Print“Great companies will get funded,” says Matthew Perry, portfolio manager, BVF. “I’m confident in the next 12 to 18 months we’ll see early stage high value high science companies going public.”
If startup companies and investors were looking for reassurance at the BIO Investor Forum, held in San Francisco last week, there was little to be found. Although show promoters claimed attendance was up 5 percent over last year, sessions were sparsely attended and the mood was sober. The two day event wrap was an ominously titled session, “Opportunity or Apocalypse? Prophecies for 2012.” While entertaining, it shed little light on a huge problem facing biotech entrepreneurs and investors alike: making money.
For entrepreneurs, capital has become very expensive and the prevailing mantra of capital efficiency and return on investment weigh on every drug development decision made. For investors, the IPO is no longer an exit, and a long-term view is less tenable as limited partners need to see a return on invested capital.
Moderator Luke Timmerman got the discussion going by noting that biotech returns have lagged other sectors. He challenged the panel of life sciences investors to tell the audience what it will take to turn things around.
After a brief moment of silence, laughter erupted and wildly different views emerged. Bryan Roberts, venture partner at Venrock, said the problem in biotech is there is no existence proof for the 50x or 100x return. In most limited partners' portfolios, biotech is the “black swan” part of the asset class. Investors know that most deals will lose money, but there has to be a possibility that a few deals will give them returns large enough to cover their losing bets and still come out ahead.
Kurt von Emster, managing director of venBio, a small private equity firm, countered that biotech is gaining favor and the healthcare sector as a whole is attracting renewed investor interest as private equity returns revert to the mean. He noted two recent acquisitions (Adolor by Cubist and Anadys by Roche) as examples of investors getting good returns on their investments.
Matthew Perry is one of the biggest boosters of the sector. The portfolio manager of the Biotechnology Value Fund, which invests in small to medium public companies, is excited by what he has been seeing in the recent evolution of the venture market and wondered if the IPO drought was more a symptom of the quality of the companies trying to go public. “There’s health in the public markets,” says Perry. He pointed to Exelixis, a company that has reduced its size and is focused on one oncology asset, but has a $1.5 billion valuation because its asset has some really interesting data that has excited investors.
In his view, he would have rather seen Plexxikon, which also had a promising drug, become a public company rather than sell itself. While Perry finds the difficulty VCs are having raising funds troubling, he thinks that there have been too many companies started with “ho hum” assets, repurposing old drugs in the past 10 years, saying that doing so has reduced VCs returns. He also blames a shorter time horizon and VCs being too quick to sell companies as further reducing VC return on investment.
Perry is encouraged by a recent VC model, exemplified by Third Rock, where VCs are launching companies with exciting technology with enough funding to get them to a significant inflection point.
Ron Laufer, senior managing director at MedImmune Ventures, says there’s money to be made but wonders if the venture process can be scaled up. He says that there hasn’t been enough investment in the sector to build it to be a large-scale asset class. He notes that biotech VCs have a greater mandate to support companies that will improve healthcare—build the next generation of drugs, a mandate not recognized by the public. He doesn’t see government funding filling the gap.
Although the number of healthcare VCs is shrinking, innovative companies are still getting funded. Even Roberts, possibly the most pessimistic of the panelists, admitted that there are some hot areas such as oncology and rare diseases. The trick is to ask the hard questions and take risk early when it’s technical risk rather than clinical risk—an anti-specialty pharma in-licensing drug model, he says. “You want something at the end of the day that changes clinical care in a material way,” says Roberts. If he has that, he doesn’t worry about the FDA or CMS because they are easy to deal with if your technology can improve the standard of care—if you’re really saving people’s lives.
Looking ahead, Perry expressed confidence that in the next 12 to 18 months we’ll see early stage, high-value, high-science companies going public.
Kurt von Emster predicted that market uncertainty will push investors toward trade sales of their portfolio companies. He said 2012 is going to be a phenomenal year for the industry as it is very much a value play.
Matthew Perry noted that companies can still go public and sell a small portion of the company, as is the case for many of the recent offerings, making dilution irrelevant. All agreed that companies do not need a “window” to go public. There will always be public interest in companies with good business models and good products.
Finally, asked who will win the 2012 presidential election and what effect it will have, panel members refused to commit although all said it will have little effect on the biotech sector or their business models.
October 28, 2011
http://www.burrillreport.com/article-biotech%e2%80%99s_access_to_capital_difficult_in_volatile_economic_times.html
