Biopharmaceutical Report II
• Recent IPOs have started to lose some steam, one banker notes
• Tax inversion key theme enabling specialty pharma M&A
As the life sciences sector continues its record-setting levels of industry financing and public offerings, industry experts discuss whether this trend will continue. .
Small-to-mid-cap biotechs have been strong outperformers year to date, and the NASDAQ Biotech Index recently reached a new high, said Noel Brown, managing director, healthcare investment banking, RBC Capital Markets.
“There has been no slowing of activity in biotech financings,” Brown explained. “It continues at a level we’ve not seen in the past 10 years. The deal pace continues to be bolstered in part because of the activity of generalist investors.”
In terms of the basic categories of investors, there are the healthcare specialist funds, healthcare-dedicated mutual funds and the generalist funds seeking high, defensive growth wherever they can find it. “While the generalists may not comprise the largest pool of money, their role in recent markets is not insignificant because there [is] now this other pool of money competing to have its orders filled against the usual participants in the biotech market. This provides some leverage for issuers and their investment bankers to price deals at better valuations,” Brown explained.
It is great to have generalist investors, who have been largely absent for a decade, Brown noted. “But our fear is not that this pool of capital is frightened off by some Phase III failure or a commercial launch flop, but rather, strong performance in other sectors, say consumer, technology, industrials, etc., with which those investors have more familiarity,” he said. In that scenario, generalist investors could find growth that is achievable without the learning curve or risk profile of biotech.
This year represents a big opportunity for antibody drug conjugates. Both pivotal and earlier-stage readouts are expected from Seattle Genetics (NASDAQ:SGEN), ImmunoGen (NASDAQ:IMGN), Endocyte (NASDAQ:ECYT), Celldex (NASDAQ:- CLDX) and Roche (VTX:ROG), said Brown.
“Other areas of interest are antibiotics, as evidenced by Cubist’s (NASDAQ:CBST) acquisition of Optimer and Trius, which we financed and The Medicines Company’s (NASDQ:MDCO) acquisition of Rempex, on which we were the exclusive advisor to Medicines,” Brown said.
Orphan drugs continue to be an area of much excitement, he added. Companies also continue to show interest in solid tumors like melanoma as well as liquid cancers like chronic lymphocytic leukemia and acute myeloid leukemia, Brown said. “Ophthalmology is seeing an era of revitalization, and new companies in both front and back of the eye diseases are progressing,” he added.
IPO market starting to cool
One industry banker noted almost all the biopharma IPOs that launched recently are flat or less than the offering price, he added. “Seven IPOs that I followed earlier this month are either at or below IPO price,” he said. “The IPO market is cooling down, and low-quality companies are taking this opportunity to go public, but they’re not ready yet,” the industry banker said.
Dicerna Pharmaceuticals (NASDAQ:DRNA), an RNA interference company, is an example of a firm that is extremely overvalued, the industry banker said. The company has a pipeline of preclinical and Phase I drugs. The company’s share price increased 170% on the listing date.
There have been 35 IPOs priced so far this year across all sectors, a 75% increase from last year, according to Renaissance Capital’s US IPO Marketwatch.
“One thing is certain: Biotech rallies often end with an over-issuance of equity. Phase I and preclinical IPOs in biotech have a tapered history,” said Les Funtleyder, consulting partner at investment firm BlueCloud Healthcare.
Brown added he believes the IPO pace will change in terms of slope but not general trajectory. “While I think the market is due for some level of correction, current activity shows no sign of near-term abatement,” he noted.
The IPO frenzy should continue until the major oncology meeting in June -- the American Society of Clinical Oncology (ASCO) meeting, said Funtleyder. However, he noted the lack of expected catalysts and thus he expects less event-driven news flow in the fall, after this scientific meeting. While it is tough to predict when the IPO frenzy will end, Funtleyder said he would be surprised for the cycle to continue at the current pace. Some of the recent IPOs within the life sciences sector will probably delist, the industry banker added.
Lock-up expirations will definitely be an issue to manage for many of the newly public companies, explained Brown. “It could create some instability in trading if not managed in the aftermarket. Much of this newly available supply should get absorbed by other investors,” he explained.
After the lock-ups from the initial group of IPOs, it will become clear if the market can absorb all the biotech shares available, Funtleyder noted. As the capital markets cool down, companies will look for alternative areas to raise financing and find shelter, he added.
On the pharma side, we continue to see some interesting evolution of business models.
Tax inversion, capital allocation
Tax inversion is a key theme that has been enabling specialty pharma M&A. RBC Capital Markets will be hosting a keynote panel discussion at the 2014 RBC Healthcare Conference with tax inversion expert Robert Willens, president, Robert Willens LLC, and Eric Jacobs, RBC Capital Markets Global M&A managing director, to understand expectations for more tax inversions and inversion-driven M&A within specialty pharma and healthcare more broadly.
“On the pharma side, we continue to see some interesting evolution of business models. Pharma has become a slow- to no-grower, and many are struggling with where the business goes over the next decade,” said Brown. Years ago, pharma was the source of innovation, but now R&D productivity at pharma cannot provide sufficient growth and pharma is going to have to acquire that innovation to stay at the forefront, said Brown.
“We should also expect continued divestitures and spin-outs from pharma as they work to focus themselves in areas of excellence – both current areas of strength or where they may not now be a leader but see the need to lead in the future” he added.
Capital allocation will also be a big theme for large-cap biotechs over the next couple of years. “Amgen already has a growing dividend. We expect there to be discussion with other large cap biotechs regarding what needs to happen for them to get comfortable with issuing a dividend, and whether that could bring in new income-style investors to these stocks, like what we saw happen with Amgen in 2011,” Brown said.
Biopharm Insight A financial Times Group product