Print“When the company is generating really interesting data and they are really going down the risk-value curve, that’s a great time for us to be plying more money in. Instead we are looking for the exit door. That’s something we need to work on ourselves.”
Large-cap biotech stocks may be performing well, but venture investors are moving away from early-stage companies, according to a final panel at the BIO Investor Forum in San Francisco, which concluded October 10. Two strong IPOs that just happened notwithstanding, public markets remain highly risk averse and generally have little interest in small-cap companies, they say.
The final panel, in which several venture capitalists and one fund manager gave their views on what lies ahead, centered on where value could be captured for biotechs. The message: there is money to be had, but your product had better be differentiated and your target patient population well defined. Payers will only pay for differentiated products, says Srini Akkaraju, managing director at New Leaf Venture Partners.
But capital efficiency matters too. Bryan Roberts, a partner at the venture firm Venrock said the question is how much capital it takes to get to compelling data. “If you choose the wrong place to play,” he says, “you are never going to get compelling data.”
The recent run up for large-cap biotech stocks is largely because many investors fled the market since it bottomed out in 2009, according to Evan McCulloch, portfolio manager at Franklin Templeton Investments. “Valuations just sat there while there was fundamental improvement and then—boom, M&A started,” says McCulloch. “Pharmasset was acquired by Gilead, then Inhibitex, Human Genome, Amylin. I think it woke up all the buyside.”
But the momentum in the valuations of the big biotechs, those above $5 billion in market capitalization, is not transferring to the smaller companies, those with $200 million or less of market value. None of the panelists expect to see an out-performance of small-cap stocks. One reason is that pharma is waiting for companies to be de-risked before acquiring them. That’s what happened with Amylin, says McCulloch. Its stock sat at $10 a share for a long time before Bristol-Myers Squibb wanted to buy it for $22 a share.
Venture capitalists are building companies that they hope to partner with or sell to Big Pharma, but Big Pharma today holds the cards. “The dynamics of what we think about for where we put money in biotechs have much more to do with where our ultimate customer is going to be,” says Akkaraju. And the customer is Big Pharma.
But Big Pharma is only buying a small percentage of the companies backed by venture capital. They are slashing internal R&D and increasingly relying on in-licensing to access early innovation.
The VCs see lots of opportunity, but they are playing in a difficult space themselves. “We have a very steep curve between risk and value that we’re playing on all the time in the private side,” says Akkaraju. “We’re willing to wait until that time to go up that curve but as steep as the curve is, there is only a short period of time to turn that curve—make that inflection.”
All three venture investors on the panel said they were quite willing to invest in early-stage companies, especially if it was for an innovative product targeting an unmet need. But there is more money than good ideas, says Roberts. “We get paid for taking risk at the end of the day,” says Roberts.
“The way you really create value here is to get through risk gates that create a product that people didn’t think could be made for a big unmet need that people thought if it could be made, there would be eight people making it.”
But the structure of most investment funds means “fundamentally we are investing in a 15 year business and trying to stick it into a five year box,” says Akkaraju. He acknowledges that they should be investing for the long term and not depending on pharma coming in when they think they should.
“When the company is generating really interesting data and they are really going down the risk-value curve, that’s a great time for us to be plying more money in,” he says. “Instead we are looking for the exit door. That’s something we need to work on ourselves so we can take advantage of what we’ve worked so hard to get to.”
The takeaway from the panel: hot areas are oncology, orphan disease, capital efficiency, and very high efficacy drugs; invest in things nobody likes today but will like in four years; and regardless of who wins the election, healthcare reform is here to stay.
October 12, 2012
http://www.burrillreport.com/article-outlook_for_small_biotech_remains_difficult.html
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