KBC Peel Hunt: The Bad News for Traditional Therapeutic Biotech Companies




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Video title: KBC Peel Hunt: The Bad News for Traditional Therapeutic Biotech Companies
Released on: May 19, 2010. © PharmaVentures Ltd
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In this episode of PharmaTelevision News Review, Fintan Walton talks with Dr Paul Cuddon, Analyst at KBC Peel Hunt. Filmed at BioTrinity 2010 in Newbury, UK, they discuss:

• The current investment mood for biotechs

• UK biotech success stories

• Companies with lower risk

• Platform companies as opposed to firms with one or two pipeline products

• Private companies as part of the emerging IPO market

• Big pharma acquisition before IPO

• Dr Cuddon's views on what business models will work in the current market

The current investment mood for biotech's
Fintan Walton:
Hello and welcome to PharmaTelevision News Review here at BioTrinity in Newbury, Berkshire. On this show I have Paul Cuddon, who is at KBC Peel Hunt an Analyst there, welcome to the show.
Paul Cuddon:
Thank you.
Fintan Walton:
As an Analyst working in an investment bank it's you obviously see a range of companies in life sciences area, we are here at BioTrinity there is a range of companies here too, well you get an idea of what are the real investment opportunities the ones that you want to steer away from or not just you but the markets tend to steer away from, so how would you describe the current investment move for a typical biotech company currently?
Paul Cuddon:
Okay, so if we start by defining a typical biotech company as loss making therapeutic, zero revenue pipeline (indiscernable) story I think the appetite is actually very low. This is in the way that we were coming to this conference we were looking to come to this conference to say appetite is picking up which over late 2009, early 2010 when investors were beginning to realize that portfolios and other sectors hadn't collapsed the world survive the financial armageddon and they've actually came out with a fairly large funds still under management which was a surprise to a lot of people their risk appetite started to pick up, we started to see much more interest in therapeutic biotech companies likes of Vernalis, Antisoma, Vectura, BTG these sort of names are cropping up again on investors wish lists. And I think safe to say they were starting dip their toes back in the water unfortunately what's happened particularly over the last few weeks is that there have been several blow ups in therapeutic biotech's and the companies that people were starting to take an interest in, so I think that's been a big setback for the sector actually and the traditional loss making therapeutic biotech is solely out of favor again I would say for another sort of 12 months. And there a few more stories now we are waiting on to run that course hopefully prove successful and then we can start thinking more positively about the loss making therapeutic biotech.
Fintan Walton:
So it's a bad start quarter one, 2010 bad start?
Paul Cuddon:
It was a bad very bad start, I mean you had investors who had wiped the slate clean, we know biotech has struggled in the past, we know the disasters of British biotech and all the others that have gone before hand but I think people were starting to give them a new chance willing to just re-appraise the investment case, stick by a few shares not investing massively but just starting to dabble again and the setbacks for particularly Antisoma, Vernalis and Vectura have generally been received very poorly.
UK biotech success stories
Fintan Walton:
Right, so what can be described as may be outside this sort of traditional biotech also good, what is good?
Paul Cuddon:
Okay, so I think it's easy to get down about therapeutic biotech, but it's important we do have some very strong success stories in the UK. If you speak of Abcam, Immunodiagnostics, Epistem, Axis-Shield these all companies that are on the market at the moment that are revenue generating are profitable and are trading at very high earnings multiples that starts to demonstrate the investors like these stories they are willing to assign high valuations to them and that there is actually relatively scarcity of these companies, so it's diagnostics, it's services, it's reagent supplies and that all seems to work quite very well for investors at the moment, so I guess more of those would be very nice.
Companies with lower risk
Fintan Walton:
Okay, so these aren't obviously the traditional biotech company these are the companies in the way we described them earlier, these are ones which have got other cash flows coming through them they are basically largely derisked from a cash flow basis really?
Paul Cuddon:
Absolutely, they've their approach already approved by the regulators even if with some of the regulatory approval process might not even be necessary for the companies like Abcam, so they do traditionally not appeal to the more standard venture capital investor in biotech who will be looking for a 10, 20, 50 fold x upon a successful Phase II, Phase III result and eventual acquisition by big pharma but those are the sort of stories that are regularly been promised by institution investors and never delivered. The boring revenue companies that might not appeal to venture capital that offer the prospects of two, three potentially fourfold returns a very interesting to institutional investors.
Fintan Walton:
Well with the safer bets basically?
Paul Cuddon:
Absolutely.
Fintan Walton:
Right.
Paul Cuddon:
And safety in life sciences is something that's something been very hard to justify over the last few years.
Platform companies as opposed to firms with one or two pipeline products
Fintan Walton:
So let's go back to the biotech therapeutic model, because it's important it's not just important to the VC's and to the biotech's themselves are also obviously very important to pharma who need to access these sort of companies, now you've talked about spreading the bet in relation to some of the investments, the platform company, company with a platform is that a company that's got a better chance than say a company just got one or two products in its pipeline?
Paul Cuddon:
I would say so, I think this excellent conference has been hosted Newbury, Racecourse this last couple of days has shown that this is exactly what pharma companies are looking for they want access to platforms that will help their drug discovery efforts internally that will eventually contribute to their late stage pipeline these are the sort of areas as well that VC's are looking to invest and I think the combination of venture traditional venture capitalist with corporate venture partners really supporting these platform based companies is the sort of thing that could appeal to investors in the future should we see success for some other biotech companies like BTG and Renovo, Vectura could be a turn around, but I think the important thing is one deal with big pharma will no longer cut it what we need to be seeing is platform companies with multiple deals with big pharma so that if one deal potentially blows up.
Fintan Walton:
There is other?
Paul Cuddon:
There is a another one to fall back on or even another four and I think those potential for less upside but actually more control down side is the sort of thing that will go down better with investors. That's obviously you have some investors in the market they like to build their own portfolio's so they are willing to take an asset here and asset there and own stakes in each of those companies, but I think what's happened over the last few weeks and over the last few years has generally shown all Phase III trials in UK biotech failed. So I just don't think that's a viable strategy going forward single product companies with big deals with big pharma it means nothing anymore.
Fintan Walton:
So that basically means that the traditional therapeutic biotech company is gonna struggle in the future?
Paul Cuddon:
I think so in the UK.
Private companies as part of the emerging IPO market
Fintan Walton:
And so right, so how can we go back to the more preferred option which is a company that has either is a platform or it's got a hybrid business model where it got some sort of revenues coming through, now a lot of those companies that exist few them are, there is a few like Galapagos for an example you've mentioned are ones that are publically quoted, a lot of these companies you're describing are actually still privately held they are not in the public market. So are they are these companies likely to make it to public markets from your perspective? Are these the type of companies in the next few years could be the ones that will be the may be the emerging IPO, part in emerging IPO market?
Paul Cuddon:
Possibly, we've heard from Chroma Therapeutics recently today and they presented a very compelling case with their platform based technology. I would say they need to do few more deals before they could consider an IPO they may even just look for the traditional trade (indiscernable) beforehand, but we saw Ablynx's IPO on Euronext in late 2007 that's generally been perceived as a success, but these are sort of much better funded companies by the time they get to market they've already got the deals in place and at the moment I am not aware of too many UK companies that are actually in that situation. So I think there needs to be a lot of progress over the next couple of years in those platform based businesses before they can start thinking about accessing the institutional investor market again. I would say with different for specialty pharma companies that have already got products on the market, that have got revenue that are perhaps benefiting from pharmaceutical companies divesting and of life span products I think those could be very quite interesting, but therapeutic biotech it's going to be difficult. One of the interesting companies at the moment on the markets is Epistem and they operate hybrid contract research services model, they have a very nice deal with Novartis [PharmaDeals ID = 32637] that seems to be going very well with the potential to identify new drug candidates, on top of that has a biomarker division as well. So this plays into the three key things of pharma outsourcing. Pharma companies need more drugs with more innovation, epithelial stem cell targeting for Epistem they need help with safety screening which is Epistem's contract research services and they need ways of making drug development more efficient that goes into the biomarkers. So I think Epistem is one of those companies that is going down well with institutional investors at the moment that makes revenue, that earns a profit and I think really sets the template for what companies need to look like going forward.
Big pharma acquisition before IPO
Fintan Walton:
Right, now not all the business models are the same obviously but just going back to the platform based company you say it's an attractive investment opportunity for the reasons that you've described, I suppose one of the issues when we looking at the markets and the public markets are those companies ever likely to make it to IPO because pharma companies you've just said have these companies in their sites anyway, but one of the things that pharma companies want to do right now is they want to try and ring if they see a good nice platform technology that can could be a nice harvesting point for the goose that lays the golden egg matter of form, you know if you can get a nice piece of technology that can give through to a number of products with the pipeline they want to acquire it, so are we likely I am trying to get a feel for what is the shape of the life sciences particularly in the healthcare area, what is that gonna look like particularly from when we are looking at both moving from a private equity holding position to public markets?
Paul Cuddon:
Yes, I think that's a very interesting question actually and I was quite surprised by the Corporate Venture session that was hosted today where it was discussed that of 30 investments for MedImmune only one of them had lead to an acquisition. And I think SR One the GSK Corporate Venture spin out had made a 100 investments and only acquired one company. So these were quite surprises statistics for me that actually the big pharma partners who were taking equity stakes are necessarily going on yet to buy those companies, so I think really that starts to play into the IPO market favor where if there is a Corporate Venture partner on board who wants to plat the technology for the long-term and there is a more visible route to exit at some defined board in the future, I think that would be kind of received well by investors. So I don't see the pharma companies necessarily buying them before they will become attractive to the IPO markets.
DrPaul Cuddon's views on what business models will work in the current market
Fintan Walton:
As an Analyst during your day job looking at this whole sector are you optimistic about the future? Have you has the last quarter giving you enough faith in what you are doing out there?
Paul Cuddon:
I was optimistic, I am not sure if you know the history but I've been one of the more negative analyst on the sector and with plenty of (indiscernable) out there, over the last year I've gradually turned much more positive and was looking forward to lots of good news coming out over the next 12 months which I thought would build the platform for future success in therapeutic biotech, now I've got to be honest and say that I am actually very pessimistic about the outlook for lot of these companies that the ones that have been refinanced the likes of Phytopharm, Vernalis and Proximagen came at a very good time, so they've got funding now it's most of them till 2012, 2013 or beyond. It's the ones with cash running out over the next 12 to 18 months that I think could find things very difficult. So again they've got to take it on upon themselves to do the deals with big pharma company to bring in cash and assume that there is going to be very little support from the equity markets. And that's not to say that the therapeutic devices, the diagnostics, the services and supplies I think there is a lot of potential there and I guess that's where I wake up in the morning and generally feel quite optimistic.
Fintan Walton:
So time to interpret what you've just said there very briefly, I mean basically you are saying I suppose is that it's the business model is intrinsic to whether the sector the chosen business model for these particular companies is going to be critical, so even if they got cash what sort of business model they adopt going forward they may even have to abandon the past business models, they may have to move into new business models to be successful?
Paul Cuddon:
I think so.
Fintan Walton:
Paul Cuddon, thank you very much indeed for coming on the show.
Paul Cuddon:
Thanks and thank you.
Fintan Walton
Dr Fintan Walton is the Founder and CEO of PharmaVentures . After completing his doctoral research on the genetics of cell proliferation at the University of Michigan(US)and Trinity College (Dublin, Ireland), Dr Walton gained broad commercial experience in biotechnology in management positions at Bass and Celltech plc (1982-1992).
Paul Cuddon
Analyst
Dr. Paul Cuddon joined KBC Peel Hunt in 2007 following 8 years experience in the drug discovery industry. While completing a PhD at Cambridge he worked in big pharma with Merck Sharpe and Dohme and spent three years in biotech with DanioLabs. He brings significant experience in academic and commercial due diligence to the sector.
PharmaVentures
PharmaVentures is a corporate finance and transactions advisory firm that has served hundreds of clients worldwide in relation to their strategic deal making in the pharmaceutical, life science and healthcare sectors. Our key offerings include: Transactions / deal negotiations; Product / technology valuations; Deal term advice; Due diligence & expert reports; Strategy formulation; Alliance management; and Expert opinion for litigation/arbitration cases. PharmaVentures provides the global expertise to ensure our clients generate the highest possible return on investment from all their deal making activities. We have experience of all therapeutic areas and can offer advice on both product and technology commercialisation.
KBC Peel Hunt
KBC Peel Hunt is an investment banking group based in London, England