Bob Nelsen on AI, China and the IRA

Arch Venture Partners’ co-founder discusses the biotech industry’s challenges and opportunities

In a wide-ranging conversation with BioCentury, Bob Nelsen, co-founder and managing director of Arch Venture Partners, said he is excited by the potential for AI to “create a language of biology,” is cautious about investing in China given increasing geopolitical tensions, and is convinced that the U.S. healthcare system could do a far better job of delivering on the promise of rapidly progressing science.

Nelsen, who has helped finance and create more than 150 companies, including 47 that have reached valuations exceeding $1 billion, discussed his conviction that focusing on creating transformational medicines, rather than looking for short-term gains, is a key to success in the life sciences.

He warned about unintended consequences of the Inflation Reduction Act, expressing concerns that it could be expanded in ways that would punish biomedical innovation. He also offered to meet privately with Sen. Bernie Sanders (I-Vt.) to forge solutions to Alzheimer’s disease and other pressing public health challenges.

The AI opportunity

Responding to a question about the technologies that he’s most excited by, Nelsen said “you have to give a nod to AI and the potential of AI, with lots of caveats.” He pointed to opportunities for AI to improve a drug development paradigm that is plagued by low success rates, which stem from an inability to accurately predict biological relationships.

“The promise of AI to 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,” Nelsen said. While AI will be able to improve existing processes, the most interesting promise, he said, is the possibility of creating a “language of biology.”

The goal would be to use AI to find relationships that provide insights into the nature of disease, as well as design drugs to treat and prevent diseases.

He predicted that “all of the major diseases that are not precisely traceable to a point mutation are going to be approachable” by AI. The technology could also, he said, move drug development from “a reactive afterthought” that seeks to treat disease, “into more preventive pharmaceuticals or intervening in pre-disease in a fundamentally different way.”

Making the leap to preventing disease will require rethinking the pharmaceutical industry and, especially, the system for paying for healthcare, Nelsen believes. “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. We're going to need to figure out how to align the interests of society in a way that gets paid for.”

The Inflation Reduction Act

By setting the threshold for negotiating the prices of small molecules at nine years after launch, while biologics are exempt from price negotiation until they’ve been on the market 13 years, the IRA creates “perverse incentives to move away from small molecule drugs to biologics,” Nelsen said.

The effects of the IRA are masked by rapid innovation, he added.

Nelsen seems to be more concerned about the precedent set by the IRA. “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.”

Cautious about investing in China

Arch was one of the first U.S. VCs to invest in China, and Nelsen is chairman of Chinese pharmaceutical company Hua Medicine (Shanghai) Co. Ltd. (HKEX:2552).

Arch, he said, is taking a cautious approach to investing in China. “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.” Right now, Arch is watching and thinking about China, rather than actively investing, he said.

Arguing that engagement with China is preferable to non-engagement, Nelsen alluded to experience with COVID, SARS and other infectious diseases. It is, he said, “a very important place when it comes to emerging diseases, as we've already seen.” He added that “putting your head in the sand because there's strategic tension is probably a bad idea.”

There is a real possibility that the U.S. could lose its preeminence in the life sciences, Nelsen said, but rather than focus on trying to constrain China’s industry, Nelsen says U.S. policy makers should emphasize bolstering U.S. capabilities.

Arch formed National Resilience Inc. to enhance U.S. infrastructure for manufacturing advanced biologic products.

The U.S., Nelsen said, should “lean into playing offense and just winning.” Part of winning, he said, is protecting intellectual property. A bigger part, he suggested, is “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 making sure that we don't hurt it.”

Bad public policy in the U.S. presents a far bigger danger to life sciences companies than anything Chinese companies are likely to do, Nelsen said. “There is 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.”

Nelsen warned of serious unintended negative consequences for U.S. competitiveness if Chinese contract manufacturing and development organizations WuXi AppTec Co. Ltd. (Shanghai:603259; HKEX:2359) and WuXi Biologics Inc. (HKEX:2269) are banned from the U.S.

Rather than banning Chinese CDMOs, “we should be encouraging U.S. manufacturing, we should be encouraging the reimagining of manufacturing in biology to make it more efficient and more effective. There's an opportunity for the U.S. to win in that.”