investment interest in that space?

Yeah, I mean, well, some of the drivers... Well twofold. Let me give you a sense of scope, and this is global, but the global radio pharmaceutical market, it's estimated to grow from 3.7 billion in 2024 to 9 billion in 2035. And it's the result of two things, I think. Number one, the prevalence of chronic diseases, number one, and number two, the rise of targeted radiotherapy using radiopharmaceuticals. So historically, you've got growing geriatric populations across the board globally, and that's one thing, the market is only going to get larger. What does that mean? That means you're going to need more capacity to manufacture products. And why is this a special issue with radio pharmaceuticals? It's because radio pharmaceuticals have a very, very short half-life, meaning, so F18 has 110 minute half-life. So once you dispense that from a nuclear pharmacy, you've got 110 minutes to get this into the patient and do, whether you're doing a diagnostic or you're doing some sort of targeted therapy. So you need these CDMOs to be close in proximity to whatever region they're serving. That's what I think, again, what is driving.

Is it turning into a land grab? I assume that there's a lot of green space out there, just geographically. Is that how investors are approaching it?

To an extent. However, because you are seeing this significant rise in clinical studies, for example, targeting radiopharmaceuticals, you're going to need to have, and you're going to have additional radiopharmaceuticals approved by the FDA and on the market, and these are extremely complex products to manufacture, at least the regulatory oversight, given the NECO regulatory commission and the FDA and your other state regulators, you need more facilities to manufacture the product. Currently, there are, I think it's 200 clinical trials underway. I think globally there are more than 190 manufacturing facilities, and there are over 215 industry and non-industry players in the space. And 50% of that, 50% of the overall radiopharmaceutical production is captured by North America. What I'm seeing currently, at least with respect to CDMOs, is increased partnerships with big Pharma, for example, because you've seen since 2019 over 270 strategic partnerships developed between CDMOs and big Pharma with these radiopharmaceuticals, and the majority of the deals are, again, supply chain related.

Like other areas of drug development and manufacture, they tend to arise a whole array of satellite pharma services that relate to each step of that process. I'm assuming that radiopharmaceuticals has a similar array of ancillary business opportunities that support that industry.

That's right. Yeah. I mean, the distribution in particular is a big one, and distribution as it relates to clinical studies, and those are two areas that are important.

From an investor perspective, no sector is all tailwinds and no headwinds. What are some of the risks or headwinds that investment in this space encounters?

The intense, I guess, regulatory oversight if you're a radiopharmaceutical CDMO, but if you are an ancillary service provider, let's say you're helping with clean room activities, you're helping with pharmacy dispensing operations for nuclear pharmacies, you're dealing with staffing issues. I mean, there's a huge staffing shortage right now for techs at CDMOs, for radiopharmaceuticals, but there are a number of ancillary providers that are there, and I frankly think given the market, the need for those services is only going to continue to grow.

Kevin, one of the drivers of interest in pharma services in general is that whole sector, which I know it encompasses a whole bunch of not very similar things within it, but one of the drivers of investor interest in it is that it's very, very fragmented. How would you describe the current state of the radiopharmaceuticals subsection of that, and what are some of the more notable things of scale that have been happening?

Yeah, I think it does. It's had its heyday years ago, there was a bit of a pause, and I think it's back in the limelight, at least. Now, bearing in mind that the investors more broadly, a number of them are sitting on the sidelines anyway, and they're waiting for something to occur before they move forward. That's just sort of the baseline issue, but you are seeing increased investment in the space and success in it. So one example is CDMO Nucleus Radiopharma. Bear in mind, this is two years after its initial funding round. They just announced a few weeks ago that they were tripling their manufacturing capacity, adding a hundred jobs through upgrades to Arizona and Pennsylvania. The Arizona location notably is going to be shipping to Asia, which has an expanding geriatric population that needs these services, and the Pennsylvania location is going to be shipping to Europe.

So I mean, there are strategies where you can be a US-based radiopharmaceutical manufacturer, but you've got some OUS revenue streams. One other note is, I think it was Trilantic North America, they recently completed a strategic growth initiative with Sophie Biosciences, and again, Sophie's already a leading player in the radiopharmaceutical sector, and that was a significant investment that's going to expand, again, their growth strategy. And lastly, I would, I guess just note that some of the larger manufacturers and frankly sponsors, I mean, Novartis is expanding its capacities in California. [inaudible 00:16:16] announced its investing $50 million in its radiopharmaceutical manufacturing capacity, and then on a larger scale, Eli Lilly acquired BioPoint Pharma for $1.4 billion. So I mean, there is a focus on both on the sponsor side, but then also on the CDMO side to get into the space and keep moving things along.

Kevin, I think we'll call that a wrap there. It's real fun to have you join. It'll be great to have you join the podcast as a more regular feature as we bring in some folks that are ready to talk about different kind of FDA oversighted industries or investors that are making investments in that arena, but thanks a ton for joining.

Yeah, absolutely. My pleasure.

Thank you for joining us on this installment of The Corner Series. To learn more about today's discussion, please email host Geoff Cockrell at gcockrell@mcguirewoods.com. We look forward to hearing from you. This series was recorded and is being made available by McGuire Woods for informational purposes only. By accessing this series, you acknowledge that McGuire Woods makes no warranty, guarantee, or representation as to the accuracy or sufficiency of the information featured in this installment. The views, information, or opinions expressed are solely those of the individuals involved and do not necessarily reflect those of McGuire Woods. This series should not be used as a substitute for competent legal advice from a licensed professional attorney in your state, and should not be construed as an offer to make or consider any investment or course of action.