Part 2: The future of biotechs M&As: The investors' perspective




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Video title: Part 2: 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.
MPM Capital's investments and involvement of Novartis Venture funds
Fintan Walton:
And for the other investors who originally put money into the company what do they think?
Kenneth Greenberg:
So you know they today have been very enthusiastic as well, they you know MPM treats this investment like any other investment. We sit on the board it's not a Novartis member sitting on the board, it's a MPM member sitting on the board and our goal fundamentally is to maximize the value and typically these option deals are very good for the company and very good for the investors assuming that you know the clinical trial ends up the kind of way that everyone hopes that will end up.
Fintan Walton:
Do you want to add to this Campbell, you said that you were in involved in this maybe wants to aren't there few differences?
Campbell Murray:
So in a very small way. No, no I think everything that was said by Kenneth Greenberg is correct. The name of the fund that's associated or works with MPM is the MPM, Novartis pharma strategic stipend. And that is a very strategic fund for Novartis. And involves Novartis pharmaceutical corporation and in fact involves the DDNLT and it's entirely a corporate because they are making a commitment to a portfolio company of MPM and other investors that, if that -- you know, if it's promising and the company achieve these milestones that they may go on to undertake a $500 million bio dollar deal work you know a very valuable deal. This clearly -- when you talk in those kinds of numbers and that kind of commitment from the pharma company they are not gonna expect the fire work. Our funds, all funds Novartis option fund and Novartis Venture Fund have a completely independent advisory board. Majority of people on that have until till a year ago was only one person from Novartis on a board of 7 people. And it was credited as an independent trust. So it really wasn't directly connected with Novartis pharmaceuticals. And so they simply you know this wouldn't be appropriate for us to be taking options on clinical stage assets for a pharma company. However when -- and the venture funds never been a strategic fund in the sense that we've been, we've always invested our strategy for Novartis and in fact there almost successful. If you look in my perspective the strategic investments by the Novartis Venture Fund for Novartis we've had over 30 exits, I think 17 big pharma acquisitions, only one of which was by Novartis, well there have been a lot of collaborations with our portfolio companies, the one investment by -- sorry two actually, I beg your pardon, as they acquired Speedel recently. Speedeland Idenix [PharmaDeals ID = 12577] [DOI: 10.3833/pdr.v2009i2.84] so Speedel [PharmaDeals ID = 30726] [DOI: 10.3833/pdr.v2008i98.161] first it's easy. There clearly wasn't a strategy to Novartis they spun it out, they were shutting down the program and in fact they did have a call back originally and the Novartis venture fund helped negotiate the way they call back because it made it difficult to keep continue for us to finance the company. So that was a very big win for us that was a 11X and we put a lot of money into it. Excuse me. And another investment that was successful for us was Idenix when the Novartis Venture Fund invested in Idenix, Novartis had no interest in anti infectives. There have been lots of investments we have made which because of the size and breadth of Novartis have been on strategy. And you know that nothing happened with Novartis. We invested in medical devices, we invested in diagnostics, we were investing in vaccines for years before Novartis became a vaccine player. The Novartis option fund, I'll say a little bit more a colleague was going to be here for the first panel but she got back from Mexico over the weekend, and she came to the office yesterday but she hasn't, she is gonna take the rest of the week off. So the Novartis option fund manages about $200 million, and they will that is a more strategic fund. That came about around the same time that the MPM, Novartis pharma strategic stipend was setup. And Novartisdid want us to have a more strategic flavor. So in consultation with Novartis we tried to come up with a formula that would work for everyone. And the formula we came up with was they will invest in equity in seed and series A companies where the risk is high, and there is no information or very little information symmetry between buyers and sellers. It's not like when you are taking an option on a clinical stage asset and the sellers know if this is a good asset or not. You know when you are investing in a seed stage company you just don't know if the technology is going to work, there is a lot of risk. So the option -- the other thing you don't want is for a pharma company to have an option on the entire, the entire startup, I mean that's crazy. Why would any other, you know why would MPMor Polaris want to invest if they take all of this early stage risk, and if the risk works Novartis has already got the upside, that's not attractive. So the model we came up within it seems to be very successful because we are doing deals with you know a lot of great funds, and there have been a lot of deals done now, is the Novartis option fund will invest in equity like any other venture investor. And then they will make a non-dilutive option payment for a Secondary & Tertiary Program in a platform company. So if you come to the Novartis option fund, if you come to Lauren or Henry and you have a two product company, were you at " they will decline even if they love what you got they might actually refer you to me. And in fact they did that with a company called the Akebia Therapeutics a couple of years ago which was a spin out of Procter and Gamble because if they took an option on one of those two programs they've kind of taken half of the value of the company or even worse if it's a one product company. And it's still too early and you gonna need to fund that a long way. But if they take an option on a Secondary or tertiary Program in a platform company. If they -- if Novartis in the future and their decision to exercise the option once the option is made is not Novartis option funds it becomes Novartis research and Novartis pharma. And if they choose to exercise the option they buy the option of the option fund, and then they pay in an exercise or a strike price it's a Wall Street option. They will pay a strike price to the portfolio company. Now if the deal they negotiate the strike price will be at market comps. And if you think about it there is a very strong self correcting mechanism because if the deal they negotiate is too cheap and therefore doesn't reward the other venture investors and entrepreneurs in the startup they will smile, they will take the option payment and they'll kill the program, They won't put another dollar on it, why would they. The strike price isn't picking up. There is also a self policy mechanism for the startup if they negotiate a ridiculously high strike price from Novartis say I don't know, a $100 million and by the way the option expires after five-years when they first demand if they negotiate too aggressive or expensive the strike price Novartis pharmaceuticals will never exercise it and the option will go unexpired. So you, there is win-win for both sides, that it's a fair market deal and if Novartis exercises this option they have validated the entire platform on an early stage high risk company. The company itself is getting a non-dilutive huge upfront strike, it will get milestones and royalties and certainly Merck and Pfizer and Genzyme and you know you pick there is certainly -- Novartis has just done a deal on the third program, just go look at their lead program. I would say by 2012 I bet you the IPO markets open again so these companies are going to be well positioned for an IPO. So hopefully we have created value for the co-investors and you know there is a program that's been into Novartis pipeline.
DRI Capital's relationship with investors.
Fintan Walton:
Okay. Thanks Campbell, for making all of that very clear. Quite interesting, Gordon we were just listening to these three previous speakers talking about collaborations between pharmaceutical companies and investors as a sort of -- as a funder through monetization of royalties and we've just listened to some levels of complexity which deals can get into. Does that happen in your field? Do you get into these sort of more complex relationships? Do you have relationships with other investors? Do you have relationships with other " with other third parties that will give some sort of element of risk sharing?
Gordon Winston:
Yeah. I mean I think on one of the earlier panels there was discussion around the topic that was raised about multi party transactions. The example used was (indiscernable) and (indiscernable) those, those sorts of odd type transactions are taking place more and more frequently. To that end we clear role in that transaction by virtue of the interest in the royalty at the same time there is also interest by private equity participants to actually finance some of the clinical development programs that basically would go into these vehicles. So the " the inherit complexity of the transactions I think that are noted make their way into these multi stepped and multi trenched transaction that we are also working on financing.
Fintan Walton:
Can I just ask if you entered into relationship with the companies who got a royalty stream you monetize that. Can they buy that back out of can they return the money to you and get out of that monetization?
Gordon Winston:
Can they buy the royalty back from us is that you are asking?
Fintan Walton:
Yes.
Gordon Winston:
I mean at a price they presumably could.
Fintan Walton:
Would you have ever you haven't done that? it is not something that happens?
Gordon Winston:
We've not done that. We've been approached I guess over the last seven-years we been approached on two separate occasions to that end.
Fintan Walton:
And the answer is no?
Gordon Winston:
The answer was there the pricing just wasn't there.
Advantanges in monetization of royalities
Fintan Walton:
Okay, right. So when you look at the landscape that we've talked about and the opportunities where do you you know you're you obviously sighted one benefit in monetization of royalties is a non-dilutive nature of it.
Gordon Winston:
Right.
Fintan Walton:
But there are any other advantages?
Gordon Winston:
Well it depends on whose perspective you are looking at I mean from the perspective of the party that holds the royalty they've got to come " they've got to look at this is another means of financing versus the other alternatives that they have. So there is a whole series of decision--decision making processes that they will go through. The way the cost of some of the development program that they actually have to reorient financing to at the same taking majority of these royalties are not core, non-core and by virtue of them being financial instruments, there is a " there is a clear accounting benefit to monetizing them. As far for the most part they'll recognize this as ordinary income. So I mean it depends upon who you are speaking too or what their specific needs are.
Fintan Walton:
Right.
Gordon Winston:
I've actually also felt and I need to recollect the fact that we also do work with inventors and research institutions and with governments that also have their own funding needs. So each I guess " each party that does gone on a royalty has their own specific set of needs that they are trying to match.
Fintan Walton:
Okay. So I mean part of this discussion and I am gonna ask you a question again Gordon just in a moment but
Gordon Winston:
Sure.
Fintan Walton:
Part of the discussion is around M&A and we've heard that once Campbell you mentioned IPO, I was waiting for the first time some of you mentioned that, so it's well done you get a price for that but Gordon one " we were talking about mergers and acquisitions, have people used the fund that the money they get?
Gordon Winston:
Yes.
Fintan Walton:
To do acquisitions is that one of the benefits for that?
Gordon Winston:
Yeah, I would say that I mean to that end we are seeing a lot more activities as a result of the, I mean one could call it consolidation within the industry. Most of the time that transaction an organization enters into is not is primarily to acquire either core set of technologies or portfolio. I mean again it depends upon the size of the organization and the target that they have in mind. But typically and again the royalties are bio product in fact if they exist there is a simple a bio product of the company's breadth in their asset base. They are not been looked at it's core, their transaction are actually being look at as ancillary but yet something that needs to be paid for. From our perspective what we where we join in that process is that because our business model is in fact to acquire these royalties are likely to describe a higher valuation to them than a pharma company might or some other party might and therefore maybe we see ourselves as we are participating prior to the acquisition or post the actual transaction itself.
Coming back of IPO markets, pre bake deals and exit options.
Fintan Walton:
Okay. So if I can go to you Mark and ask you the question we've already heard the term pre-bake, pre-bake an exit for a biotech company and in some ways I would imagine by having sponsors like pharmaceutical companies to maybe bit of pre-baking going on in your model as well. But going to the IPO market, assume that if the IPO market does come back, when you take the two exit possibilities, one being an acquisition and the other being an IPO in the end isn't a trade sale a lot more favorable to everybody than an IPO because IPO you go into a period of uncertainty, post " postulation throughout there in the big bag worldwide if you are just on the trade sale you're consumes and some of the products are spot out?
Mark P. Carthy:
Well I think that in normal public markets there may be even what some people call it exuberant public markets the IPO and public returns will far outpace any of the private M&A trends there, multiples that you will see and it's more likely that you will see 30 to 40 times or 50 times of money in selling public stock in an exuberant market than you are ever going to see that in the M&A market. I think most all venture capitalist will agree with that. However at the moment when that exuberance isn't available I think that certainly trade sales are better way to get an exit and more sure way of getting an exit and LP's will be looking for the ability to do those trade sales and having a pre-baked arrangement may help that and help the LP's understand what are you doing because to go around and saying that maybe IPOs will be around the corner and maybe I am gonna take the bunch of companies public and sell their stock in the next 12 months I think is probably a little bit of a difficult sell and maybe that's what you are referring to. So it's a different market right now than the usual that we've seen over the last 20-years.
Fintan Walton:
Yeah. I am just trying to you know key thing here is from your point of view I mean the risk profile of IPO's coming back is different from one of a trade sales. So isn't there a danger that you could pre-bake too much?
Mark P. Carthy:
It's always good to keep your options open that's for sure because I think as Campbell was saying that you know IPO market might come back in 2012 pick your year and these are 10-year funds and we hope that there will be a good IPO market sometime in that 10-years and we certainly would be able to take advantage of it where is if we had pre-baked everything maybe we certainly might miss out on that. So it's " it's a reasonable point, I would say that we want to be able to keep some of our options open in that regard.
Fintan Walton:
Just going back to your own fund just to get some further clarification I presume this you know normally when you have fund you have a life time to that fund, is your fund the same way is it?
Mark P. Carthy:
Yes.
Fintan Walton:
Are the pharmaceuticals companies expecting a return of money in that, at the end of a particular period?
Mark P. Carthy:
It's going into a little bit more detail it's a traditional venture capital firm, 10-year fund you know management "
Fintan Walton:
Just a source of fund?
Mark P. Carthy:
Management fee plus, plus carried interests in the same manner as all the other venture funds and our pharmaceutical partner and CRO will help on the picking of deals which I think is a very important point because in the past many venture firms have been picking on their own without the input of " of pharma and I think having pharma do some input although you don't want go exactly according to everything that they say for example the reference that was made to vaccines earlier I think that there are areas that are " that where venture can do a very good job but there are also great inputs that you can get from pharmaceuticals companies on the design of the clinical trial the data that one would need in Phase II to make that acquisition decision all of those aspects are very important input that can help drive the acquisitions that would happen at that stage.
Are we in danger of closing out innovation scope?
Fintan Walton:
Just if I ask Ken this question, are we in danger with all this pre-baking and participation of pharmaceutical companies? Are we in a danger that true innovations are gonna be locked out? that we just stick to that more traditional view that pharmaceutical companies have which is to something I know is something I like and something I'll stick to rather than being probably one of our industry really needs something more radical? Are we in danger of closing out our innovation scope?
Kenneth Greenberg:
That's a good question and I think I am not sure that we are, let me tell you why, I think that venture funds there was a, you know venture there is kind of different companies that venture capitalist can invest in and I think in the you know not too distance past venture capitalist were investing in fairly kind of a low risk into you know kind of (indiscernable) reformulations, you know there is a big specialty pharma, pharmaceutical trend MPM is a member of specialty pharmaceutical companies to try to manage risk and this was a you know in reaction to the " you know the crash in of 2000 and you know what we are consistently hearing from pharmaceutical companies is actually innovation, innovation, innovation and so when we are thinking about these pre-baking and these you know we are doing pre-bake deals and all the stuff pharmaceutical companies typically Novartis certainly is and I can tell you when we " when we chat with all the other pharmaceutical companies and ask them you know two or three times a year what kind of companies they are interested in they tell us innovation, innovation, innovation. That's actually when venture capitalist kind of try to " you know we see a scary market and we try to we become slightly more risk averse and try to invest in less risky assets that actually the pharmaceutical companies are the ones that are pushing us to continue the invest in innovation.
Fintan Walton:
Right. But innovation, innovation is risk, risk, risk?
Kenneth Greenberg:
That's right and that's certainly right and it and I think venture capitalist continue to invest in fairly risky assets. I am not seeing you know in the last 12 months I am not seeing MPM, I don't think I am seeing other venture funds invest in kind of any less novel M&A's or things like that.
Fintan Walton:
Right.
Kenneth Greenberg:
I continue to see investment in innovation and risk.
Fintan Walton:
Right.
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.