Biotech Bull Riders
Transcript of BioCentury This Week TV Episode 133
Stuart Duty, Senior Managing Director for Healthcare, Guggenheim Partners
Craig Johnson, Managing Director and Senior Technical Analyst, Piper Jaffray, Minneapolis, Minn.
Dennis Purcell, Senior Managing Partner, Aisling Capital, New York, N.Y.
PRODUCTS, COMPANIES, INSTITUTIONS AND PEOPLE MENTIONED
Acorda Therapeutics Inc. (NASDAQ:ACOR), Ardsley, N.Y.
Alkermes plc (NASDAQ:ALKS), Dublin, Ireland
Amgen Inc. (NASDAQ:AMGN), Thousand Oaks, Calif.
AstraZeneca plc (LSE:AZN; NYSE:AZN), London, U.K.
Biogen Idec Inc. (NASDAQ:BIIB), Weston, Mass.
Celgene Corp. (NASDAQ:CELG), Summit, N.J.
Gilead Sciences Inc. (NASDAQ:GILD), Foster City, Calif.
GlaxoSmithKline plc (LSE:GSK; NYSE:GSK), London, U.K.
Pfizer Inc. (NYSE:PFE), New York, N.Y.
Regeneron Pharmaceuticals Inc. (NASDAQ:REGN), Tarrytown, N.Y.
U.S. Food and Drug Administration (FDA), Silver Spring, Md.
Eric Pierce, Publisher
ERIC PIERCE: Rising stock prices and raising cash on Wall Street -- how long can this biotech bull market last? I'm Eric Pierce. Welcome to BioCentury This Week.
NARRATOR: Your trusted source for biotechnology information and analysis, BioCentury This Week.
STEVE USDIN: Biotech has just completed another big quarter on Wall Street, outpacing the broad market indexes by 50% or more. That's on top of 2012, when biotech did even better, almost doubling the NASDAQ and more than tripling the Dow. In fact, the BioCentury 100 stock index has nearly tripled since hitting bottom four years ago.
Along the way, investors have poured cash into public biotechs that can use the money to reach value-boosting milestones. But the companies are spending the money as fast as they can raise it, investing in clinical trials and product launches.
In the past two years alone, total spending by 200 biotechs has jumped by 12% to nearly $65 billion dollars a year. That cash appetite could mean trouble if the bull run ends. And while more advanced biotechs are raising stock prices and cash, only a trickle of VC-backed innovators are doing IPOs.
ERIC PIERCE: To find out why investors have been flocking to biotech and to speculate on how long the bull market can last, we welcome back three Wall Street veterans who are also veterans of BioCentury This Week -- Dennis Purcell, whose Aisling Capital manages $1.7 billion and invests in both public and private biotech and medtech companies; Craig Johnson, who directs technical research and is a managing director at Piper Jaffray; and investment banker Stuart Duty, senior managing director for health care at Guggenheim Partners.
I'd like to start with you, Dennis. Really, what's the fundamentals that are driving the marketplace right now? We seem to be in a really hot market for biotech. It's super hot. What's your take?
DENNIS PURCELL: Well, I think the biotechs are the new pharmas. Back 10 years ago, we had the pharmas trading at big multiples. Today, they're basically dividend yield plays and consequently, people have moved into the larger cap biotechs that have the same multiples as the big pharmas, but have much higher growth rates.
So we're seeing a real transition from the traditional pharmaceutical companies to the bigger biotech companies. And we've see a great run this year.
ERIC PIERCE: And it's interesting you bring up the pharma sector, because occasionally, the biotech and the pharmas trade in tandem. But typically, from a price-to-earning standpoint, biotechs do get a little bit more multiple effect. Stuart, what's your take?
STUART DUTY: I think we always get excited when we see the biotechs move strongly, forgetting that they tend to move with the broader market. The broader market's done very well this year. It's a higher beta category. And so you'd expect it to outperform in these kinds of markets. It's following that same pattern.
I do think that biotechs deserve that higher premium, though, when they're working, when the market's working, because of the longer patent lives, typically, that those companies carry.
DENNIS PURCELL: And what you're seeing with the big biotechs are a lot of new, exciting products, also -- more than you see in big pharma. So I think we're getting rewarded for that pipeline.
ERIC PIERCE: So some of the money that's getting put to work -- and we'll get into this a little bit later -- is starting to go to more value inflection points than maybe we've seen 10 years ago.
DENNIS PURCELL: Well, when you can buy something at the same price -- at the same multiple, you can buy the big pharma but with triple the growth rate -- it's an easy place to go.
ERIC PIERCE: Craig, we talked about price-to-earnings ratios earlier. And despite biotech's run up, you feel like the market's still pretty cheap.
CRAIG JOHNSON: Still pretty cheap -- in terms of the big picture, we are still very bullish on this market. In fact, we're actually looking for $1,700 on the S&P 500 this year and $2,000 on the S&P 500 next year. I think there's a great rotation coming, money coming out of fixed income, coming into equities. It's going to lift all stocks, biotech also.
ERIC PIERCE: And Stuart, when we were on the show a year ago, you were lamenting about the lack of investors in biotech.
STUART DUTY: Sure.
ERIC PIERCE: How has biotech done in terms of recruiting new investment?
STUART DUTY: I think big cap's done very well. To Dennis's point earlier, there's been some move from traditional investors in pharma to large cap biotech. I haven't seen that same trickle down to the mid and small cap names yet.
We are starting to see signs that that buyer group is broadening. But it's in its infancy. I think we've got a long way to go to bring a full new group in.
DENNIS PURCELL: The big biotechs are all trading at $40, $50 billion dollars of market value so the big money managers can own them. What Stuart's talking about is less people can own those stocks as you move down the market cap.
ERIC PIERCE: So the maturation of the industry, the Gileads and the Amgens getting larger has actually helped broaden the investment thesis for bringing in some new investment. I think this is a good time to look at some of the charts that Craig has brought.
Let's first tee up the -- this is Piper's big cap index. And Craig, why don't you let us know what this graphic's showing?
CRAIG JOHNSON: So this is a Piper Jaffray proprietary large cap biotech index. It's going to include all the companies with greater than a $10 billion market cap. And what we're seeing here in this chart is pretty interesting.
This index has broken out to all-time new highs. And that's what you're seeing at the very top with those red lines.
ERIC PIERCE: And this is a 25-year chart?
CRAIG JOHNSON: This is a chart going back at least 25 years.
ERIC PIERCE: OK.
CRAIG JOHNSON: You also can see that, in terms of the relative performance -- which is a line right in the middle -- it's trending higher, making a nice series of higher highs and higher lows. So with this kind of price action in the large cap biotech area, it's certainly drawing in a lot of attention from investors, potentially new capital, too.
ERIC PIERCE: Well, we've got about a minute left. I wanted to also get your take on the mid cap index as well. So let's bring that up, because to Stuart's point earlier, we've started to see a little bit of trickle down into the mid cap space. So let's take a look at what we're seeing here.
CRAIG JOHNSON: So this would be our mid cap index. Basically, it's sub $10 billion dollars. And bottom on this would be about a $1 billion dollar market cap. And what we're seeing here is this group is just starting to reverse a very long term down trend that's been intact for about 10 years.
The relative strength trend has also started to turn higher. So this group is at an inflection point. And it's clear the investors are starting to care and pay more attention to this market cap tier biotech.
ERIC PIERCE: We've just got about 15 seconds. So what needs to take place to get the money to fall into that micro cap or smaller cap space, Stuart?
STUART DUTY: It's going to be tough to see more money coming without significant new inflows into funds where they are forced to put some of that money into work, into less expensive stocks.
ERIC PIERCE: OK. Great. Well, big pharma continues to depend on biotech research to provide new drugs. Last year, the top 200 biotechs spent nearly 40% of their operating budget on R&D. Here's a look at the numbers.
NARRATOR: You're watching BioCentury This Week.
ERIC PIERCE: This is BioCentury's Quarterly Financial Market Report. We're discussing the bullish biotech market with Dennis Purcell, Craig Johnson and Stuart Duty. I'd like to start with you, Dennis. We ended the last segment with a graphic on R&D.
You're private equity providing capital to emerging companies. Does that increase in spend concern you at all?
DENNIS PURCELL: Well, it's interesting. If you look at the big pharmas, you actually see a decrease in spending in research and development. I think Pfizer announced that it was going from $8 billion a year to $6 billion dollars a year.
But in the smaller cap biotechs, we do see that increase. And we've been funding it because the capital markets have been good. So we've been able to raise the capital.
The question is can we get smarter about how we spend the money, and particularly as it relates to killing projects early? I think one of the things we've learned over the last decade is that we sometimes take projects too far when we could have killed them earlier. So I'm hoping that we're more efficient with the dollars that we have.
If you look at cancer, for example, over the last 10 years, we've spent almost $100 billion dollars in research that did not come up with any new drugs. We have to get better at that.
ERIC PIERCE: And Stuart, you spend a significant amount of your time raising capital for both private and also established companies. What are you seeing in terms of the business plans and the stage of development? Are we in a market now where biotechs have matured to the point where an increased R&D spend, and maybe even a little bit in SG&A, is rational for the industry?
STUART DUTY: I think it's necessary, partly because where we used to see some of that spending get pushed off to pharma, through partnerships or acquisitions, has not reached the same level that is has in some historical cycles. So companies are forced to take things further, accounting for some of that spend, and also launch products, in some cases, on their own, requiring the SG&A spend that we historically, especially in some of the specialty pharmaceutical areas, would have expected them to be snapped up by that stage -- once they have Phase III data or an approved product.
DENNIS PURCELL: To follow up on Stuart's point, it used to be a mark of acceptance if you did a deal with a big corporate partner on Wall Street -- gave it some valid validity. And as Stuart was saying, many of the smaller caps, now, are trying to go it alone. And that does require higher spend.
ERIC PIERCE: Right. Yes, because some companies now are essentially being established to run a commercial operation, which I guess raises the question, are biotechs established enough to actually -- running an R&D company is one thing, but running a commercial company is another thing. Are we to the point where biotech can turn the corner and succeed on the commercial side?
DENNIS PURCELL: Well, at least on the venture side, we have to focus on those disease areas where it doesn't cost hundreds and hundreds of millions of dollars to get to market. Therefore, in areas like neuroscience, you don't see a lot of venture capital money because the trials are so long and so expensive -- same in cardiovascular.
But generally, now, when we start companies, we make the assumption that we're going to own them all the way through to profitability. So that's different than it was five or 10 years ago, when you thought you were going to own these companies to an IPO or to Phase II or something like that. Now, the whole notion is funded to profitability.
ERIC PIERCE: Yeah, so the time horizons from the investment side may have changed a little bit as well.
DENNIS PURCELL: Well, it's difficult, because the timelines for biotech are pretty long, but the timelines for limited partners and pension funds and college endowments is becoming shorter. So there's a little bit of a mismatch in terms of how long it takes to get a product to the market and get profitable and the amount of time that the venture capital community has to get capital back to their limited partners.
ERIC PIERCE: Yeah. Craig, let's jump to the public side. In terms of the timelines, what are some of the longer-term charts and longer-term timelines showing you right now in the marketplace?
CRAIG JOHNSON: In terms of biotech, they still remain very, very constructive. We're still seeing lots of names inside of the biotech space making higher highs, higher lows, nicely above rising 40-week moving averages. So really, no signs of weakness among the large cap areas, and the mid cap are just starting to turn and starting to look a lot more constructive.
Small micro cap names -- a little tougher. There doesn't seem to be quite as much liquidity down there. And the charts seem to be a little bit more volatile.
ERIC PIERCE: We've got about a minute left, Stuart, so why don't you give us a recap on your thoughts there with the R&D spend and the companies where they're putting their money to work? Because I think the thing that I'd like to question is -- are companies really getting smarter about the spend? And Dennis mentioned earlier that they are killing projects earlier. What do you see?
STUART DUTY: The same -- I think they are killing projects earlier. I think they are still having to focus on single indications when a product might be applicable across multiple indications. And so there's a sequential nature to that R&D where they've got a cash flow base to drive further investment. It still means a cash constraint.
ERIC PIERCE: Well, we're going to get right back to that when we come back. But while Wall Street's been happy to snap up offerings from established public companies, the number of IPOs remains very, very small. Here's a look at the numbers.
NARRATOR: Now back to BioCentury This Week.
ERIC PIERCE: Investors are pouring money into established companies, but wallets remain closed for IPOs. We're continuing our discussion with Dennis Purcell, Craig Johnson, and Stuart Duty. Stuart, we left the last segment with a graphic that showed clearly a divergence in the amount of money being raised by established companies through follow-ons, and then on the other side, IPOs, which are still pretty few and far between. What's that telling you?
STUART DUTY: I think there's two things. One is we've got a large number of public companies now, which, in historical cycles, we had many fewer. So six IPOs in a relative market may not seem like many, but years ago it wasn't normal.
The other is people are still averse to a liquidity trap. And an IPO is by definition, for most of these smaller cap names, a liquidity trap. You see success on big spin-offs, on highly liquid IPOs. The small stuff is still getting, hard to do.
ERIC PIERCE: Dennis, what are you seeing?
DENNIS PURCELL: Well, I agree with Stuart about this liquidity trap. Although I would say that last year the IPOs, of which there were 16 or 17, on average traded up about 30%. So that if you played the IPO market, you actually did pretty well. And we're actually seeing venture people and private equity people buying IPOs versus doing private companies.
So my hunch is we're going to see some more try to get out, and the question will be whether they succeed or not. But we certainly have a large backlog of companies that want to try to get public. And to make the industry work, we really do need a robust IPO market.
STUART DUTY: I think that performance is spot on. I would also say the pricing of those IPOs is a 30-to-50% discount to its comp group. So in effect, you're having to give away that upside to an investor to get in knowing they're going to take that 30-to-50% over the following year.
ERIC PIERCE: Let's stay with the aftermarket performance topic. Because follow-ons have actually performed very, very well in the first quarter, by and large. And Stuart, talk a little bit about how that sort of cascade effect can actually help improve and beget further deals when offerings are priced correctly.
STUART DUTY: I think there is an element of people chasing trends and chasing return. And so when something performs well, you see people follow. There's an element of that. But there's also an element that this is a good time to get out and push while the getting is good. The key here is, do funds flows continue to be strong?
ERIC PIERCE: And I think the one thing that we chatted about earlier is in typical biotech markets, you have a strong run up until the market sort of gets saturated by these offerings. Are we to a point where the offerings are going to start to be the goose that kills the gander? Or do we still have some room to run?
DENNIS PURCELL: I think we still have some room to run. One of the interesting things about the follow-ons is that a lot of them are getting priced right at the market with no warrant coverage or discounts to their stock prices, and they're still doing pretty well. As long as that trend continues, I think we'll continue to see pretty robust follow-on market.
ERIC PIERCE: Now, in terms of the IPOs, you mentioned earlier about the public number of companies has increased. So we're at almost not necessarily a saturation point, but that it's gone up significantly. The other thing that companies have been doing for a while is dual tracking. And that has to have an impact on the IPO process if you're also looking over your shoulder at the M&A route. So talk a little bit about what you're seeing there with your clients.
STUART DUTY: Sure. I think that goes back to an earlier conversation. Most companies do tend to look at that dual track as an option, whichever turns out to be best for their shareholders and their company. But often, what we've seen lately is the buyers aren't buying. And you've got to have a willing buyer along with your willing seller so that IPO course is the route that they end up taking.
That still hasn't driven a larger number of IPOs. Companies now today typically need to be in that Phase III stage to execute a successful IPO. It takes time to get there.
ERIC PIERCE: So let's talk a little bit about the M&A market. It's been a little bit choppy, but we're also seeing some activity from big biotech, as well. So Dennis, what's your take on the M&A market?
DENNIS PURCELL: Well, it's really evolved over the last few years. It used to be a very fine line between an M&A transaction, or an acquisition, and a licensing deal where you licensed your product to a larger biotech or a big pharma. And today those lines are blurred.
A lot of the merger and acquisition activities taking place include milestones, include royalties down the road. So that the merger and acquisition market is beginning to look a little bit more like the corporate partnering market. And we're seeing the emergence of the big biotechs, that now have market caps in excess of $30, $40, $50 billion dollars, become more active in the sector.
ERIC PIERCE: Stuart, what do you think?
STUART DUTY: It is much more of a risk sharing model in terms of the buyouts. Where that speaks, I think, historically to how big the pharmas were and how strong their pipelines were -- they could take big risks. It's harder for them to do now, so you see a lot more of these risk-sharing models, at least from a pharma buying biotech.
But activity is still fairly robust. There's a lot of activity going on behind the scenes. Deals take a while to gestate.
ERIC PIERCE: And also, we're starting to see some options that have done, I know Celgene has done a number of these options. Explain how that can work in this marketplace, as well. Because I can imagine that could also collar a company, as well, where you sort of feel like you're almost beholden to the company.
STUART DUTY: I think back to Dennis's point -- it's a risk sharing model. So you're willing to pay up if it works, but you're going to defer that upfront payment until you know the answer. We've seen some big blowups, some big pharmas take on those risky deals. They put big up fronts up and really come out on the wrong side of that within a very short period of time. So these options really reduce that risk.
DENNIS PURCELL: The other element to the options is whether you have a put to the bigger company. So these option deals started out where the bigger company had a call if in fact certain data were positive. Now we're seeing more puts and calls so that the data is positive -- you force the larger company into acquiring you.
So these kinds of deals I think are going to become more mainstream. But I think the biotech industry is still trying to figure out whether M&A is part of the strategy or not. Certain companies like a Regeneron or an Accorda -- some of the mid cap biotech companies -- have really stuck with their own technologies.
ERIC PIERCE: They're still trying to sort of sort out --
DENNIS PURCELL: But it's their own technology. Other companies like a Cephalon or an Alkermes, they were acquirers of other technologies.
ERIC PIERCE: They were looking outside the box earlier. Well, next, we'll hear our panel's predictions for what to watch on Wall Street. You're watching BioCentury's Quarterly Financial Markets Report.
NARRATOR: BioCentury, named the 2012 Commentator of the Year by the European Mediscience Awards for excellence in communications and clear, concise commentary.
ERIC PIERCE: Now, what everyone's been waiting for. Let's talk about the predictions for the second quarter and beyond. Dennis, let's start with you. What do you see on the horizon?
DENNIS PURCELL: A lot of good macro things that are happening. The FDA is getting much more friendly to the industry. The new GAIN Act is very positive for anti-infectives. The new BRAIN initiative that the President announced yesterday is very good for the industry. And I think we're seeing new models emerge that are going to really help the industry grow -- things like the pharmaceutical industry partnering up with the venture capital industry and the biotech industry and academic institutions. So I think we're going to see more data sharing, more interesting new collaborations. So I think the future's pretty bright.
ERIC PIERCE: So more technology transfer-type deals and synergistic deals between academic and industry.
DENNIS PURCELL: And what we need to do is share what we know better than we have in the past. And Glaxo and AstraZeneca are really leading the way there, where they're opening their books to trials that fail so that we don't make the same mistake over and over.
ERIC PIERCE: Stuart, how about you? What do you see?
STUART DUTY: I think the markets remain robust. I think the financing windows for follow-ons remain very strong. We're not tapped out there yet. IPOs will continue to get done, but they'll get done as they have been at discounts to the comps and in a limited number.
ERIC PIERCE: Universe of public biotechs 12 months now -- larger, smaller?
STUART DUTY: Larger, but realistically the same -- a few buyouts, a few IPOs.
ERIC PIERCE: All right. Speaking of buyouts let's take a look at some of the big cap players which could play in that space. You've got Amgen, I think here, teed up, Craig. What do you say?
CRAIG JOHNSON: Absolutely. Let's take a look at that chart. The shares continue to make a nice series of higher highs and higher lows, and we're above our 40-week moving average. So any sort of pull backs would be buying opportunity, we think, for those shares in Amgen.
And then next, looking at Gilead, the shares continue to trend higher. We're above our 50- and 200-day moving average. Arguably a little bit extended, but any sort of pull-backs toward the low 40s creates a pretty good buying opportunity for Gilead shares.
And then lastly, on BIIB, shares have been in what we would define as a well-defined up trend for 28 weeks. We're above a rising 40-week moving average. And again, any sort of pull-backs toward this big, long-term uptrend support line is creating a pretty good buying opportunity for investors.
ERIC PIERCE: So the charts are looking pretty good, especially from the big cap side. Dennis, you mentioned earlier, some of the big caps also plan on having some pretty robust news later on this year.
DENNIS PURCELL: I think even though they've had a nice run to date, when you combine Craig's analysis with the fundamental analysis of what some potential products are, I think the future looks pretty good for the big caps.
ERIC PIERCE: If you look at how the genomics bubble. We take a step back. 10 years ago, we were all in the market. That ended pretty nastily, and it was very sharp and very scary, if you will. Nobody's expecting that to happen again, but how could this market sort of end, or peter out if you will? Or are we in a situation where the sine waves maybe aren't that divergent from top to bottom?
STUART DUTY: It's very different. We have revenue now. We didn't then. That's a huge difference -- revenue and cash flow. So can it peter out? Sure. Can global macro come into effect? Yes. But it's not going to burst the way it did last time.
ERIC PIERCE: And back to your earlier point, we have companies that have products on the market which are attracting larger investors, which bodes well for the ongoing point of the industry. We've got 30 seconds. I want to get your last take.
DENNIS PURCELL: That have growth rates substantially in excess of the price earnings multiples. So it's a totally different environment than we were 10 years ago or 12 years ago with the Genome Project.
ERIC PIERCE: And in terms of the spend rate, obviously the spend rate is going up. But I think we talked about earlier, companies seem to be putting that money to pretty good use. So we hope that continues to play out as we watch the market go forward.
DENNIS PURCELL: Look at some of the charts -- Biogen with the new MS drug, Gilead with their Quad drug for HIV and the HCV franchise -- really exciting stuff coming out of the big cap biotechs.
ERIC PIERCE: And that's it for our Quarterly Financial Market Report. I'd like to thank my guests, Dennis Purcell, Craig Johnson, and Stuart Duty. For more biotech ideas, you can get BioCentury's stock preview at biocenturytv.com. Remember to share your thoughts about today's show on Twitter. Join the conversation by using hashtag #BioCenturyTV. For Steve Usdin, I'm Eric Pierce. Thanks for watching.