Notes from the BioInvestor Forum October 9-12–Biotech Investing
The BioInvestor Forum held every year at this time in San Francisco is one of the premier events for emerging companies. Over 500 investors and companies attended with 7 major sessions on investing and innovation trends. Over 100 private and public companies made a 20 minute presentation.
The biotechnology sector is having a great year with many ETFs and mutual funds up 35-40% YTD led by larger cap companies over $5B in valuation.As I wrote in an article in Seeking Alpha,” Who Knows About the Bull Market in Biotechnology?” there are several reasons for the bull run such as M&A, earnings growth for the top tier companies, a limited number of quality companies, and FDA approvals for new drugs. But participation in this market is limited to “specialist” investors and has not migrated to more generalist money managers. Although financing has improved with over $12.8B raised in the current quarter (BioCentury BCIQ), 71% was debt. IPOs are still not available except to a few exceptional companies with two recently and $183M in Q3 2012. Follow-On and PIPE offerings in Q3 were 15% of the total raised for about $2B. Venture funding for the life sciences remains depressed at 12% of the total or $1.6B.
Continuing the theme from last year, the financial sessions at BioInvestor Forum provided commentary on the funding gap for early stage private companies and venture capital. The market for life science investments has drastically changed since 2008 and financing trends were discussed:
- The rally from the 2009 bottom has been primarily in the large caps that have revenue growth but M&A has also boosted some mid-caps.
- A strong bull market should also spur a rally in small cap stocks.
- A big inflection point for stock appreciation is Phase 2 data.
- There is less expectation for an “exit” with an IPO.Even with an IPO the investors may have to support stock rather than exit. Private companies may have more control over their fate.
- Venture investing has recently seen more outflows than inflows ($4B in, $5.5B out). Institutions need to keep their powder dry to fund their Company portfolios for next stage. Is the VC model broken?
- The odds for a biopharmaceutical company to go from pre-IND to approval are 1 in 15.
- “Super-angels with ultra high net worth are a source of funding but access is limited. Angel funding in general is high risk because of the scientific expertise needed to evaluate deal.
- Clinical trials and experimental drugs need to be highly efficient so that only 100 patients can prove efficacy. Clinical development takes too long and is very expensive.
- Government Federal and State) funding through grants and SBIRs are an important source of early stage funding.
A major session focused on the “The New Pharma-VC Model For Biotech Investing” provided insight into corporate partnerships between pharmaceutical companies and traditional venture capital funds. Because the big pharma model is increasingly less productive with respect to R&D funding, companies are financing large funds that will invest in early stage technology and products. One example is Index ventures a consortium with $200M in funding from GlaxoSmithKline Plc (GSK) and Johnson and Johnson (JNJ). A point was made that this model has a financial objective on its own rather than a strategic objective such as a portfolio or technology match for the investors. Advantages of this model are flexibility, asset mix, clinical staging and a focus on a single asset. Another example is Third Rock Ventures a megafund supporting over 30 early and mid stage companies with almost $1B in funding. Sanofi (SNY) recently partnered with Third Rock to launch the biotechnology Company Warp Drive Bio. Merck also created a $250M Merck Research Venture Fund.
The bull market has created a lot of interest in biotechnology and new investing models promise better focus and less risk for big pharma. In 2011 a total of $4.82B venture money was invested in biotechnology up 24% from 2010 and although financial returns take longer than technology,2012 should show continuing progress.