Financial perspective of 2009.Paul Larsmon:
Hello I am Paul Larsmon it's Wednesday December the 30th. Welcome to PharmaTelevision news reporting worldwide on the business of healthcare. We are taking advantage of the holiday period to run a series of special programs in which leading industry figures reflect on the year that's passed and look forward to the one that's to come. Today a round table discussion with three wise men who've been extremely close to the biopharma scene over the last year, PharmaVentures Fintan Waltonis asking the questions. Over to you Fintan Walton.
Fintan Walton:
Thank you Paul Larsmon. On this show I have Andy Smith, who is with AXA Framlington.
Fintan Walton:
Sam Fazeli, who is with Piper Jaffray and Stephen Parkerwith Celtic Pharma. Welcome to the show. Gentlemen 2009 has been an interesting year for both the pharmaceutical and biotech sector, each of you've got your own perspective of that from a financial perspective and you're in the " you are a Fund Manager for a large fund AXA Framlington, how would you sum up 2009?
Andy Smith:
It for an investors perspective it's seems to have been a reasonably tough year, not an easy year by any means. There are certain stocks as the investor in a fund if you didn't hold the year would be very uncomfortable, so for instance at the start of the year we didn't have Genentech in there which got taken up by Roche [
PharmaDeals ID = 30853] in May that and if you didn't have one of either for example Dendreon or Human Genome Sciences so if we didn't have any of those three in your fund in the year and luckily we had two of those, this year would have been very, very tough for you in performance wise.
Fintan Walton:
So is down to just a few performers?
Andy Smith:
Well this year it's certainly been down to a few performers either way so those are the positive ones of the year there were quite few others that were you know that could have damage performance for the year.
Fintan Walton:
So I mean obviously when you went into 2009 we just gone through the what happened in the end of 2008 which is " what was your approach to that, obviously this is, it was opening up the new game?
Fintan Walton:
And did you have to become smarter or anything like that?
Andy Smith:
No I think you just have to become different, I think you have to think of every year as you approach has been different to one that just gone on. So when I came out of 2008 I was thinking we've done well this year because we stayed in the big cap most profitable names the Amgen, the Genentech, the Gilead and the Genentech and they performed very well for fundamental reasons through the year and there were people thinking there is no economic sensitivity to biotechnology companies. And as we just entered into the first part of 2009, I was looking for recovery in the markets at some point and I would still say I am still looking for that, but I position the portfolio till to date if you like towards slightly higher built beta stocks as we went through, so more mid cap companies rather than and that's really a move from something like 75% profitability to 72% profitability or 70% profitability as we are today not, not much of it but are positioning really.
Fintan Walton:
And you are on the basis that you just saw potential growth in the stock on that " on those?
Andy Smith:
Well I suppose on the basis that at some point people would want to want high beta stocks in the recovery and, and would not be as keen as they were on the large cap of things that's last year, yeah.
Fintan Walton:
Okay. Now Sam Fazeli at Piper Jaffray you are looking at various things here, you are looking at both private companies who are looking to be financed, you are looking at companies who aspire to go into those public markets, from your perspective Sam Fazeliwhat was it like?
Sam Fazeli:
Actually I am going to echo exactly what Andy has just said. If you look at the performance of the various industries that we run sub market caps up to billion, billion two et cetera and the large caps cutting out the kind of numbing effect that the bigger caps have on the small caps when you just look at the Nasdaq biotech for instance. And we found that exactly as Andy's team had done and as Andy just articulated in 2008 you frankly were doing well if you stayed in biotech, biotech was especially in the larger cap because it was they were perceived to be less risky, but coming into 2009 not only smaller caps did better and then the mid caps and then the large, the large caps are putting a pretty benign performance, where as the small caps I think you know we are looking at 50, 60% up and lot of that was driven by a few stocks, so exactly that ones that Andy noted, that's exactly what we saw.
Fintan Walton:
So selecting those particular stocks again I mean is it just purely based?
Sam Fazeli:
It was very hard I must say because you know at the time when you look at Human Genome Sciences mainly what the lowest $0.40, $0.50, $0.60?
Andy Smith:
Well we invested at yeah I mean a low is less than a dollar we invested at $2.50 and they are under 30 just under 50.
Sam Fazeli:
Under $30 now. And I am not sure whether this is true or not, but I think at least our analyst on that name was probably one of the last bulls standing. And, and even he kind of capitulated very near the end, because everybody knew that the drug they were trying to develop, the indications they were going for Lupus is so called for one that a better phrase a graveyard a lot of the drugs (indiscernable) like sepsis. And so I think very few people were really right on that and many people got cut short, so it was a stock pickers yeah.
Fintan Walton:
Right. So Stephen Parkerfor you then, this must be incredibly encouraging for biotech that funds can do so well?
Stephen Parker:
Of course, of course although I think that looking back on the year in a funny way the private markets and the VC funded market has not been hugely different to the previous couple of years and clearly that one or two very attractive exits and then certainly one or two funds working around with great broad smiles in their faces. But I think in many ways it's un " it's the unusual aspects of the year is this is year that the private markets sorry public markets have sort of captured the headlines both in terms of the shadow that the big pharma mega mergers at Pfizer and Wyeth [
PharmaDeals ID = 32282] and Merck and Schering-Plough [
PharmaDeals ID = 32697] have thrown and clearly where they lead and awful lot of the industry follows and both the good and for bad but also of course we have seen one or two very interesting science of follow on offerings coming back into the market, just in the UK context as a substantial fund raising by Vernalis in the spring and very interesting raising by Proximagen of course in the autumn. And we've seen just in the last couple of weeks Proximagen has started to invest the money raised there once they're acquired the Cambridge Biotechnology [
PharmaDeals ID = 34001] business. So I think in some ways it's unusual that the public markets grab the excitement, you usually find the public markets are the one that are sort of putting in the solid, the solid numbers and there is the private markets in turn certainly have the stalls, for me I think say that the private market has been more of a sort of (indiscernable) this year.
Fintan Walton:
Right. So but then I suppose put the whole public market thing is just symptomatic of the markets in essence rather than reflection of the outstanding performance of biotechnology and pharmaceutical companies?
Sam Fazeli:
There is one element that I would say I don't know whether Stephen's agrees with this, but the private funds are suffering from one thing that I have not in all case, not in every fund, not in very company in that a lot of the valuations that some of the private companies are sitting at in their hands are at levels which are not congruent with the current status of the market. So having financed them in what were essentially the bull markets of 2006, 2007 attracting very high multiples or that pre money valuations, post money valuations which we were gonna look at it is now difficult to see that fit in and time will come hopefully that they're either mature enough to attract sufficient interest or they have enough " the market is hot enough for them to come into market, so that's, that's the nature.
Fintan Walton:
So there is an expectance by the current holders of stock in those companies that there has been a massive?
Sam Fazeli:
No I don't know whether they expected it or not but I think that's a kind of
Andy Smith:
That said that you what have been told by public market investors anyway.
Fintan Walton:
Yeah, yeah.
Stephen Parker:
But it is something you will see and this is the not the first time we've seen this of course in the " as we came off of the early 2000 peaks there was a lots of pressure on private companies on desperately holding on to valuations which simply couldn't be justified by capacity of the public companies.
Andy Smith:
And it's difficult to see really what's gonna turn that around in a short space of time obviously over a period of time the evaluations of private companies will come down slightly depending on the funding rounds and then perhaps the evaluations of public companies as a group will come up. But at the moment you know there are " you know we are in very tentative early stages of recovery in the biotech market and at the same time we have healthcare reforms still hanging over not just the biotech sector but the healthcare sector in general. And that really puts a lid outside of single stock events line Dendreon , like Human Genome Sciences, like Genentech outside of those we really you know it feels like we are trading alter at the moment waiting for recovery.
The Biotech cycle.Fintan Walton:
But Andy when you look at the future for biotech, I mean you know clearly biotech is still in the doldrums and it's as per say, Are we going to – are we just basically watching the end of the biotech cycle really here, I mean the companies you've mentioned, you know are essentially ones that have, have aroused from over a decade, decade of decades away ago and now we are just sort of left with a group of companies that never make it to the same levels that Genentech ever achieved?
Andy Smith:
Well I think that's an interesting point. I mean if you think along the development and evolution of Human Genome Sciences they came to the market was in '99 or 2000 they raised the billion dollars in an IPO and they spent the next 10-years spending that money and you know to ever one else said getting nowhere, that's where we were at the start of this year when Human Genome Sciences were trading below a dollar and then there are at $30, so this …
Fintan Walton:
Because they --?
Andy Smith:
because they have finally performed, because they finally had a product that actually worked in Phase III studies in an indication when no one as Sam said an indication where no one else thought it would work. And this is biotech you can go from demon to angel in the space of a few months.
Sam Fazeli:
But more often from angel to a demon.
Andy Smith:
Unfortunately yeah, yeah.
Fintan Walton:
Well that comes back to you, because you Sam I would say that you are looking at that interface between the rising companies who have aspired to become the Genentech in future and those that will ultimately get there and you know we've talked before on this on our sister program here on PharmaTelevision about the industry and I remember you were gloomy and you….
Sam Fazeli:
I thought they are normal, didn't you?
Fintan Walton:
And you are actually a little bit more cheerful today maybe, but so has 2009 really made it even tougher for biotech or are you – is there any element of hope that biotech companies can actually get back in there and get well financed?
Sam Fazeli:
So I don't really share your – what I think you threw at is big trust here with regards to is biotech dead is it gonna recover from this cycle. Let's not forgot that we were going through times which a lot of people where literally singing the death you know ringing the death bells of everything not just biotech great depression and all this, this is not quite precedented times as I guess every time we go through a cycle they are on un precedented the bubble burst which we created out of something. So I don't think there was anything, that anything in the past two-years that are specific to biotech that I'm going that worry me necessarily of course cheap capital doesn't exist as much as we used to do before, so I shouldn't expect to have so many biotech companies come along and getting funded with 0% conversion, convertible bonds with a lot of hedge funds just throwing money in it because it was basically free cash they were chucking in it anyway. What I do still see I mean I've just done this the markets are warm, Luke warm and warm I guess which one of us has a perspective on this to look at the IPO's that we've had so far, there been reasonably mature companies that represents the market or one we just talking about earlier one that just had a product approved and it's about execution and it can question whether they can execute or not. And the same thing happened last time you get what look like more mature companies first then I can tell you that there are at least six companies out there with really nice pipelines pretty advanced are the phase II or in Phase III or technology platforms that are really interesting and exciting. And I would be pretty optimistic about the possibility that these would be visiting the markets in the next 12 to 18 months provided we don't have any equivalent of Dubai world or whatever what is called effecting a very serious economy, that basically takes the rug from under the feet of everyone.
Fintan Walton:
You are talking about six companies…
Sam Fazeli:
It's just a number that I, that I …
Fintan Walton:
In Europe or in the?
Sam Fazeli:
Europe, Europe.
Sam Fazeli:
Yeah. So I mean you remember my perspective is Europe in the US I am sure there are, you know I know that are guys out there….
Fintan Walton:
Well certainly in efforts in the teams probably?
Sam Fazeli:
For sure or even if not more.
Fintan Walton:
But isn't, but isn't the great fear I mean all you need is two or three of those IPO's to go to South on price and then we are back out again?
Sam Fazeli:
We already have one.
Andy Smith:
We already have one and Omeros in the US done IPO to $10 and the scene five just under $6, actually say.
Sam Fazeli:
Well two of them Cumberland came in at 17 and is at 13.
Fintan Walton:
So that's what I am saying in the end you are you know we are not – we haven't got a right yet?
Andy Smith:
Yeah, yeah. I think that's right and I think yeah we are started – I mean the end of 2009 is an interesting stage you know we've seen the exit of Genentech this year the biotech sector itself is only 40-years old so you can't really say are we at the end, are we halfway through the period yet it's a bit too early to tell, but what we can say there are more profitable biotechnology companies today than there have ever been before there are drugs that three types of cancer that were untreatable 5 or 10-years ago. So the snap shot of where we are today is just a step a snap shot of the progress of biotech, and I don't doubt we would see progress next year, you know Human Genome Sciences drug may well go approved, Dendreon may possible get approved and that would be another you know from what we've seen this year the news we've seen from most of the companies this year doesn't stop this year you know they file, they filed or they will file and hopefully though they will get response with the FDA next year, so it's a progression it's an evolution if you like of the biotech sector.
Coming up with right biotech business funding model.Fintan Walton:
Stephen, if I could just go to you because clearly you know you are at – you are evolved in lot earlier stage companies and all the history that we've had over the many years and particular 2009 are we seeing an evil an evolving or change in the way of the business model, biotech business model, because when we look at the biotech model you know the first thing we got up against is that every drug that goes into clinical development is likely to fail, so you know that the basic statistics are there. So it then comes down to well we know what the risks are, nobody can say that biotech is an unknown risk factor we know exactly what the risks are, but can we come up with the right business model funding model for our biotech company that allows it to be sustainable so they can become these great companies in the future?
Stephen Parker:
Well to some degree I think you do have to ask the questions what's the desirable end game is? And whilst for management and for local and central government it's wonderful to have something that's enormous like Genentech which you can point to be suggested out. For investors the end game is the liquidity and I have to say without pushing to undermine all of my colleagues here I am not saying here about the IPO market returning in any meaningful way, because to me it's not whether you can have a primary issuance it's the volume that you can share the trading volume to support their shares after the event and I think that without a trading volume you just end up backing the debt by thousand cuts scenario irrespective of whether the company does anything wrong or not, you just seen it so many times before and I haven't yet seen anything wrong or not we have just seen so many times before and I haven't seen anything that suggests of this time around is entirely different. So I am not saying when I have to say. Going back to the point about how we grow something that's really largely important I remain – the elephant is in the room of course is the FIPCO and the model that the Genentech's and the Amgen's went out with when they were first rounded it was going to be the big wide hope and what everybody particularly in the 80's were used to raise money on the back off the FIPCO model I think is now largely discloset no doubt assuming the (indiscernable) approval next year we will certainly find the sales force being recruited, but none the less the swallows and summers, spring to mind I think that when you look at how drugs get marketed particularly in the climate of severe change in terms of healthcare regulation. It's very hard to argue that the best people to sell drugs and not to be pharma companies and therefore my feeling is that the natural exit for most of these companies is a trade sale to big pharma, but certainly most VC's would always prompt for the certainty that comes to the trade sale even if there are milestone payments follows not just one bullet to the uncertainty of the markets where you are at the mercy of what everybody else is doing apart from what the company itself is doing, so I suspect that actually the future of biotech is highly creative, very beautiful but small.
Fintan Walton:
So companies will never get to the size of the Genentech again it will be a company that – it's basically a product development company into clinical proof of concept may be with a number of products and then it go?
Stephen Parker:
Certainly that's the model that we have chosen to follow, I'm not claiming it's the only solution and as I assume surely we will see plenty of exceptions to prove the rule. I do believe that's what will be.
Opportunities in Asia.Fintan Walton:
Sam from your perspective looking at – if I can just move just away from that just looking at other issues I know that you focus on Europe but when we look at China the emerging markets and so forth are there companies emerging which are biotech like or entrepreneurial like but are exposing that opportunity for pricing – for pricing for just simple drug development, I mean are we getting European biotechnology companies for an example looking at the opportunities within Asia whether it's from an investment perspective because there is an opportunity to take their businesses there in and get access to lower cost research and development may be not, I don't know, what's your view?
Sam Fazeli:
I will spend a little time there looking at this. One thing that's struck me was that the investor attitude to risk is not quite the same there. They are very much focused on revenues and potential property ratings so they are a lot more – I'm just saying there, I'm referring the whole region here. There is less appetite for intellectual property investment at the moment to the degree that we seen in Europe and the US. I'm pretty sure that will change over time and I think they are doing the right thing in terms of focusing on what they can actually monetize today. So if I say that I have you know 10 Chinese biotech companies which have the same shape and business model as European biotech companies I might be exaggerating or and US in terms of I'm going to spend six-years doing R&D on the particular drug or a mechanism of action and then try and bring your product after five more years to market, that I haven't seen very much there. What there is clearly there is that growingly affluent, increasingly affluent population which I think anybody who can and has got a product to potentially market to is looking at, now clearly the better of manufacturing there to gain the economics and sell the product – to sell the product there however sometimes the transfer of products that are manufactured in China don't necessarily work for coming out into Europe, you know we already buy their active ingredients often out of China and India just pressing tablets in China I don't think necessarily will make much difference. So I think of giving you mixed answer there but I hope I've answered your question.
Fintan Walton:
No, no it's good.
Andy Smith:
Those markets have found an exceptional niche in modern drug development as you think, you know as an investor I ask companies where do you do your medicine and chemistry, where you do your clinical trial supplies, and I'm comforted by the fact that they do in India and they do it in China because it keeps the cost down and the quality is just as good as you could have ever done in an Western market.
Fintan Walton:
Stephen, you can say anything?
Stephen Parker:
Slightly different perspective in that I was fortunate enough to be over in China about three weeks ago. And from my perspective in certain conversations that I had with various people I think the feeling is that the science space has got to a point where it is competing pretty much with certainly many if not most countries in the west. The discovery process is coming on very well and they are following recognizable processes in that way, what I think is different at the moment is they haven't yet got to the point where they are developing drugs consciously to address global markets, I think there is a tendency to just rely on that the Chinese market at that stage.
Sam Fazeli:
It's big enough.
Stephen Parker:
This is indeed.
Sam Fazeli:
The problem sorry that I found was not that it was lacking, the problem I found is that the people I met were not particularly comfortable with investing the way that our venture capitalist do at the moment.
Stephen Parker:
Certainly and as far as there are funds over there, they've tended to have sort of quick flip type of investments, I agree with that.
Is US going to lead biotech turnaround?Fintan Walton:
May be we can just focus little bit on the US. and I'm going to turn to you Stephen Parker on this, when you think of your US colleagues operating in the US generally and then looking into 2010 is the US going to lead biotech out of the doldrums this time?
Stephen Parker:
It's always very, very hard to see anybody else doing it, it was fundamentally the capital markets are more efficient, there are many, many more several more options for dressing gaps in capital market that we don't really have over here. And the sheer size and the science space in the States of course is so much bigger it was very interesting to reflect when a few years ago with Chris Evans I Co founded the UK stem cell foundation one of the things that was exciting people at time was the, that the Bush restrictions on stem cell alliance and there was just frankly very naive assumptions that for once the UK and Europe generally were ahead of the game and ahead of the States if you actually look at the publication record at that time I think America was responsible for probably three times the total publications size than everywhere else in stem cells. And that was the subject though was considered they went as far ahead as usual. So it's very hard to see how it wouldn't come out of the States, does that mean we rely on the States only, no I don't think so I think that science is global. Anywhere that has – there is no monopoly on good ideas and as we've seen over the years I mean very, very great companies such as Glaxo were founded – well not founded but are what they are today because of one drug, I mean it only takes one real winner to transform everything, so there is a likely hood of that great idea if it happens in the States getting all the way is frankly high up because of the way the funding is there then if it happened in somewhere in Europe, but there is no reason at all to say that it has to be that way.
Fintan Walton:
I sort of just round off then with 2010 and where we see ourselves as an industry and I'm talking about all the pharmaceutical industry in general but also obviously specifically the biotech's sector of that industry, Andy, what's your view as a fund manager looking at stock?
Andy Smith:
Well for 2010 it's a big of a water shed year if you like, because it's the year before many large pharma companies have their patent cliff which starts in 2011, so I would have expected once the, the big two mergers or big mergers of four companies in pharma happened and always happened well they are actually betting in and combining, they will be looking towards that patent cliff in 2011 and when you do that you got a – you can accelerate your own R&D to a certain extent, but you got to acquire new products, new close to the market products.
Fintan Walton:
So more consolidation?
Andy Smith:
And you would expect more consolidation, yeah.
Fintan Walton:
And you expect that as big pharma big pharma, are do you see big pharma going for some of the more different?
Andy Smith:
No I mean there may well be one or two big pharma, big pharma collaborations yet to be done. There might be arguments for against them being done, but I think it's a lot easier at the end of the day to say big pharma, big biotech as we did a couple of years ago or perhaps more frequently big pharma mid stage or small cap biotech, because they are easy to digest, they are easy to transact.
Stephen Parker:
And there is the obvious projects that the mid size biotech especially don't have the sales forces and that the – it's a huge cliff of investment to get there.
Fintan Walton:
Right. So you are expecting the mid size to be targets?
Stephen Parker:
I would think so.
Fintan Walton:
Right. And Sam Fazeli?
Sam Fazeli:
Okay, so I would like to add two points from me. One is with regards to consolidation, my money is going to be on companies who already have alliances with pharma companies. If your Phase III trial reports positively or your Phase III reports positively and at some point you only get 25% royalty to a biotech company having just going into a time zone where you are losing some of your top line I think what you would rather not do is, or what you would rather do is pay from your balance sheet to pop up your P&L by 25%, that's it but that's always a lot easier to do mostly you have some more clarity on the right.
Fintan Walton:
Yeah, when the risk is when it's being de-risked?
Sam Fazeli:
So and the second point I wanted to make is going back at few steps here with regards to I've been thinking about this trade sale of private companies, the more VC say that and more the public markets are going to be skeptical when the companies that they haven't sold come for IPO. The problem I think is that there is a little digging of a hole going on here which I think has to be very carefully managed, because if we end up in a situation where a company instead of doing an M&A deal, licenses a product to a pharma company the very fair question by investor should be well why didn't they buy it if it such a great idea but the reality is the pharma company does not have to make their decision, they are great sales forces which I feel you said yourself, but what they wanna do I think is by betting on technology and science elsewhere not to take the risk in necessarily internally, if the thing doesn't work you could walk away from it, you don't have an army of people who still (indiscernable) to the technology and want to carry on doing the research. So we have to be a little bit careful here from the VC perspective I say this in all humility having never been a VC myself, I am not actually experienced being on that side of the table and I have many friends you are in the VC side and I hear the same thing from all of them, that is a little bit of a flow or cracking the odd with that they have to be very careful with it.
Fintan Walton:
But there is also endorsing the fact that the IPO market is definitely over that really?
Sam Fazeli:
Well that's always been the wrong thing to say, nothing is ever over in capital markets it goes in cycles.
Andy Smith:
And evolves evolved I think, I mean if you think back three-years the periods of time where private companies were acquired virtually on mass by big biotech for a reasonably large sums where you have GlycoFi in the [
PharmaDeals ID = 24165]US, KuDOS in the UK and Domantis [
PharmaDeals ID = 25980] though you know I think pharma stepped back from that period and said well that was great we got what we wanted, unless we are bit more financially savvy about how we go about, as Sam said option, options on products rather than acquiring the products themselves.
Fintan Walton:
Sure. Stephen, how do you react to Sam's remark about that?
Stephen Parker:
I think there are two very different scenarios, I think we have a platform company with a technology I think Sam is absolutely right, it is by an option. But equivalently he said it himself where you got a company there is got a product coming through, the gap in the pipeline is, it's simply too rich to meet they will buy at that point.
Sam Fazeli:
Absolutely, absolutely.
Fintan Walton:
Thank you very much indeed gentlemen. Thank you.