Bubble trouble? Investors advise cautious optimism

January 19, 2016 ctheodoropulos

As Art Pappas, managing partner, Pappas Ventures, said, “Be cautious. We’ll see some ups and downs in the political environment and overseas markets, so have plans in place to weather uncertainty. Bolster your balance sheet, have a great team and novel technology, and it will all work out.

“For early stage companies considering the practicality of starting something, nothing has changed,” Pappas emphasized. These companies are attracting early investments from the public markets and can draw on a pool of experienced CEOs who have survived the ups and downs.

Nonetheless, “companies are watching and waiting, considering their next steps,” said Evonne Sepsis, managing director, ESC Advisors. They are concerned that the market will be closed when they are ready to go public. She recommended formulating a strategy now that prepares a company for all contingencies and maximizes possible options. At its most fundamental level, that means focusing on activities and trials that will drive the value of the company forward. For example, “know what amount of cash will get you to what inflection point,” advised Alex Zisson, partner, HIG Capital, formerly of Thomas McNerney & Partners.


Asthika Goonewardene, senior biotechnology analyst, Bloomberg Intelligence, added, “Go shopping for cash now. You need a five- year head start to catch the next wave.” He advised forming the relationships with potential investors and partners early so they already know the company and the management team when they are approached later.

Also, lay the groundwork for an IPO, advised Eric W. Blanchard, partner, Covington & Burling LLP. “If the market is there when you’re ready, you need to be able to pull the trigger and go.” Without announcing an intention to go public, management can arrange audits, draft the necessary documents internally and introduce themselves to the relevant bankers and research analysts. “They’re the ones who will finally say, ‘go’,” Pappas said, “so know who you would work with. If it’s too early to even consider an IPO, they’ll tell you. You can’t have a credible IPO timeline without starting the process. Get your ducks in a row now.”

Blanchard and Pappas each reported sustained interest in mergers and acquisitions, even among private companies during hot markets. Big pharmas and big biotechs are a traditional source of acquisition and collaboration, but corporate venture funds and other creative financing resources are alternatives. “There’s so much money sloshing around the system for private companies,” Zisson said.

That said, be extremely careful about partnering all your assets. “Be flexible and keep your options open for both M&As and IPOs. International, regional deals are options, as well as debt or royalty deals.” Zisson also advised a narrow focus. “We believe in single product companies. We don’t need our companies to diversify our risk for us. We want a company that will drive one football 100 yards, rather than one that will drive five footballs 20 yards each.”

Crossover funding, in which organizations that typically invest in public companies invest in private companies likely to go public soon, is expected to continue. Early involvement gives these funds a higher return, but limits their ability to sell assets if the market drops. Investors exercise their investor rights agreements to arrange transfers, leaving biotech companies with different investors who may not have partnership in mind.

While the very largest investment firms can ride out any delays and setbacks, Pappas said, “many of the big names won’t be doing this in the next few years.” Zisson agreed. “The public mutual funds haven’t seen these bubbles.” He speculated that group of investors won’t be involved in crossover funds much longer.

“Family offices have become extremely influential,” Pappas added. They are becoming quite sophisticated as angel investors and some consider investment in biotech philanthropic—a way to advance science toward eventual cures, even if not developed by the company they funded.

The challenge, the speakers said, is the level of industry knowledge among the investors. Generalist investors are attracted to biotech returns, investing when new data is released and fleeing when they realize a product won’t reach the market until many years later. Given the recent fluctuations, “we’re bearish on the stock market for 2016,” Zisson said.

Since summer 2015, pricing concerns are increasing as murmurs of price restrictions are rippling throughout the economy. Speakers predicted sound and fury but no substantial consequences.

“The possibility of Medicare negotiating prices is far-fetched, but the discussion puts the matter of drug pricing in the public eye,” Goonewardene said. Pappas called drug pricing discussions “just the flavor of the year,” suggesting they are more based on political pandering in an election year than substantial concerns. He added, however, that pricing must be addressed seriously at some point.

To see a video of this plenary panel, please visit partnering360/Insight.


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