The biotechnology industry is “awash in cash… we are seeing cash, everywhere.” So said moderator Adam Feuerstein, senior writer at STAT, in kicking off a freewheeling panel discussion on the state of the biotech industry and the investment climate held at BioPharm America™ September 5, in Boston.
Panel members included investment experts Steve Abrams, partner at the Philadelphia law firm Hogan Lovells; Kevin Bitterman, partner at Atlas Venture, in Boston; Alicia Irurzun-Lafitte, principal at M Ventures, the strategic corporate venture capital arm of Merck KGaA, Germany; and Rick Pierce, of Cambridge, MA, founder of FEP Capital Advisors, which provides private equity and investment banking services.
The four addressed questions about who is investing, potential problems, very early stage investment, Chinese influence, and their own investment foci.
Is biotech awash in cash?
Bitterman, of Atlas Venture, agreed that the biotech industry is flush with cash. “We are in an extraordinary time”—both qualitatively and quantitatively. “Just about every quarter, we're setting a record in terms of private financing and capital inflows into the space,” he said. He described a “fascinating dynamic “in which, over the past ten years, “while the amount of capital invested has grown tremendously, the number of companies getting started stays flat—at about 100 per year.”
This is quite different from the tech industry, in which “two guys drop out of Stanford [University] to start a company in a garage,” and in which, in a good year, some 1,200-1,400 companies might be formed. In biotech, it takes many years to form a successful company. “It’s the talent of people, not the cash, that is most telling.”
Bitterman also pointed out that whereas a few years ago an investment of $50 million was considered “headline” material, today people don’t even pay attention to that. Feuerstein added that presently, even a $100 million dollar “A round” investment might not seem overly impressive.
Pierce, of FEP Capital Advisors, asked if a $100 million investment in a series A round wouldn’t put tremendous pressure on a small company.
Bitterman responded that a company receiving that level of funding “did not start three weeks ago.” Rather, it’s more likely that the company was incubated, developed in stealth mode for 18 months to two years. At Atlas, he added, “we start small, set up some clear milestones, run the killer experiments. The seed stage creates some very high hurdles. If we feel confident in deploying more of our capital, attracting a world-class management team, we’d then go out and raise $100 million at a much higher valuation….You can bet that a $100 million company is on the road to IPO.”
Irurzun-Lafitte suggested that for a company to bring in $100 million, it likely has multiple targets and exit plans, as well multiple goals in its work plan. Some companies need “a decent amount of capital” to have a chance of reaching their goals, she said.
Who is investing?
When Feuerstein asked where the money is coming from, Bitterman described three main sources:
(1) Specialist, public buy-side biotech investors whose funds have gotten much bigger
(2) Generalist investors who have watched the extraordinary gains and focus on later stage companies
(3) Less traditional investors from emerging markets—especially in Asia—who are looking at returns but may be less discerning. “They may not be aware of the risks involved in biotech investments.”
Pierce said high net worth millionaires and family offices are increasingly seeking to invest in the biotech industry, and that outside the US, governments are providing limited funds to help energize companies in early stages.
Abrams, of Hogan Lovells, agreed that in addition to funds from what he jokingly called the “biotech mafia” and generalist investors, American companies are seeing inflows of funds from outside the US, especially from Asia.
What could go wrong?
Several panelists chuckled when Feuerstein pointed out that “when you have all this money, there is going to be some bad decision making," and asked, “What could go wrong in this environment? What do you worry about?”
Irurzun-Lafitte answered, “Science.” As we get deeper into the biology, the genetics, “are we at risk of running out of ideas or of funding bad science or a bad idea?”
Abrams said that in a bull market, investors with extra money might not do proper due diligence; if companies fail, investors can lose money and “drag everything else down.”
But, Pierce countered, “We’ve seen some spectacular failures in the last few years” [in the Alzheimer’s space, for example, and in immuno-oncology]. In the past, such failures “would have taken the cycle down.” But, he said, and the other panelists agreed, recent failures have not inhibited investment.
Bitterman said he isn’t worried about investment or the availability of good science. What keeps him up at night is “the scarcity of talent.” That’s because “if you have more and more enormous early financings, they are going to soak up good people.” If you build companies with good fundamentals, the challenge is in finding the extraordinary managers, drug developers and scientists needed to ensure success.
Preclinical IPOs
Feuerstein asked if another potential challenge for the industry is a new trend in which preclinical companies go public “with nothing but promise and sizzle—” that is, with very limited data. While some such companies will be successful, he suggested, “it’s been more challenging for some clinical stage companies that do have data” to obtain funding—perhaps because “there's a lot more due diligence on protocols.”
In response, Bitterman said he is seeing “enormous fatigue” in the “blue chip” investment banking universe regarding “the preclinical story.” He pointed out that investors he knows are “hungry for companies that have stronger fundamentals, clinical stage assets and other things found in more traditional IPO candidates.”
Irurzun-Lafitte said that in Europe, many companies are “slow to go out,” and some don’t even think about it. While some should, perhaps, move more quickly, she finds the US trend toward very early stage companies going public “a bit scary.” Still, she said, “it’s an option. You just have to get it right.”
Chinese influence
The discussion then segued to Chinese influence on the biotech market. Pierce suggested that, much as in the US real estate market, there could be “dislocation” if Chinese investors continue to “push up” market investment—especially if there is no solution to what he termed “the talent problem.”
Feuerstein pointed out that the Stock Exchange of Hong Kong now allows pre-revenue and pre-clinical companies to trade; Bitterman said its rules are “still being written.”
According to Abrams, many Asia-based companies are seeking US funding and US companies are thinking of going to Hong Kong. Although there are currency and other restrictions as well as “transparency” issues regarding Chinese companies and the government, Hong Kong is increasingly seen as an alternative to NASDAQ, he said. Pierce pointed out that despite Chinese talent depth and new drug development, Chinese data and numbers can be “funny.”
Still, Abrams said, “It's worth noting that there's a lot of very sophisticated money there, and there are players who could become a really important cornerstone for investors and later stage rounds….The size of the (Chinese) market is too large to ignore.”
You can further tap into cross-border investment and collaboration opportunites at the upcoming China Showcase on January 6, 2019, in San Fransisco, California.
What are panelists funding?
Regarding his company’s investments, Pierce of FEP Capital Advisors described the formation of a new company that will work with Boston’s Dana Farber and Mass General Hospitals in a rare disease space around colorectal cancer.
Irurzun-Lafitte said her company, M Ventures, has a mandate to “get closer to biotech.” Focused on oncology, M Ventures is seeking “the big breakthrough;” “differentiated” solutions that have not been tried before or are “very clear.”
Bitterman said that Atlas Venture is interested in applying immuno-oncology biology to autoimmune and other diseases; emerging biology genetics moving toward more validated, trackable targets and the translational path. Atlas also invests broadly across small molecules, biologics therapies, smart chemistry platforms, and next generation biologics technologies.
The panelists agreed that mergers and acquisitions have been limited, of late, and that companies should consider how their products will be reimbursed much sooner than they are at present.
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