Part 3: The future of biotechs M&As: The investors' perspective




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Video title: Part 3: The future of biotechs M&As: The investors' perspective
Released on: June 02, 2009. © PharmaVentures Ltd
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  • Summary
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Dr Fintan Walton, CEO of PharmaVentures, asked a panel of leading industry fund managers how they are tailoring funds to ensure maximum return and the future of biotech M&A. They discuss:

· Benefits of the current investment strategies used and new models for M&A
· Big pharma - how they use their cash in M&A and acquisition and licensing of products
· At what stage deals are being financed, and who is investing in early stage companies
· Relationships with investors on risk sharing
· When the "IPO window will re-open"
· Exit strategies, and where the most successful have been coming from

This panel discussion was the 3rd in a series filmed by PharmaTelevision at the thought leadership conference, "Financing and Deal Making in the New Landscape", held by PharmaVentures and UKTI at The British Consulate General in Cambridge, MA.
IPO market and focus on M&A.
Fintan Walton:
So a question for you Campbell, it is going back to this issue of exits and so forth, what's your view? Do you think that there is you mentioned in your one of your answers you never know the IPO market come back in 2010 or something got to miss quote into that but ?
Campbell Murray:
I said 2012.
Gordon Winston:
I was miss quoting you there. You know how realistic from your perspective is that going to happen? I mean ?
Campbell Murray:
I think about
Fintan Walton:
Shouldn't you now just sort of say look we are gonna pre bake deals for trade for trade sales, forget about IPO's and is there a danger because you need two different types of management different management for taking the company for a trade sale to one whose gonna take do an IPO?
Campbell Murray:
So I think what (indiscernable) done had a very successful IPO obviously not our industry but even in the you know the worst economic recession for over 60-years there is still IPO it's happening and last I heard they were up at least 10% and 20% from their offering price. So absolutely I think IPO's will come back. I am not we or our fund is not counting on it though as a financing mechanism for you know as I said 2012. So where ever we have the ability to influence with any of our portfolio companies are with new investments that we are going into. We are not interested in funding companies that have to raise capital again in 2010 and we are really aiming for a Q4, 2011 or beyond. To your point, should we just be focusing on M&A? I mean clearly that's where the most successful exits are really been coming from, not just in the last year or two but really the last five-years. But I think you never want to be in a position if you can help it as an investor where you only have one exit option and I think we should be long-term as an industry trying to rebuild the IPO pathway because I think it's -- I mean it's better for the pharma companies too, I think it's keeps everyone honest, it provides a very healthy you know yeah you just got to have alternatives. I think Mark said before you want to have options and it's good for pharma too. I mean, I think they want to see a healthy robust mechanism for financing. If we don't see the IPO window open up. I think long-term it's a very bad sign for the industry as a whole because it's definitely gonna impact the dollars going in, you know if the dollars going out there at some point and I think we are seeing it now and I think part of the reason why it's so hard to syndicate early stage deals is I am fairly confident that there are a lot of large independent funds that have recently announced, not a lot there only a few, but of the funds that have recently announced large close, closes on you know large funds I think their LP's are asking them not to go down right now and I think they are doing that because to be honest the last 10-years the data on returns hasn't been great since you got a lot of LP's now who are saying hang on, I've been in the venture capital for two cycles and where was my pie[ph].
Fintan Walton:
Where's the money?
Campbell Murray:
So we have to and it will come back. I am optimistic it will. But it's really important for the industry that we see the IPO window reopen at some point.
Acquisitions and investing in viable technologies.
Fintan Walton:
Right. If I could ask a question sort of general to Gordon and then open it up to the panel, basically earlier today when I was talking about our industry I was talking sometimes it's like might watching a car crash in a highway on our particular present analogy but they go my darker side but mergers and acquisitions between poor companies and rich companies, good things, bad things that you know if you're a poor company and you can't raise funds and you are struggling you know should a rich company or a company better off buy that company because you know it's valuation is low. What should happen there? What should happen in this slightly chaotic atmosphere where some companies are about to go through this, you rescue them through M&A?
Gordon Winston:
Yeah I mean, I think that this team has been accurate on several other panels that the end of the at the end of the day decision is actually about investing in technology and it's the viability of that technology and whether or not there is a value added that created from it. There is also again mention if you know the haves and the have not's in this industry the dependants talk about it all the time and I think that we are starting to see more and more of that though I think that there will be more consolidation, do I think. I think the better question is the technology -- is the technology there? I think if the technology exists they will interested to acquiring these companies.
Is failure a good thing for venture funds?
Fintan Walton:
Right. I mean Mark, if I could just pass the mike for a moment. Mark if you when you did your intro to your to Orion you are quite happy to say I would like to suggest that sometimes it's good to see bad companies go to the through it or am I misquoting you as well?
Mark P. Carthy:
I don't remember saying that. But however I would.
Fintan Walton:
I mean can I just say you know from the fund from a venture fund point of view if you are going into risk you know that you are gonna have failure, it's part of the equation so isn't failure a good thing for venture funds?
Mark P. Carthy:
No. I think first of all I think your previous, quite just rolling it into your previous question I there is great technologies out there. Pharma is probably bringing in 50% of it's pipeline from outside generally from smaller companies from academia and that -- a lot of that comes through acquisition and licensing but you know we'll role out licensing into the kind of general way of acquiring things and I think that they will be taking advantage of good products that can be available at reasonable prices at the moment and you are seeing reasonable amount of good -- good amount of M&A and acquisitions of products right now. And I think they are taking advantage of that low prices that are available. There is a bit of a clean up going on in the market, there I think I would rather see the products that are not very good going away and that could be a good thing and then people are not spending their time on that. There was a while where biotech companies would never die and poor products would hang around for years and years and continue to raise money. So in that regard there are something's that are good, that were happening in this shake out and maybe will focus people on what's important about a product in the future for example I think that we really need to listen we do need to listen to the commercial needs at pharma and what they are really looking for rather than just you know what can make a decent IPO and I think for a while that was when venture guys were investing in what can make a decent IPO rather than again is there a good market for this product? Does it have a good chance with the regulatory agencies? Does it have a good chance with NICE and the other pricing agencies that are out there? and all these factors that pharma worry about I think venture needs to start worrying about and I think they are and the lot of the products that are not making it in that regard will be shaken out and it will a better pool for everybody to invest in.
Biotech companies diversing into service side business and role of management.
Fintan Walton:
Okay. Ken, can I ask you, it's quietly different type of question related to that. I talked earlier about biotech companies standing on two legs, one is equity funding and the other one is through doing deals, licensing deals but there is a third, a third one and that is actually through may be a service based side to the business in other words a maybe a contract research organization or contract manufacturing organization. So if we're really going to spread if you guys are really going to spread your risks properly then you would want to give them three legs rather than two legs and shouldn't you really be encouraging more diversity and then and doing so shouldn't you be encouraging some of the nice good biotech companies to merge with companies which have got revenue streams? In other words make your companies more diverse?
Kenneth Greenberg:
Right. I mean I to address the first question directly which is should some of these biotech's get into service businesses and it's third leg and you know I think if there if the internal capabilities that the company has are consistent with the service business having that's fine, I mean typically what we find is that the skill sets needed to do whatever drug development, drug commercialization, research are not entirely consistent with doing a service business and that kind of management team gets distracted and they just not focused in it which just doesn't work, which is the problem of that level, I mean to me into some extent it's just too much tough for management team to handle, yeah.
Fintan Walton:
Is that a scalish [ph] you because I mean those pharmaceutical companies have three legs they got to sell products ,they got revenue stream coming in, they take risk on research and development and they also raise money from markets, so --?
Kenneth Greenberg:
No exactly and they have got, you know revenues have revenues at a point.
Fintan Walton:
So it's small entities trying to do too many things or it is just the incompetent management who don't trust them?
Kenneth Greenberg:
No I mean it's just it on the interest. I mean we are not $20 billion companies with that have you know a massive senior management team divisions there, at the end of the day these are companies that have 15 employees and how do you do three different business lines with 15 employees you just can't and I think there are situations where you can be a core part of the business but it should to some extent be, you need to make sure that capabilities are you know company has those capabilities and that and has the bandwidth. You know in terms of and the kind of a second question is around should you know revenue positive companies be buying cash flow negative businesses and I think absolutely and that's what your I mean biotech by definition is basically cash flow negative and that needs to be financed and people finance by cash generated by from pharmaceutical companies or financed by the public markets or financed by private markets. So I think it's absolutely a good thing and I think I mean overall I know it sounds like a lot of doom and gloom but fundamentally now is a great time to be investing. The end of the day if you got capital now it's a great time to be investing. It's a great time for pharma to be buying companies and it's a great time for venture capitalists and private equity be invest in companies because you can get such great value and for the dollar and I think there is a you know there is a public, there is a pipe market, there are venture capitalists crossing over making investments in public companies because you see very low evaluations, so you see you know where there is capital you see a kind of you see it moving around and you see them investing I think in the good strong companies
Campbell Murray's perspective on the biotech industry going forward.
Fintan Walton:
Okay. So if I could just open up the theme to this level of optimism if we can introduce as we come to the we are the last panel so we've either got to go all the way down into gloom doom or over the (indiscernable) out into a static optimism. I leave this to my panelist to decide which way they want to go. But Campbell Murray, when you look at, at our industry and other things that I talked about right at the very beginning with all these issues of regulatory you know tougher regulatory market, financial markets being in turmoil, risks are higher, patent cliffs and all sorts of things like that how would you, you know how would you describe our industry and how would you describe our industry going forward? are we capable of turning our industry into a great player, a great sector or is it already a great sector?
Campbell Murray:
So I will pick up first on where Ken left off which was optimistic and I agree with that, I also think beside just from evaluation right now four companies of ours that are trying recruit people, the talents of management that's out there right now that is interested in at least joining some rapport of our portfolio companies is just incredible. I think when you look back historically a lot where a lot of the great venture back companies have, when they emerged a lot and it wasn't just in biotech I am referring to now but a lot of companies came out of the late 70's and early 80's in one recession and a lot of companies came out of the early 90's you know and I like you to take through the companies in 70's and early 80's but I think we will see that again. I think we will see a lot of very strong companies coming out of this time right now because one is going to be a very efficient Darwinian selection and then two the companies that survive are going to have access to the best people. So I am extremely optimistic. On the pessimistic side I think reinvestment in the US is critical for innovation globally and I think the rest of the world benefits as a spillover effect from what happens in the US and the next four to eight-years is gonna be extremely important because clearly the current system isn't sustainable. But the -- whatever the current system involves into I think will determine a lot the future return expectation we can all expect in the industry and also the future you know the patient benefit and I really believe it in terms of innovation and driving solutions it's gonna be so critical. I am optimistic that the US system will get it right and I mean you want me to go through
Fintan Walton:
No.
Campbell Murray:
Well you know I think the FDA I would be carefully about going into diabetics right now and cardiovascular. I think as a venture capitalist I think the pharma companies can afford to do it. But I think the starts that the FDA is taking in some of the in terms of safety and expectation around Phase II and Phase III trials is going to seriously impinge innovation. I think you only do it as a venture capitalist if you believe that the FDA is going to back down.
Fintan Walton:
Right.
Campbell Murray:
Are that the pharma companies are going to come earlier and take assets of your hands earlier then they have traditionally.
Fintan Walton:
So you are still remaining optimistic?
Campbell Murray:
Yes I am because I we are selecting very carefully the areas we invest into and you know right now it's a buyer's market I really, you know I agree completely with what Ken said.
Fintan Walton:
Okay.
Campbell Murray:
And demographics on our side.
Recalculation on royalties and projection of revenues over the next 10 years.
Fintan Walton:
If I could just bring Gordoninto this because when I was just thinking that when Obama came in as President of the United States you know we were gonna see prices go down. If prices are gonna go down revenues go down, if revenues go down royalties go down. Have you done recalculations on your royalties? Are they up or down or? have you got a new, a new projection for the revenues that you can get on the next 10-years?
Gordon Winston:
Just think that, I mean reimbursement and pricing are always considerations that we look at. To answer your question I mean as we look forward, we've clearly had a take in, have obviously internally held perspective on how we think things will place. But our principal focuses as investors are in critical care products. So although there has been some general pricing guidance that's been given I think that there is not yet absolute certainty however as we all I mean it's important that we are conservative as it relates to each of these factors and of course rather than looking, than looking at each product having what's typical 6 to 8% annual price increases our perspective will be much more conservative.
Fintan Walton:
And in that in the conversation of optimism or pessimism where are you placed?
Gordon Winston:
Well from I mean what we are seeing, what we were involved as opposed to where the panel is involved we're obviously we're optimistic because we are seeing a lot of transaction of course, I think that speaks to, I mean for larger principles of larger and medium size biotechnology and pharma companies looking at innovation across a broad spectrum of opportunities both public and in private. I think that universities themselves are trying to figure out how would is that the fund with clinical development programs that they have, in some cases where they do have royalties they will look to roll some acquisition to help them finance that. So where I just where I stand in this I mean I probably made out down the middle and I think that our deal flow shows that there is obviously there is optimism in the industry however with the counter balancing in this is really where innovation and how innovation in the future will define it.
Is future of biotech optimistic?
Fintan Walton:
And Mark having been in this business for many years not to over emphasis your age anything that but --?
Mark P. Carthy:
We started in the kindergarten.
Fintan Walton:
Okay, very good, very good. Can I, you know can you be can you be truly optimistic? I mean I you know I when you look at all the issues going forward can you really think that? Can you think that way?
Mark P. Carthy:
I mean I think that the drug business let's say it's 12% or so or may be 12 to 14% of the overall healthcare dollar is a very efficient way of delivering healthcare and if you can package healthcare in a drug in a bottle or in a vial you'll probably be able to deliver that healthcare solution to the patient in a much more efficient manner than for example the really intense in hospital care, the end of life care and so we are at the more efficient end of the overall healthcare system and even though there is some criticism of the high prices generally drugs are all they are not all priced to meet 50,000 per year, 100,000 per year range. I mean a lot of them are in -- chronic medicines are you know in the range of let's say 500 to 3000 per year total and I think that -- that bubble in there is a very efficient way of delivering healthcare and we will continue to be great area to invest in.
Fintan Walton:
But
Mark P. Carthy:
And actually I just on one point If you look at the top 20 market cap companies from way back in 1970 before the 70's market crash it's interesting to know that the highest sector of companies is the pharma business and it continues to be today. If you look at the top 20 market cap companies and you will see at least in the US you will see names like Merck and Pfizer and you know they are still there you know there are some that get acquired and get bigger but those names continue and it's a great business.
Venture capital investments in healthcare industry.
Fintan Walton:
But you know, this may be for both you and Kento answer I mean the LC's must be at this stage saying well you know I've got better things to do than invest in another biotech fund?
Kenneth Greenberg:
No healthcare is supposed to be what is it 15, 20% in GDP it's growing, is the big it's gonna be the big side or bigger sector in the economy it's going to be the business to get bigger sector in the economy. I think for a for LP's not to be investing in healthcare is you know they are turning their back on the biggest part of the economy. So I think that's why they continue to invest in healthcare and you know venture capital has generated good solid returns typically over the time. There has been some you know challenges with cycles et cetera but in the long run venture capital has generated good side results.
Fintan Walton:
You also seen a change in attitude? You haven't seen a change in attitude?
Kenneth Greenberg:
Well there is a change in attitude because it is now on a capital. So I mean there is a change in attitude but because it is not it's capital scarcity but I don't think it has to be with them not wanting to invest in healthcare and frankly invest in healthcare innovation. It's you know and we you know you talk to LP's and it says we want to you know, we can make capital but we just need to get our books in the shape so give us six months, give us a year et cetera, et cetera that's over here.
Fintan Walton:
Okay. We are towards the end now of this particular panel discussion. So I'd like to thank the four panelists who come along and given us their wisdom. Thank you very much indeed.
Gordon Winston
Mark P. Carthy:
Thank you.
Kenneth Greenberg:
Thank you.
Campbell Murray:
Thank you.
Campbell Murray
Managing Director
Gordon Winston joined DRI Capital as Executive Vice President, Finance in September of 2002. Prior to this appointment, Gordon Winston served as a consultant to Wesbild Capital Corporation, Inc., a subsidiary of Inwest Investments Ltd. In this capacity he was responsible for evaluating private and public market investment opportunities and managed a $25 million portfolio. Gordon has held a number of senior positions with Wall Street investment banks and with boutique merchant banks. These include Lehman Brothers, Kidder, Peabody & Company, and Hamilton Capital Group Ltd., where Gordon contributed to key finance agreements with life sciences companies. Gordon received his Bachelor of Sciences in Economics from Fordham University. Mark Carthy, Managing Partner Orion Healthcare Equity Partners Mark Carthy co-founded Orion Healthcare Equity Partners in 2007. Mark Carthy has 22 years of operating and investment experience in healthcare companies. Mark Carthy joined Oxford in 2000 and became General Partner in 2001. At Oxford, Mark Carthy was responsible for 13 investments totaling $117 million in committed capital. Before joining Oxford, he was Biotechnology Portfolio Manager at Morningside Ventures where he focused on early stage private equity investments. Previously, he was Chief Business Officer of Cubist Pharmaceuticals, where he in-licensed Cubicin, Cubist's commercial antibiotic which reached annual sales of $414.7 million in 2008. Mark Carthy was also Senior Director of Business Development at Vertex Pharmaceuticals. He received his B.E. in Chemical Engineering from University College Dublin, Ireland and an M.S. in Chemical Engineering from University of Missouri. He received his MBA from Harvard Business School in 1987. Mark Carthy was recently listed on the Forbes 2009 Midas List as one of the leading venture capitalists. About Kenneth Greenberg, MD " Principal -- MPM Capital Dr. Kenneth Greenberg joined MPM Capital from McKinsey & Co., where he worked on R&D and corporate strategy for life science companies, and on buyout transactions for private equity clients. Prior to joining McKinsey, Dr. Kenneth Greenberg advised biotechnology and medical device companies as an investment banker at Merrill Lynch. He also worked at Health Market, a health insurance company, where he oversaw disease management programs. Dr. Kenneth Greenberg earned his M.D. at the University of Pennsylvania, graduating with AOA honors, and subsequently trained as an ophthalmology resident at Johns Hopkins. He holds an M.B.A. from the Wharton School and a B.A. in Economics from Duke University, where he graduated Phi Beta Kappa. About Dr. Campbell Murray, Managing Director -- Novartis Venture funds in Cambridge, MA, USA. Prior to joining the venture fund in 2005, he worked at the Novartis Institutes for BioMedical Research as the director of special projects reporting to the president & CEO. Campbell Murray, is a New Zealand trained physician, Kauffman Fellow and holds an MBA from Harvard Business School and an MPP (public policy) from the John F. Kennedy School of Government where he was a Knox Fellow and Rotary Ambassadorial Scholar. Campbell Murray serves as a director on the boards of Aileron Therapeutics, Akebia Therapeutics, Alios BioPharm, BioRelix, and ProCertus BioPharm and as an observer on the board of MicroCHIPS and Tepha.
DRI Capital
DRI Capital manages a fund that acquires royalties from pharmaceutical and biotechnology companies in addition to research institutes, universities and inventors. Acquisition criteria are not limited to any specific therapeutic category and there is a preference for products that have been approved by the FDA and/or the EMEA. Because the investments are long-term in nature the strength of the underlying intellectual property is critical. The DRI Capital team of investment professionals has extensive asset valuation skills, industry assessment expertise and global financial market knowledge to offer industry-leading deal execution. MPM CapitalMPM Capital invests in biotechnology, specialty pharma, medical technology, and related companies that provide innovative medical products and requisite services to the healthcare industry, irrespective of geography, stage of development and therapeutic area. They seek to maximize value creation by focusing on inflection points in the development of companies, such as the achievement of clinical proof-of-concept data, the achievement of early commercial success, and by reinvigorating commercial platforms with potentially high growth assets. They believe that by investing at or near a company's value inflection points, and by lending our internal expertise to management teams, they can often significantly accelerate the development of a company. Also with their commitment to build companies, they can help focus a company's investments on the projects and opportunities with the highest reward/risk ratio. Novartis Venture FundNovartis Venture funds (NVF) currently manages more than USD 650M across all their funds and have expanded the investment teams in their two locations Switzerland and USA. In 2008 their portfolio increased by seven new investments and now comprises over 50 companies, making the Novartis Venture funds one of the world's largest corporate biotech venture funds. Including the commitment of the investors, about USD 2B is currently invested in total into Novartis Venture funds portfolio companies. The demonstrated significant liquidity events over the past decade continued this year and they are confident in their purpose and their ability to provide value beyond their investment dollars. Their primary focus will remain on the development of novel therapeutics and platforms. They balance the therapeutic focus with investments in medical devices, diagnosticsor drug delivery systems. In their investments they look for unmet need and clinical impact, novel proprietary science and understanding of mechanism, management and board experience and capital efficiency in the program. Orion Healthcare Equity PartnersOrion Healthcare Equity Partners, founded by Mark Carthy, who has left Oxford Bioscience Partners, and Jo"l Besse, formerly of Atlas Venture, is seeking a $250 million fund to invest in both sides of the Atlantic, according to people familiar with the effort. The new firm will maintain offices in London and Boston and expects to bring aboard additional partners later this month or early next. Orion Healthcare Equity Partners apparently will pursue clinical-stage companies or assets in the U.S. and Europe. It's unclear whether the firm would attempt relocate assets from one continent to the other, but that seems to be a possibility. Carthy and Besse certainly have expertise in straddling the Atlantic. While at Oxford, Carthy served on the board of UK-based Solexa Ltd., the genomic sequencing company that would be acquired by Illumina Inc. He also represented Oxford in it's investment in another UK company, PowderMed Ltd., which Pfizer would acquire after several Trans-Atlantic transactions. Meanwhile, Besse managed many of Atlas' European investments from it's London office. He was among the founding investors in publicly traded Actelion Pharmaceuticals Ltd and Novuspharma S.p.A.