Part 1: The future of biotechs M&As: The investors' perspective




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Video title: Part 1: The future of biotechs M&As: The investors' perspective
Released on: June 02, 2009. © PharmaVentures Ltd
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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.
Funding environment in the last 12 months
Fintan Walton:
Hello and welcome to the third panel today at this conference held by pharmaventures in the UK trade and investment. This time we are talking about the future biotech M&A and the investor's perspective. On my left here, I have to reintroduce Gordon Winston, who is the Co-Head, in Royalty Co-Head of the Royalty Monetization Fund at DRI Capital otherwise known as The Drug Royalty Corporation in the past. Welcome. Next to Gordon Winston is Campbell Murray who is the Managing Director of the Novartis Venture funds and hopefully Campbell Murray you will be able to tell us a little bit about what that fund specifically does when we " when we come to the specific questions. Mark Carthy is at the end there Managing Partner atOrion Healthcare Equity Partners and between Mark Carthy and Campbell Murray isKenneth Greenberg who is Principal atMPM Capital. Welcome to all of you. Okay, so this particular panel is all about the future of biotech M&A's. All of you are in the financing field and I am going to ask the first question toMark Carthy,Mark Carthy you have had a significant experience in investing having worked at Oxford Bioscience before setting upOrion Healthcare Equity Partners and you are a founder of that " of that particular fund, when we talk about funding in the last 12 months what's your view?
Mark Carthy:
Well I think that it has been very difficult for the traditional venture models to get the same funding that they were getting in the past, for example to raise you know a $100 million or 50 or even $50 million for Phase I, Phase II programs has been more difficult than it's been in the past. I think that it's playing out really that the M&A and the well the IPO market is very difficult and even the public markets are quite difficult. Valuations are down. So if valuations are down it seems that it's very difficult to raise that amount of money. So for example if your valuation was 200 million before and you have sold 25% of the company you know you could raise 50 million or so dollars if evaluation is $30 million and you need 50 it's very difficult to raise that amount based on a " on a much smaller capital base whether you are a public or a private. So this is really playing into " and the strategies that you would use to fund future companies would you really fund the company at that level at $50 million level or would you find a lower level to be able to fund that company and do those trials in a much cash " more cash efficient manner.
Fintan Walton:
Okay andKenneth Greenberg, what's your perspective?
Kenneth Greenberg:
And I agree with that. I mean, I was a bit surprised by the numbers I heard quoted earlier, evenMPM Capital has experience, typically later stage deals have been financed and earlier stage companies are having a much more challenging time being financed. We are asking all our CEO's to kind of watch their budgets to kind of do everything as cheaply as they can, we are making you know we are triaging our company, you know triaging the programs in our companies, if there is three assets two of those assets get finances the way you can monetize kind of one or two of those assets to try to fill that financing gap.
Fintan Walton:
So your general you are not investing in new companies, you are investing in existing companies?
Kenneth Greenberg:
Yes, I wouldn't say that. I mean we are you know MPM Capital is investing in new companies I think the question is what " what stage are those new investments happening and you know there are " you know there are companies out there with " their last post money evaluation was a 150 million and now those companies have been financed to 50 million and that's great value for the dollar and I think startup companies are having a hard time kind of competing against evaluations where you got clinical stage assets at $50 million pre money evaluations. That being said you know MPM Capital still is investing in early stage companies, we you know we did a few last year, we just submitted term sheet for company this year. So we are certainly doing that. But I think that the buyers are surfaced towards later stage investments.
Novartis Venture funds: Different strategies for funding on medical devices and therapeutic side.
Fintan Walton:
Right. So if I can move to you Campbell Murray and ask you just explain what your fund actually does so we can better understand that then put that into context with the other previous previews?
Campbell Murray:
So Novartis Venture funds we were set up in 1996 when Ciba-Geigy and Sandoz merged to form Novartis [PharmaDeals ID = 218] and just like any other venture fund we invest in companies with an expectation of financial return. So financial return is the complete drive and motivation behind our investments. Our selection criteria for that primarily innovation, so we are not interested in pursuing fast bowlers or (indiscernable) molecules Although having said that for lot of funds that works well and a company like Celgene with Flutamide has achieved a significant return. We are also looking at patient benefit and capital efficiency. In terms of it I was also surprised to hear those numbers that were just quoted. We think there is a lot of value in the market right now and with that valuations have come back to more reasonable levels and you know our expectation is in that three to four-years from now will be the chance for super normal returns and so we are trying to increase a lot being on the capital we are putting to work right now but we are finding it hard just we like to work with others. We are very happy to(indiscernable) that you know in so much as we only have team in Boston and Basel if we gonna invest in on the West Coast we wanna find strong work co-investors if we can and we are finding it much more difficult right now to bring in other early stage investors alongside us. We will invest in clinical stage assets but you know I saw one of the bullet points in the original set of slides saying starting new companies don't do it. So I think " I was just thinking about it in the last four months, I think we've seeded three companies from scratch from pre-series A.
Fintan Walton:
Is that
Campbell Murray:
So we are doing it.
Fintan Walton:
Is that because you are Novartis or is that because you?
Campbell Murray:
No I think it weren't, when we look at our historical returns and you know financially the funds done pretty well over the last 11 years. It's interesting in that for us " I would say the medical devices are different. In medical devices we are tending to go later to companies that are close to revenue but on the therapeutic side we've done -- usually done pretty well either going very early or going very late. But we've actually, traditionally found the valuations at companies that are you know around IND or Phase I, Phase II the valuations are usually pretty fairly priced. So we tend that just hasn't been as much of a sweet spot from investment perspective.
Fintan Walton:
Just to make absolutely clear you are not a strategic investor?
Campbell Murray:
We have a sister fund which is closely associated to be absolutely clear no, we are not. The Novartis Venture funds is not. We've a sister fund called the Novartis Option Fund, so under the family of funds which is the Novartis Venture funds we do have a strategic element but even they have a fire wall between them and any other part of Novartis and we are not a part of Novartis Pharmaceuticals, and we are not a part of Novartis Research. We feel very close to them, we view them as you know we hope an important exit opportunity for our companies or collaborator but you know we also view Roche Pharmaceuticals and Genzyme and Pfizer in the same way. We do hope that for the companies we invest in we would like to " be able to say that then we connect is a bridge to Novartis but any information or any further relationship that goes from there is between the company and Novartis has a part of Novartis.
The Business of Royalty monetization in the last 12 months.
Fintan Walton:
Okay. Thank you for that. Gordon, you are in a slightly different business, you are in the business of Royalty Monetization. Now obviously Royalty Monetization is an existing royalty coming through different business in a sense, how is it for you in the last 12 months? Are things different? Have more companies come to you because they are finding it difficult to fund, more by traditionally equity means? So what's happening in your neck of the woods?
Gordon Winston:
So our business model is really predicated on non-diluted finance. We've never ventured organizationally into pre-commercialize assets. So the assets there the royalties that we are acquiring are royalties on already commercialized pharmaceutical products. For us the " the market environment is one I think that the slides earlier show, in licensing has increased because our life cycle and as far as our royalties that we are looking at based upon licensing arrangements that may have been had three or four-years ago. We are finding that's " there is a lot more interest on the part of those companies that do gone into royalties to sell that. So pharma companies are looking them as a -- as non-core to their fundamental business and the internal " I guess the internal discussions had related to our line of funding their pipeline. Again I think that some of the earlier comments were absolutely applicable to decision making process but then the less we are seeing a lot more activity broadly speaking even within the larger companies. For the smaller and mid size biotechnology companies that do gone to royalties I think that there are lots of discussions that they are confronting today. We too what will self select to determine those royalties that we are interested in, I know that there are others in the field that will look at Royalty Monetization as just one part of their fundamental investment pieces, we are today solely focused on royalties that do exist.
Fintan Walton:
So is business up or down?
Gordon Winston:
For us business is up.
Fintan Walton:
And when it comes to evaluations have your assessment of evaluations have changed because of the economic change in climate?
Gordon Winston:
So we're I mean we too are very product centric. I mean a fundamental to our business is understanding the value of proposition of each of the products, so when we acquire a royalty we are basically buying a participation in the and ultimately the performance of the product. The simple answer is, I guess in these markets I think you can afford to be I think you have certainly everyway to be much more aggressive in your pricing, again I think it also depends upon the asset itself.
Orion's approach towards financing of biotech companies and focusing on Europe and in pre clinical compounds.
Fintan Walton:
Okay. Thank you. So if I go back to you Mark, we talked a little bit about the obviously the change in the financial markets, we've talked about the issues of funding biotech companies, we've talked about the issues related to deals are down in general for licensing at various clinical phases. So from your perspective do you need to change the way in which you approach financing of biotech companies? Do you have to look at for an example the type of relationship that a biotech company has with other third party that could include pharmaceutical companies? Are there new conditions that have to come into the financing formula for you to get in there and start funding?
Mark P. Carthy:
That's a great opening for me to talk about Orion, Fintan Walton. I think that first of all everybody should be very optimistic because the pharmaceutical business is still very strong. The companies are cash rich and they are still getting very good prices, there are pressures on them but they're the only companies that have managed to finance you know a $100 billion acquisitions in this difficult environment and so certainly prospects for the future are very bright. However in the interim the speculative finance that would come from venture and public markets is poor. And I think it's gonna be very difficult for a while. At Orion one of the things that we set out when we established this new fund was first of all to think through where we were gonna focus on Europe. We were gonna be looking for pre clinical compounds you know it's an area where people say don't go but we are going to go there. We're going to look for very innovative programs for example new targets, first in class targets whether they are in difficult areas like Alzheimer's, cardiovascular and the reason for that is that we are being sponsored by a large pharmaceutical company and that's what they want and you know in this difficult market we have already said that the fund [ph] -- the IPO markets are quite difficult and who else is going to be buying your companies besides pharma. The second thing is that these pharmaceutical companies and there is two of them have said to us that they really don't want to pay $500, $600 million for companies going forward in the future. They would rather put down you know 50 to 80 million and pay you the rest over time and I think that's going to be a model that they are going to try and do in the future, they don't like auctions but sometimes they get dragged into them but they would rather pay some money down and pay the rest overtime if they can do that. So again we are gonna focus on pre clinical, very innovative targets and we have a pharma sponsor already embedded in our fund. We are also working with the CRO that's already embedded in our fund and they are gonna carry out a lot of the development activities for us so we were gonna find compounds that are already in pre clinical, finance them through Phase IIA and then sell them to the pharmaceutical companies. It won't be as clean as that but that will be the ideal and then we will not be incurring the overhead of staffing in each of those companies because we have the CRO doing most of the work. We will have some project managers and in fact we will be able to turn off the spend in those companies when the product doesn't work and one of the biggest problems in biotech at the moment is A the overhead and B the life time continual " biotech companies never seem to die and they keep going, keep spending money even after their product, initial product has died and we will be there to frankly just kill them off and go on to the next plan that we will have and I think that's what our investors will want us to do. So it will be a bit of a different model but we think that the returns will be better in this environment. So in response to your question, yeah that's a different model, a new model that we think and it seems that many venture firms are looking at this as part of their offering and look " it's called different things virtual companies, project companies there are many different approaches. We are just kind of have in more of a pure play approach with the partners embedded in our funds as well.
Fintan Walton:
So that's when you talk about sponsors being embedded in your fund, you are saying the source of funds is from pharmaceutical companies?
Mark P. Carthy:
Some of the source, yes. Some of the funds will be coming from the pharmaceutical companies, yes and they will have some " they will have some options actually on being able to buy some of the companies that we will have and they will " have agreed, pre agreed economics on those as well.
Fintan Walton:
So the fund is a hybrid fund of both pharmaceutical money plus usual sources of fund?
Mark P. Carthy:
Yes, exactly. We actually had designed this and then I was presenting to one of the large pharmaceutical companies and we were about 50% through the slides and It says I will take it, this is I have been looking for this for a long time. So we've actually got pretty good reception.
Fintan Walton:
Are you gonna tell us who the sponsors are?
Mark P. Carthy:
Not at this time, I'll leave that up to them to choose the time for disclosure. We are already looking for projects for them on their behalf.
MPM's relationship with Novartis, option funds and strategies of investment.
Fintan Walton:
Right. Now that's on way to you Ken because MPM has a relationship with a company called Novartis is one of the representer is next to you, so could you tell us what sort of relationship you have with the pharmaceutical companies and how you work?
Kenneth Greenberg:
Sure I will happy to. And maybe I will take step back and say I think that there are two things that MPM is doing in to kind of address the original question in terms of doing with this financing environment and the first is, is ensuring that companies are adequately financed if not overly financed to achieve well defined milestones and to be financed for at least 12 to 18 months. So what we don't want our company is doing now is to you having to go on the road again you know 12 or 18 months from now to raise additional capital and what we also don't want is them to run out of cash before they have achieved a value inflection point and those are the two situations where companies or evaluations get crashed. So I think we are seeing companies being extremely adequately financed, we are seeing additional syndicates come in. So having two syndicates or three syndicates such that is enough money around the table to adequately finance the company. I think the second thing that MPM is working out is trying to pre bake an exit. so we wanna make sure there is enough capital going into company and once the capital is used up we wanna to pre bake the exit which is " which kind of dove tails with what with this you know this fund that MPM has with Novartis in this kind of third and that's get very confusing it's this kind of third fund that Novartis has since MPM have Novartis Venture Fund"
Fintan Walton:
Which is the option fund?
Kenneth Greenberg:
Which is actually slightly different.
Fintan Walton:
That's separate?
Kenneth Greenberg:
It is, options are available it's slightly different. So these options the MPM options are " we typically finance companies through a Phase II proof of concepts studies so the options is taken when there say the compound enters you know enters the clinic or enters the Phase II clinical trial. Now what my colleague at Novartis explained the Novartis option fund. [Inaudible] But you know " so, so that kind of understand the structure MPM will make an equity investment in the business along with the other syndicate partners that equity, that money actually happens to come from a fund that Novartis is in spite MPM with the fundamentally it's an MPM investment. MPM sits in the board and MPM basically tries to maximize the value of that -- of that investment along with the other partners simultaneously Novartis will " will negotiate an option to acquire the company or to license an asset and that's a separate " it's a separate structure, a separate transaction that company usually gets a some upfront non-diluted financing and then the option can be exercised post say Phase II proof of concept and that will typically involve you know as I mentioned in option to acquire the company or license an asset you know you can pull certainly some press releases on this but the bio book valuations are typically been around $500 million and it's " you know it's good for the investors for a few reasons. You know one is that it pre bakes and good for the companies for few reasons, one is it pre bakes an exit you know that when you got that Phase II result that you can sell the company and get a return. It's also good because you don't need to basically go on this, don't need to spend the year basically packaging the company and packaging the data and then trying to kind a sell the company and the third reason why it's good is because it involves, you get basically Novartis involved in a clinical development and you're not in a situation where you got clinical trial results and then the company comes around and says" oh, you should have, you know you should have a done a trial a different way to review the trial" and we found it's been very successful. We've done about a half of dozen deals over the last 12 months and companies were actually quite enthusiastic to get involved.
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.