J.P. Morgan Roundtable: Biotech Executives Expect Capital To Flow Despite Lower Valuations
24 January 2016
Informa Pharma’s Global Director of Content Mike Ward and Scrip Intelligence West Coast Editor Mandy Jackson moderated a roundtable discussion on Jan. 11, the opening day of the 34th Annual J.P. Morgan Healthcare Conference, in San Francisco during which they spoke with eight biotechnology veterans about the state of biotech going into 2016.
The executives, including an advisor and a venture capitalist, were fairly optimistic about the potential for high-quality companies to raise capital this year and to attract big pharma buyers or partners, despite declining biotech stock values – the Nasdaq Biotechnology Index (NBI) was down 11.8% versus the end of 2015 on the first day of the J.P. Morgan conference and the NBI was down 17.7% as of Jan. 22.
Portions of the edited roundtable transcript below give a glimpse of the participants’ views on biotech deals and dollars. The group included: Accera Inc. CEO Charles Stacey, Novavax President and CEO Stanley Erck, Symic CEO Ken Horne, Corbus Pharmaceuticals CEO Yuval Cohen, Trifermed President and CEO Sergi Trilla, Aisling Capital Founder and Senior Advisor Dennis Purcell, BIND Therapeutics President and CEO Andrew Hirsch, and Alder Biopharmaceuticals Chief Business Officer Mark Litton.
Mike Ward: What has been really interesting in recent years is the tons of money that has been raised by this industry, which I calculated at about $100bn in two years. Are we now seeing the strains and stresses and concerns about whether or not that money is going to continue to be available? And with that money that you’ve got in the bank, how does that change the dynamics in terms of the have and have-nots and also in terms of partnering?
Mandy Jackson: The market is looking pretty rough for biotechs already this year, only a week and half in. Do you think that that is emblematic of the way the rest of the year will go, or is this just a reconfiguring of expectations?
Dennis Purcell: Last year, about 900 companies raised money and notwithstanding what has happened in the last couple of days or the last week in the [stock] market, I think that one of the things that strikes me is how big the ecosystem has gotten. It used to be that if one company failed a trial then everybody’s stock] went down, but that is just not the case anymore.
The industry is very well financed. Another thing about the ecosystem is that it is financed by non-traditional names. When I left Hambrecht & Quist [the original J.P. Morgan Healthcare Conference organizer] to start our firm, there were probably 10 or 15 major VC firms – Kleiner Perkins or MPM – and what I’m noticing now is that the range of people investing in this industry is very wide.
I am less concerned about the boom and bust than I was before. It was a lot of money [raised in biotech], but a lot of companies are pretty well funded and there is a lot of data coming this year, so I think luckily we don’t have to look at the day-to-day swings like we used to.
Stanley Erck: I’ve been on [initial public offering] roadshows, and Synergen or somebody went down and it stopped the industry for years for IPOs. One company would affect the IPO candidates.
Purcell: Who would have thought five years ago that Gilead had a higher market value than Pepsi? It’s one of the great American companies and Gilead has a higher market cap.
Jackson: Do you think this wobbling right now of biotech stock values has more of an impact on companies that are already public, and smaller companies, as opposed to private companies that are out there raising funds?
Purcell: There is a lot of private capital out there. If you look at the traditional [limited partners (LPs)] one of the big misnomers is that everything has to be a 10x [return]. But most of the people, like [the pension fund California Public Employees Retirement System (CALPERS)], if they can get 600 basis points better than the [Standard & Poors (S&P) index], they are happy. So if the S&P is flat next year and we give them an 8% return or 10% return, they are ecstatic.
So I think there is a lot of capital trying to chase returns right now, because there is nowhere else to put your money. And even though everything has gone down – the [biotech exchange-traded funds (ETFs) known as the] IBB, the XBI, the NBI – they were up 10%, 11%, 12% last year. That’s better than CDs; better than Apple stock.
Ward: So thinking about the early stages, are any of you trying to raise money at the moment or would like to raise money? I know with biotech that is the idea, you have always got your hand out, but in terms of if you are looking at it, have people missed the boat?
Yuval Cohen: We are a Nasdaq company, we debuted in April. [But for early-stage companies] one big difference is that VCs are no longer the default financing. Our financing wasn’t done with a single VC; it was done with two hedge funds, a bunch of high net worth individuals and a patient advocacy group. I think that is really different, that never existed before.
It is always less challenging to raise money as a public company versus a private company. Raising money as a public company is a function of your share price, and if the market isn’t that great then the share price would have some sort of discount applied to it. As a private company, you just don’t have that luxury; your money is locked in.
I had a European fund manager say to me once that he would rather invest in the world’s most mediocre public company than the most exciting private company. And remember – this is a fund manager; he is not a VC – so it is a very different type of return. A functional public market is very advantageous for this industry.
A lot of our investors are long-term, but they certainly do appreciate liquidity. We are fortunate that our investors are still firmly in the black. It is not exactly a consolation, but when [your stock is] less down than your peers, there is a certain tiny amount of consolation in that.
Andrew Hirsch: But it depends on what part of the public market, because as we all know this is a really risky business. Things rarely work the first time and it takes patience. So, if your capital base is people who are looking to invest, and you’ve got a data inflection point in six months, and I am investing for that data inflection point, that is a hard thing. Because if [the data] doesn’t go the way you want, then they’re gone and then you don’t have the support.
They come in all different flavors; they come in the fast hedge funds, that are in and out [of the stock] on every little thing. They are trading around earnings; they are trading around data. They can be helpful in an IPO to bring capital on board, but they are not there to help build your company for the long term. I think the key is to really find those investors that believe in what you are doing, believe in your technology, get that it might not work the first time, and that are going to be willing to put the second and third dollar in. That is to me what is important. Those investors are there, and they have always been there and they are still there.
I think the difference now versus when we went public in September 2013 is that a lot of the generalists are gone. I think the generalists came in and drove up these valuations, because they were looking for returns that they weren’t able to get anywhere else, thanks to the large cap biotech earnings growing rapidly and those stock prices following, and that brought all the capital in. They have all gone because the [biotech IPO] class of 2013/2014 they have used that capital, they’ve gotten data, not everything worked – surprise, surprise – and the generalists ran for the hills. They said, “Wait – this isn’t riskless?”
Now you are back to a more normal [stock market], which is healthy, where not every company that files an S1 [registration statement with the US Securities and Exchange Commission (SEC)] is going to go public and get a 40% bump on the first day of trading. That’s healthy and I think that’s a good place to be.
Ward: What I am trying to understand is, are we more confident that the industry is going to be able to raise money this year? We see it go up and up and up in terms of the amounts of money that’s been raised. Is it going to be more difficult this year and if it is what does that mean for the way that you guys are going to do your business?
Ken Horne: By raising money, I think valuations will go down, because optionality has gone down. You can’t go public as readily as you could last year. So as a consequence, the VCs will give you a haircut for sure in the crossover pools and they will shift back to doing whatever they were doing two years ago, with a few exceptions.
It’s playing musical chairs with 100 people and three chairs. There are not a lot of great places to put money in, but there is a lot of it floating around, so there is still money to deploy. I think you just have to be more cognizant of what pools of capital you look from.
We have got a couple of VCs, but mostly [our investors are] family offices. There is a bunch of China funding and we’re talking to all kinds of different people and not because I feel strongly this way, but because for a matter of circumstance we didn’t go public. I am happy from the other side of that, which is I can prepare for winter now and people aren’t going to be checking on me every quarter to see what happened.
We are going to go out and raise as much money as we can in private markets because with whatever has happened this year, I don’t think it will be as bad as 2007/2008, but it could suck the next few years. And we know to go and get as much money as we can right now, and I think there is plenty of it out there, I just think the valuations are lower, depending on the pool. VC guys, I would expect a haircut. Family offices, they are investing for the grandkids. If they like the story, I don’t think they care that much.
Charles Stacey: It’s not really the number of investors that we can raise money from in the West, but also the world isn’t that small. So I am looking at raising funds soon and I’ll be in Asia as much as I am going to be in the US. There is proactive interest. Geographically there is a lot of options for companies to raise money.
Purcell: Are you guys spending a lot of time in the Middle East?
Stacey: I am not personally, no.
Purcell: You would rather be in Asia than the Middle East?
Stacey: It is just where the interest has come from, for us.
Mark Litton: Somebody once told me, and I thought it was excellent advice, valuations have never killed a biotech company. I mean, if you think about it, it’s your clinical data that kills a company or safety.
The truth of the matter is, it’s just a valuation discussion. I think biotech and innovation will continue. Sure, you might have to take a haircut, maybe you don’t make the profit that you want to for that year. But in our field of drug development, it is many years. Even trials, Phase III takes two years. It’s a long-term play and you have to weather it.
Jackson: So you have your money and you are out looking to do deals, what is impacting you? Is this finance market impacting you? Are you seeing pharma look more at whether or not the drug can be paid for? What is it that’s impacting dealmaking right now, and is it for the better or the worse?
Horne: I think capital availability and valuations going down is actually going to foster M&A, so I expect more M&A this year. I think the biggest influence, not that it impacts me, but I would hazard to guess it is going to impact some of your mid-size companies, is the exploitive consolidation that is going on at the top, because that locks up those two companies. They could probably deal with the likes of our size, but they are not going to go and do billion dollar deals when they are merging, and it takes six months, nine months [to close a big deal] and they are out of the [dealmaking] picture. Pfizer-Allergan, Shire-Baxalta, all of these things just, the number of big buyers …
Ward: We have to remember there aren’t that many of them anyway who could ever be a big buyer. Just think about how many big partners who you would actually be able to sell your assets to.
Purcell: You are saying it’s the last of them now?
Ward: Yes, there is a lot fewer companies.
Horne: But the companies in the top 10 to 50 are bigger, so that helps, but the top 1 to 10 companies are now the top 1 to 5.
Purcell: In the last few years we have tripled the number of billion-dollar companies by 3x, so I am not so sure I agree with you.
Ward: Are we going to see a depression in terms of the deals that biotechs can do? Will we see a shift away from it being the pharma guys having to pay top dollar?
Purcell: I don’t have the math with me, but if you assume your drug is going to be a $2bn drug and let’s say you get a 20% margin, so $400 million. Then let’s say you’re five years or seven years away from getting a product [launched], and let’s say you have to discount that back, because of the risk, by 20% to 25% or something like that, you start to do that math and the present value of some of these companies is tight. If you just give everybody the benefit of the doubt, it’s a $2bn drug, or it’s a 20% margin, then just discount it back to today, what you find is that some valuations are hard to swallow or explain.
Horne: I still think even with all of the consolidation at the top, if you net out all of the mega-merger stuff that’s going to happen this year, because number 10 through 50 is bigger, and because prices are going to go down, the people who are looking to buy their third asset and fourth asset who can actually stomach [a high valuation]. You know, $500m is not something to turn your nose up at, it is a big outcome, mostly, depending on what it cost to get there. I think there will be a lot of M&A this year.
Purcell: You think there is going to be a lot of mid-sized M&A this year?
Horne: I think there will be a lot of people who can step up, because they are large enough now and because valuations have come down. I think people will step up. [Fully integrated biotech companies (FIBCOs)] are back on track now.
Litton: I think what might be interesting, and I will play the devil’s advocate on this, is that I think debt capital for big pharma is still very, very cheap, and so as you get more pressure, I think big pharmas have also been very conservative. Not to say there isn’t going to be deals, there will be deals done, and I think they look at it and they say, “Oh, gosh. That is 30% less than when I was looking at it six months ago,” so there is some appetite to that.
But I have also found the interaction, and this has happened over the last two years, much more, I really want no risk associated with this. I will pay for that, because when I’m borrowing the money, whether I am paying 20 basis points or 25 basis points, I want that asset so that it’s completely de-risked.
Purcell: So your devil’s advocate thing is that pharma is only going to buy more de-risked assets, whereas in the last six months they have gone earlier.
Litton: Yes, any group that has done a lot of deals, they are going to become a little bit more conservative.
Cohen: So I think big pharma have very easy access to money, etc. I think the challenge there is, what we have seen in the last couple of years is they go through these fads, where if you have a CAR-T program they will buy it, if you have whatever [is popular] they will buy it. I think the challenge has always been, what if you don’t fall into that box? What if you have a first-in-class asset? So that has always been the challenge, so you have to work harder, you have to de-risk it more, but the money is there, the prices are there.
Big pharma always do pharmacoeconomics; I would be very disappointed if they don’t do pharmacoeconomics. So the assumption is they know if it is going to be successful or not. I humbly say that the biggest problem of big pharma is that they are big. These are gigantic organizations, and especially when one swallows the other, I think nine months [to close big mega-mergers] is optimistic, I think three years is probably the level to which it takes. So doing deals with mid-sized players is actually sometimes much, much easier.
Litton: You have to force big pharma to get off their butts, and I worry if those mid-sized players stop doing deals, then it slows everything down, and that was where I was going.