Despite a continued struggle for funding, participants in last week's BIO Investor Forum in San Francisco expressed a renewed optimism in the biotech sector. The meeting focused on early-stage and small-cap life science companies, and attendance was up 5% over last year.
The biotech market still has a positive public-market bias, despite apparent gloom in early-stage financing and volatility in the public markets driven by macro events. The biotech sector as measured by the leading biotech ETFs or mutual funds was up over 10% through June until a macro-driven meltdown occurred in early August. On Friday, the life science sector remained up over 7% year-to-date (YTD), beating most major stock-market indices.
Many well-known larger-cap biopharmaceutical companies have had strong years, with many up 50% and more YTD. Outperformers for the year include Alexion Pharmaceticals Inc. (Nasdaq: ALXN), Biogen Idec (Nasdaq: BIIB), Cubist Pharmaceuticals Inc. (Nasdaq: CBST), and Regeneron Pharma Inc. (Nasdaq: REGN).
The BIO meeting drew a mix of 100 private and public companies with all types of investors, including venture capitalists and funds. Despite successes in the public markets, funding for the industry has not been good over the past three years. The real estate meltdown and the derivative bubble cut the lifeline of cash going into risky early-stage biotech companies.
Funding models slowing, changing
Biopharma startups have attracted only $251 million of funding in 2011, with $147 million going to cancer-focused companies, according to the trade publisher Elsevier. The squeeze has been exacerbated by a dearth of funds for the venture side, combined with the difficulties of exiting with an initial public offering. However, mergers and acquisitions have been brisk in 2011, offering short-cut exits for companies with the right product. Venture returns for healthcare have not been good over the past several years, so money has gone to technology, social networking, biofuels, and other sectors.
Jeron Eaves of Campbell Alliance presented data from Thompson Reuters that showed venture capital investments dropping to $6.5 billion in 2010 from $9.4 billion in 2007. Almost $4 billion of the 2010 investments went to biotechnology, compared with $5.2 billion in 2007. Venture capital deal volume has remained steady at 400-500 per year over the past five years, with only a 5% drop from 2007 to 2010. Corporate venture deals and M&A have helped fill the void in classic venture funding.
New business models have been created in venture capital. One example cited was Third Rock Ventures, which was founded in 2007 and is based in Boston and San Francisco. It has raised $804 million, including a second round of $426 million in September 2010, and it has 22 companies in its portfolio. The firm has experience in both company and venture management and provides a more hands-on approach to building early-stage companies.
In the past, too much capital has gone into overhead and infrastructure, so the new trend is to outsource certain functions, according to Matthew Perry of Biotechnology Value Fund.
Another trend that has picked up the slack for public exits is reverse mergers, in which a private company “takes over” a public one. Over 19 biotech reverse mergers have been executed since mid-2008, though with a high risk of market volatility. Biotech stocks, especially those making their market debut, had wild pricing swings in August 2011.
Life science financings were humming along through the first half of 2011, raising a record $51.8 billion (according to the Burrill Report), with secondary offerings up over 179%. But in late July, the European sovereign debt crisis and other macro economic events brought funding to a standstill. Marc Beer, the CEO of Aegerion Pharmaceuticals Inc. (Nasdaq: AEGR), says companies can still access the public markets with an IPO if they have the clinical data to support it. His company went public in the fourth quarter of 2010 with a Phase III clinical stage product for a lipid disorder, as well as other clinical programs.
Strong trends driving investment
At the BIO meeting, it's clear that a handful of key trends are driving money into hot areas, including personalized medicine, immunotherapy, and diagnostics.
For a primer on many of the biotech trends in place throughout 2011, please see Guide to Biotech Investing. Here is a review of some of the big trends evident from BIO 2011:
- Personalized medicine. This market is driven by the need for targeted biological medicines in oncology. Pfizer (NYSE: PFE) recently received FDA approval for its Xalkori drug, which treats late-stage non-small cell lung cancer (NSCLC) patients who express the abnormal anaplastic lymphoma kinase (ALK) gene. Xalkori was approved for use with Vysis Fish Probe, a companion diagnostic genetic test (or biomarker) produced by Abbott Labs (NYSE: ABT) that preselects patients more likely to benefit from the drug. Companies such as Genomic Health, Inc. (Nasdq: GHDX) provide molecular diagnostics that analyze the biology of cancer, allowing physicians and patients to make individualized treatment decisions.
- Diagnostics demand. Increasing knowledge regarding the molecular basis of disease drives the need for companion diagnostics and collaboration between diagnostic and biopharma companies. This means many drug companies will need to consider companion diagnostics at an earlier stage of development. The FDA will increase its labeling requirements for biomarkers or companion diagnostics. And reimbursement and revenue sharing becomes an issue for diagnostic companies as their clinical trial investment goes up and they provide added value to a drug.
- Immunotherapy. There are dozens of companies working in immunotherapy with diverse technologies. Jason Kantor, an analyst with RBC Capital Markets, led and moderated an immunotherapy panel that included three entrepreneurial CEOs of emerging companies: Timothy Rodell of GlobeImmune Inc., Carlos Paya of Immune Design Corp., and Herve Brailly of Innate Pharma SA (Paris: IPH.PA). Immunotherapy is a new treatment paradigm that can harness the human body's natural immune system to treat cancer and other serious illnesses. Immune Design Corp. recently announced an agreement with Sanofi Aventis to investigate IDC's TLR-4 agonist to shape the immune response to allergies.
Innate Pharma, a French company trading on the EuroNext, focuses on antibodies that target receptors and pathways to control the activation of immunity cells in cancer and inflammatory conditions. GlobeImmune is a private company that uses antigens derived from yeast cells to treat cancer, HCV, and other infectious diseases. Also on the panel was Kevin Heller, director of strategic transactions with Bristol-Myers Squibb (NYSE: BMY). A major breakthrough for Bristol-Myers Squibb this year was the FDA approval of Yervoy (ipilumab) for treatment of skin cancer melanoma. Yervoy, an antibody developed by Bristol-Myers Squibb and Medarex, blocks a T-cell antigen (CTLA-4) to unleash the immune system. Dendreon (Nasdaq: DNDN) recently received the first FDA approval for an autologous immunotherapy for a specific type of prostate cancer. That product, Provenge, was launched in 2010.
With so much activity in the biotech space, it is hard not to see trading or investment opportunities, despite the macro market volatility. Many small-cap public biotech companies have already been driven to lower valuations. Investors who can understand the science and markets have opportunities to trade more than 50 public companies that have financing in place.
Because there are fewer well financed biotech companies with later-stage clinical pipelines, larger drug companies that need products will need to strike deals. Thus partnering has driven up value for top-tier and mid-tier companies with Phase II validated products.
The shortage of capital for the life sciences industry is due in part to an aversion to risk investing with the backdrop of macro concerns, but these concerns may be overdone. More risk money will begin to flow back to the life sciences. Many on the BIO Investor Forum plenary panel agreed that there is good value in the industry, and opportunities for 2012 look good.