During the past five years, the biotech sector raised some $400 million—twice that raised in the prior five years. 2018 saw a record number of new molecular entities (59) and, during the first half of the year, capital flowed readily. During the second half the story changed and nearly all who invested in IPOs lost money. Nonetheless, we just saw the largest IPO ever and BMS acquired Celgene for $100 billion. Despite the hiccups, these are still great times for biotech, according to panelists at Monday’s luncheon plenary at the 2019 Biotech Showcase.
James Sabry, global head, pharma partnering, Roche put a big pharma perspective to the situation. “There are cycles in evaluations. We’ve have five years of both an economic and technological upcycle. Now we’re starting to see some volatility. Valuations are coming down.” However, there has been a discrepancy between the actual and perceived value of companies for the past three or four years.
That discrepancy in valuation had a chilling effect on mergers and acquisitions. Deloitte’s recent report on the return on invested capital for big pharma’s late stage portfolio hones the point. “If you don’t get more than 6 to 8 percent from your R&D investment you’re destroying value. Last year’s valuation was 1.9 percent and the year before that was 3.2 percent,” Sabry says.
Partner with an eye to the future
“This is where partnering comes in,” he says. While there’s value in innovation, potential partners need to think clearly about how to manage innovation and those partnerships.
At Sutro Biopharma, “Partnering was critical to our success,” William J. Newell, CEO, says. “You don’t know where the next funding is coming from, and relying on venture or crossover investors exposes you to risk that affect those investors.”
Partnering isn’t a complete solution, of course. “If you partner every asset, when you want to excite public markets, you’ve already given everything away,” Newell says. He advises partnering some assets, licensing others and finding multiple sources of funding.
It also helps to be a platform company. “They have a real advantage in any market cycle,” Newell continues, “because they can do things that single product companies can’t do to build value.” Sutro’s work with Celgene on the CMA antibody in 2016 is one example. “We had never worked on that target, and now the product is headed into the clinic in the first half of 2019. You don’t have to sell the ‘thing.’ You can sell the capability.”
That’s a good strategy for the capital-limited environment that some of the panelists say is likely for the coming few years. “Keep something for yourself to generate long term profit,” Sabry advises. “The tendency is to partner your best product, but keeping it may be best for you.”
To get the most out of an asset, it’s important to invest early in the right things, Michelle Keefe, president, commercial solutions, Syneos Health, emphasizes.
For example, many companies don’t understand their mechanism of action (MoA). That was fine 50 years ago, but the environment has changed. Now, to raise maximum funding, companies must have a good understanding of their MoA.
“Clinical development is very important, but companies also need to think about the market they will launch into as well as to invest into their other assets.” Specifically, understand your broad group of stakeholders and apply commercial insights to the development process. She invests for the long-term, she points out, and expects the companies she works with to take a long-term, company-building approach themselves.
That includes thinking about what happens to the company two or three years after going public. With private financing, companies work with a handful of investors who typically understand the market and the industry. After an IPO, that no longer is true. Instead, they interface with thousands of investors, many of which are generalists hoping for a quick return.
Pappas, a venture capitalist, advises companies to remain private as long as possible. “Venture capital is the most expensive capital you’ll ever take on board, so why do you want it?”
The reality, however, is that eventually, companies exhaust sources of private capital. Venture funding is the next logical step. “You reach a different investor—one that can tolerate risk. Private investors’ resources are more limited.”
Foreign investors into US biotech come with added risk, in the form of mandatory reporting requirements to the Committee on Foreign Investment—US (CFIUS). Specifically, companies must report all their foreign investors from all countries, regardless the size of investment or the degree of control they gain over the company or its research. Reviews may slow deals. Recent headlines suggest this is chilling foreign investments into critical US industries.
Consider political winds, too
“Policies in Washington, DC, can have macro effects on our industry,” Newell cautions. He’s on the board of BIO and chairs the California life Sciences Association and says drug pricing is becoming a hot topic. “The champions in the Republican party who used to understand innovation and the need to avoid price controls, and the President, will sing with the left side of the Democratic party,” in response to steady reports of pharma companies raising their prices “four six, eight percent across the board.” So far, the industry has held price caps at bay, “but that wave will hit the shore. Our industry needs to know what it will look like, how to adjust and how markets will react to this new normal.”
The ramifications affect investors, too, Sabry says. “There must be a dialog among civil society, pharma, payers and providers about how to deal with price controls. This pending change may not affect biotech companies immediately but, in the long run, is an important issue for our industry to take on.”
Unless pharma is part of the discussion, Newell predicts “something will be handed to us that will be hard for the industry to recover from.” He mentions a chill on earnings; reduced monies for internal investment, acquisition and licensing; and less investment into the industry as likely outcomes. “Markets hate uncertainty, so get as much capital into your company as soon as you can, and be ready to weather the storm.”
