INTEROFFICE MEMORANDUM

TO: JOHN MCCARTHYFROM: MATT ARENS, FIRST LIGHT ASSET MANAGEMENTSUBJECT: RESPONSES TO TWENTY GOOD QUESTIONSDATE: SEPTEMBER 16, 2022

1. What is an area of health care public policy that is going in the right direction?

Access to health care. It is one of the rare instances in which numerous groups are joining forces with important constituents to try to make significant improvements. Of course, “access to care” is a broad term that applies to a variety of situations, but it principally refers to finding innovative ways to deliver effective health care to people who may be economically or geographically challenged, or elderly citizens who may not have easy access to transportation.

To address these challenges, both public and private payers are incentivizing greater access to care. Physicians who have long been aware of health care accessibility problems are robustly supporting these vital efforts. Additionally, the health care industry — primarily led by earlier-stage companies — is developing innovative products, services and business models that are enabling a level of access to care that previously was unattainable, which can create tremendous value for investors in those companies.

2. What is an area of health care innovation that is going in the right direction?

Precision diagnostics. For decades, it seemed most of the diagnostic industry was exclusively focused on test accuracy and reducing testing costs. While both of those objectives are critically important, there was little advancement around nor desire for companies that could drive diagnosis to a much deeper level. It’s hard to blame the industry for this issue as diagnostic companies recognized there wasn’t an appetite for reimbursing more expensive, higher-value-add testing.

This environment changed in a very meaningful way over the past ten years. The diagnostic industry has made a compelling case: if their tests can deliver actionable information enabling better outcomes for patients and eliminate other considerable costs, such as expensive therapies that may be ineffective, then these “expensive” tests can actually be cost-savers. As a result, a wave of diagnostic innovation is occurring that we believe will forever change health care and be critical to finding effective cures for many diseases.

3. If the consensus view is that small pharma is innovation and large pharma is distribution, how do you view this consensus?

I believe this consensus is both accurate and effective. In general, research and development productivity within large pharmaceutical companies has been declining for decades. This trend is not particularly surprising as we see it in other areas of technology development outside of the health care sector.

As pharmaceutical companies grow, their core competency typically shifts from innovation to competencies associated with efficiency, including greater effectiveness in areas such as sales and marketing, regulatory, reimbursement and intellectual property protection. When companies reach that point, it is a logical pivot to reduce spending on less effective research and development and allocate those dollars to mergers and acquisitions. This shift creates a symbiotic relationship between small pharma and large pharma benefiting both parties. Large pharma is able to acquire innovation to help drive growth, and small pharma benefits from the often meaningful premiums large companies pay for innovations that prove successful in the clinic.

4. What area of development stage biotechnology will we be hearing about soon, due to major advances?

Pulmonary medicine. Based solely on demographics, society was already on pace to need a greater number of more effective solutions for lung ailments, given chronic lung conditions increase both in prevalence and severity as we age. These needs likely will grow due to new or exacerbated lung diseases related to COVID.

Fortunately, there are innovative companies focused on developing solutions representing a range of treatments — from improving the standard-of-care to curing diseases at the genetic level. We are particularly excited about companies applying redosable gene therapy and those targeting previously “undruggable” targets that hold tremendous promise.

5. Is it true that virology was under-invested and under-attended until recently?

I think it is fair to say virology has been under-invested. Until recently, academia and industry largely avoided this area because the economic benefits of doing so were anything but clear cut. While virology is undeniably benefiting from increased attention due to the COVID pandemic, consistent interest and stable funding is required to meaningfully advance the science in order to adequately address both current and future virology challenges.

6. Biotech has a reputation of “binary outcomes” of success or failure. Assuming this is true, will this change, or is it part of the process?

I believe dedicated health care investors have done themselves a tremendous disservice by promoting what some refer to as a “golden era” of biotech investing. While increased knowledge and advancements in life science tools certainly provide greater opportunities to pursue better medicine, in our view, they do not broadly lead to fewer binary outcomes and higher batting averages, as some investors would argue. We believe the opposite is true — biotech will continue to feature binary outcomes and the probability of success for companies generally will be lower than it has been in the recent past.

This assertion is based on a couple of simple facts. The first is that every time a company advances a standard-of-care, the bar for success is raised. Second, although there’s only been a slight increase in the number of diseases biotech companies are targeting, they are throwing many more agents at these diseases and they simply cannot all be successful. This reality is not nearly as big of a negative as it might seem. Biotech will continue to produce extraordinary winners that equity markets will tremendously reward. In this environment, it will be more difficult for investors to benefit from a broadly rising tide in biotech, and stock selection will be more critical than ever before.

7. What area of drug development offers good payoff in terms of relatively low cost and yet wide benefit potential?

Companies focused on addressing endocrine diseases provide a highly efficient development pathway as biomarkers measured from preclinical and early clinical trials are often used as regulatory endpoints in final pivotal studies, allowing for substantial de-risking early in development programs. This set-up is in contrast to some other drug development areas where early studies simply serve to identify safety characteristics across a range of heterogenous patients and dose levels; middle-stage studies attempt to identify the right type of patients and balance the risk/benefit scale; and late-stage pivotal studies attempt to leverage those learnings, but typically require completely different endpoints.

Drug development in the endocrine space also can be highly lucrative given a high unmet need, typically less competition than other indications, and advantageous pricing and marketing costs reflective of a smaller patient population. In addition, there are often commonalities across endocrine-based diseases, allowing different indications to respond to the same mechanism or agent. For example, the acromegaly and neuroendocrine tumor indications are both treated with SST2 peptide agonists, resulting in a more than $3 billion drug class for approximately 200,000 non-optimally treated patients.

8. Is Artificial Intelligence a game changer in drug discovery?

So far, artificial intelligence (AI) appears to be an important tool for companies to use in their drug discovery processes. Although, we have not seen anything that would indicate meaningfully better outcomes from the use of AI as compared to traditional methods. AI has certainly helped identify potential protein structures, and companies anticipate it will allow them to refine and reduce the molecules they test. However, the complexity of biology in a disease state cannot be underestimated.

To become a game-changing tool, an AI algorithm will need to understand not only how something works, but also how something does not work when in a diseased state, along with all of the specific ways it doesn’t work, factors that influence it not working (genetics, social determinants, etc.), and ways the system may continue to fail even if the current problem is fixed (escape mechanisms and so forth). This task is a monumental one AI may someday be able to address, but it doesn’t appear to be there quite yet.

9. You have much experience investing around orthopedics. What major themes or technologies are longer-term investable themes?

Much of the innovation in orthopedics and spine over the last 10-15 years has focused on creating new implants that improve upon traditional approaches to common procedures, including stemless shoulders, patient-specific knees, expandable interbody spinal cages and 3D-printed titanium implants.

Moving forward, we believe two interrelated themes will contribute significantly to further enhancing orthopedic surgeries:

• Enabling technologies, including robotics, navigation/visualization equipment and pre-operative planning software

• New imaging modalities

These areas are receiving increased focus and investment as companies work to improve the consistency and outcomes of orthopedic procedures, with the long-term vision being the utilization of AI-based treatment planning software to fully design a surgical case. Among other capabilities, this software has the potential to leverage large amounts of data from past procedures to create 3D-printed, patient-specific implants and instruments, which are then paired with intraoperative navigation systems, allowing surgeons to implement a surgical plan with precision accuracy. This approach is a clear improvement on the current standard-of-care for many orthopedic procedures, which most often involve a surgeon determining the optimal treatment path during the operation itself.

The second theme centers on designing entirely new procedures to better treat orthopedic and spine conditions. Recent examples of this type of innovation include Alphatec’s complete redesign of lateral spine surgery using its prone transpsoas (PTP) technique, which allows for lateral placement of interbody cages while a patient is in the prone position, and Treace Medical Concepts’ Lapiplasty® procedure for bunion repair rather than the standard osteotomy.

In many cases, the implementation of these new procedures will rely on the enabling technologies discussed above.

Also, historically, orthopedic-related research and development has been focused, not surprisingly, on where the money is — hip replacements, knee replacements and spinal fusions. Going forward, the orthopedic areas which may see the most progress outside of hips and knees are the upper and lower extremities. These areas have not seen the same level of investment and attention from medical device companies, but that appears to be changing. Companies, such as Treace Medical and Paragon 28, are investing in the foot and ankle space, bringing new implants, procedures and technologies to patients. In fact, through its Smart28™ initiative, Paragon 28 is making large investments in enabling technologies for the foot and ankle market.

10. You also have experience in novel antibody development. What investable themes do you see there?

We continue to monitor the novel antibody landscape for truly transformational opportunities, though many are still early in their development. Technologies we monitor include:

• Antibody-drug-conjugate (ADC) approaches in which a chemotherapy-like toxin is attached (conjugated) to a target-seeking antibody in an effort to leverage the specificity of antibodies with the tumor-cell-killing potency of a toxin. There has been substantial progress made in developing this technology with multiple blockbuster ADCs on the market.

• Bispecific antibodies in which molecules are designed to recognize two different targets and create a novel action — such as T cell redirection and/or activation, targeting known tumor heterogeneity, targeting multiple checkpoints, and other novel functions. At their best, these agents appear to be able to provide efficacy approaching CAR T therapies, but with greater safety and without the infrastructure required that makes CAR T usage in the community setting challenging, if not impossible.

• Antibodies to deliver radioisotopes, as they are being increasingly explored after the recent approval of a therapy leveraging this technology in the prostate cancer space.

• Novel-but-early antibody technologies, including those leveraging masking technologies to only “activate” in the presence of a specific enzyme or tumor marker; antibodies built to respond to different pH levels in order to activate/de-activate in the presence of cancer cells; and technologies aiming to improve antibody shortcomings by altering peptides such that they mimic antibody binding characteristics while reducing the molecule size and time spent circulating to reduce adverse events.

We couldn’t be more excited about the opportunities antibody technologies will present over time. We will continue to closely monitor this space and anticipate it will lead to many exciting investments in the future.