How Can VCs, Biotechs Navigate Uncertain Markets?
Biotech firms are shifting towards M&A and away from public exits because of increasing economic pressures not sector specific challenges. Meanwhile, those struggling to secure new cash will be able to weather the storm if data and innovative research remains strong. This was the verdict from a panel discussion at partnering conference BIO-Europe Spring on keeping your head whilst navigating uncertain markets.
Adam Kostyal, senior vice president of global listing services at NASDAQ, told his audience on April 4 in Stockholm, Sweden that interest from investors for biotech IPOs remains high, but that the overall market has become cautious due to the poor performance by biotech public companies so far in 2016, particularly in the US.
"The US will pick up because we are still seeing some healthy science come out of this region," Kostyal said, adding: "I'm expecting a turnaround in the public markets in the US by mid-year." Kostyal also noted that the market has shifted its focus to earlier stage products and technology platforms, the combined effect causing recent IPOs to be lower in value. He expects that trend to continue.
Michele Ollier, co-founder of Medicxi Ventures, concurred. "A lot of innovation has come out of early startups that might not have secured funding before," when pharma's focus was squarely on de-risked and established drug candidates to in-license.
Stuart Collinson, a partner at Forward Ventures, took an opposite view however, saying that though pharma has moved towards earlier-stage deals he thinks this trend will reverse itself. "I remember having conversations a few years ago that if you weren't talking about Phase III, you would struggle to get attention at all, especially enough attention to go public. It wouldn't surprise me if we see a shift back towards this way of thinking."
As for the "hot areas" currently drawing considerable attention and investment, Collinson gave gene editing as an example. "Gene editing is exciting - but not so long ago this area was almost untouchable. It remains to be seen if the data are robust enough to translate into marketed treatments for patients."
Collinson highlighted full pharma pipelines and a shrinking sector in general, as major challenges for biotechs and other healthcare startups. "As pharma continues its mega-merger activities and larger scale acquisitions, the sector goes from in-licensing to out-licensing mode." However, pointed to large biotech businesses like Gilead Sciences and Vertex, to "pick up some of the slack," in terms of investing in and acquiring novel technologies from smaller firms.
When asked by discussion chair Adrian Dawkes, vice president of Pharma Ventures, who leads the partnering conversation , pharma or VCs, Ollier said, "Pharmas are defending their territories and acquiring assets and companies that could be a threat to their pipelines. But this means pharmas interest is in targeting assets that are far better than what they have already."
A big pharma executive in the audience noted that sometimes the industry does know what it really wants, but that good data is enough to change a company's mind. "Internal prioritization can slow novel approaches and they don't always survive internally – we need to look to outside sources," he said.
Kostyal noted duel-track IPO and M&A plans as a challenging method in the current investment environment. "There is especially very little appetite for this kind of activity in Europe," he noted. "Investors or acquirers don't understand where a biotech's commitment lies in these situations. These duel-tracks are also time consuming for a company."
Dawkes said in his view it is prudent for a company to have a backup plan for its exit strategy, but adding that it is "perhaps not cost-effective."
Collinson said, "It makes sense to keep your options open and you can do that by continually talking to big pharma. If you only target the IPO route you have to hope your inflection point lines up with a moment when the market is up."
Ollier said, "You have to keep all the doors open because younever truly know what is coming up in the near future."
China meanwhile continues to present a challenging environment, Collinson said. "China is a territory to take seriously but it's not for the faint of heart," he said. "Large emerging markets are tricky for smaller Western companies and we have even seen large pharmas, for example GlaxoSmithKline plc, make slip ups in this region."
Collinson said in this case he would argue that a strong local company might be better placed to get a drug through regulatory processes and onto the market. So out-licensing in areas like this would be his preferred method.
To close, reminding the audience that success is always in reach, Collinson told the room, "If you are developing novel tech and you have good data, a strong patent position and are addressing some of the regulatory questions that might come up with innovative products, then you can ride the ups and downs."
