Wall Street Parties
Transcript of BioCentury This Week TV Episode 159
Jonathan S. Leff, Partner, Deerfield Management And
Chairman, Deerfield Institute
Edward Mathers, Partner, New Enterprise Associates
Jamie Streator, Managing Director, Healthcare Investment Banking, Cowen Group
PRODUCTS, COMPANIES, INSTITUTIONS AND PEOPLE MENTIONED
PWC's Money Tree Survey
Silicon Valley Bank
National Venture Capital Association
Bio Industry Organization (Bio)
Securities & Exchange Commission
Affordable Care Act
Eric Pierce, Publisher
ERIC PIERCE: Led by Wall Street, the global biotech industry has raised more than $27 billion in new money this year. Is there any more money left? And who's being left out? This week: BioCentury's 4Q investment preview. I'm Eric Pierce welcome to BioCentury This Week.
NARRATOR: Your trusted source for biotechnology information and analysis-- BioCentury This Week.
ERIC PIERCE: Biotech is living a tale of two cities. It is the best of times for established companies, and it is the worst of times for startups. The biotech bull market of 2013 hasn't slowed down. The JOBS Act and optimism about FDA have fueled record setting IPO investing. Mature biotechs are getting a double boost. Stock prices are going up, and they're attracting new investment.
On the flip side, things aren't looking so good for the new generation of biotech innovators, the young companies that are nurturing the next big ideas. First time life science investment by venture capital firms is close to a 20 year low -- this according to the Money Tree survey from the accounting and advisory firm, PWC, PricewaterhouseCoopers.
Today, BioCentury This Week asks two VCs and an investment banker to analyze the biotech funding ecosystem and predict where it's heading in the final months of 2013.
To discuss the tale of two markets, we welcome investors Ed Mathers of NEA, Jonathan Leff of Deerfield Management, and Wall Street banker Jamie Streator of Cowen & Company. Jamie, you've been in the industry for 30 plus years. You've been in the investment banking community.
This is a pretty robust market. Our BioCentury 100 Proprietary Index just reached an all-time high. It bested the genomics bubble level just last week, actually. So how good is it, from your chair?
JAMIE STREATOR: Well, candidly, it's a once in a generation market. And we haven't seen anything like this for at least 12, 15 years. And I think it's going to continue.
And I think, candidly, it's actually a reflection of what's been going on under the surface for over five years, where healthcare has outperformed just about all the other indices. And if you were under-allocated in healthcare, you frankly underperformed. And so now, a lot of the generalist community is migrating into healthcare. And that's adding more lift to the market.
ERIC PIERCE: So we're seeing some performance driving investors into stocks -
JAMIE STREATOR: -- stocks expanding -
ERIC PIERCE: -- that they might have been under-weighted in.
JAMIE STREATOR: Correct.
ERIC PIERCE: Great. But there's also some regulatory things that have happened in the last couple years, Jonathan. Why don't you talk a little bit about your take?
JONATHAN LEFF: Sure. Well, in terms of why the appetite for risk and the appetite for investors to support these companies in biotech has increased over the past several years, there have been a lot of factors. But certainly, one of them is credit to the policy making environment.
We've seen the JOBS Act, which has smoothed the path to the public markets for many companies and taken out some of the inefficiencies that existed in the system. And I think of tremendous importance is the FDASIA, the regulatory reform that became law last year, which really represented, in my mind, a watershed moment of the FDA, the industry, patient groups all coming together to recognize that a lot of the things we've been doing for decades in drug development have not been working as well as they need to to drive innovation to the market. And a number of important changes were put in place, and a new mindset about working together to make the process work better.
ERIC PIERCE: So we're starting to see some collaborative efforts, some fruits of that regulatory labor, if you will. Ed, what's your take?
EDWARD MATHERS: I think the number one thing impacting this market right now is the JOBS Act. If you look at from 2012 to 2013, there were 12 IPOs in 2012 -- healthcare IPOs. In 2013, we're already at 40 to date. And it's provided the opportunity for companies to actually get out, before they even file for an IPO, to talk to investors, understand what is going on, whether there is an appetite for this type of investment opportunity. And then the boards are taking the companies forward in probably a less risky fashion.
ERIC PIERCE: So it's really created a conduit where private companies can have these -- they're referred to as Test-the-Waters-Meetings --
EDWARD MATHERS: Correct.
ERIC PIERCE: -- to get information on whether the company is at a right level for an IPO, but also get some information around like valuation.
JAMIE STREATOR: Yeah, and I actually would say that if you don't know who's going to buy your deal in what size and at what kind of a price, you probably shouldn't embark on the IPO process at this point. And the JOBS Act and the Test-the-Waters-Meetings that have come out of the JOBS Act have allowed us to actually have a constructive dialogue with investors on all those fronts. So we can go to boards with a much higher degree of confidence in what the outcome's going to be. And therefore, I think they're much more inclined to take that major step without worrying about it.
ERIC PIERCE: You know, in the investment area, the strength is not just limited to IPOs. We've seen a number of really, really large follow on offerings, as well. Jamie, you talk to the investor crowd quite a bit. Talk about how these companies are able to raise such money, and also that we're really raising past the typical milestone that was funded in the past. Companies are actually raising money well beyond that.
JAMIE STREATOR: Right.
ERIC PIERCE: What's the impact of that?
JAMIE STREATOR: Two dynamics here. One, I think this cycle most recently is still pretty heavily skewed to IPOs. But that's kind of typical in these cycles. Last year was predominantly, I think, follow-ons. As the market began to perform and the stocks went up, people could raise money.
I think what is dramatically different now is the public investor is now willing to take on a different sort of portfolio of risk in the sense that they're willing to fund these companies as they go public with it to Phase I, II, or III. And a lot of the companies do that without, in effect, having to partner the assets. And so the public is willing to bet on those assets now. I think that's changed a lot of the complexion of how investors have been willing to fund these companies, both existing public companies and new IPO companies.
ERIC PIERCE: So investors have really migrated up the risk curve a little bit. And we'll see, in the next segment, we'll talk a little bit about whether that's happening in the venture capital environment, as well. So the public markets are flush, but the same can't be said about venture investing. We'll discuss what can be done about that in a moment.
But first, here's a look at the funding gap between public and private biotechs this year.
NARRATOR: You're watching BioCentury This Week.
ERIC PIERCE: We're talking about the venture side of the biotech ecosystem with Ed Mathers, Jonathan Leff, and Jamie Streator. Jonathan, not a pretty picture. This shows first time VC investment in life sciences and biotech. Before we hit the panic button, talk about how nervous this chart makes you and what can we do to fix it.
JONATHAN LEFF: Well this is a very important picture and very important data. And I think it's important to look at through two different perspectives. One is what it says about the flow of innovation. And the other is what it means from the point of view of those of us who do venture investing and the emerging companies that are trying to raise venture capital. Looking at it through the lens of innovation, it is a daunting set of statistics and of great concern from a policy point of view.
If you look at where the important new drugs, new drugs that are first in class and have served important, unmet needs have come from over the past couple of decades, the majority of them have had roots in venture-backed small companies. So this statistic, which is the number of new companies being created and receiving first-time financing, which we're seeing this decline somewhat dramatically, more than 50%, over the last four or five years.
ERIC PIERCE: And it looks like it's almost at a 20-year low right now.
JONATHAN LEFF: It is. It's at the lowest level we've seen since 1995. And what that says is, fewer new companies getting started, it's really the top of the funnel for medical innovation. If less things get started, there are going to be less new drugs coming through the pipeline on the other end, unless something changes and this dynamic begins to move in the other direction.
ERIC PIERCE: Ed, you're squarely in that area. Your fund invests across all stages of biotechs, but you also can invest in other sectors. You can do energy, you can do IT. How much of that chart is reflective of basically VCs that have blended funds doing more outside of life sciences? And could we have an opportunity to bring them back?
EDWARD MATHERS: I think that chart is probably more a reflection of things that happened during the financial crisis and when funds were starting to getting to a situation where they needed to raise additional capital but were not quite ready to do it. So they ended up putting less money to new companies, making sure they had reserves for the companies that they were currently in. Benefit from an NEA point of view is if the market did take a downturn for whatever reason in the healthcare sector, we are a dynamically allocated fund.
So it allows us to move money into the tech sector. And we do that dynamically. But I don't think that's more a reflection of money is moving to multi-specialty funds but more just the dynamics of where people were in their funds.
ERIC PIERCE: So you really see the data and more a reflection of VC making sure that their existing portfolio companies had enough to sort of weather the storm, which sort of took their eye off of maybe starting new investments.
EDWARD MATHERS: Yeah, I think it's more of not necessarily taking their eye off new investments but being more disciplined at what they can do by making sure they have to get the exits on their current investments. Otherwise, their ability to raise a new fund in the future will be limited.
ERIC PIERCE: Jamie, one of the things that's interesting on this graphic is a lot of the companies that are going public today were started at the high watermark, 2005, 2006, 2007. Those are the companies that are now reaching the IPO market. Are you, as a banker, are you concerned at all that we're not replenishing the IPO queue for the next few years?
JAMIE STREATOR: As Jonathan said, I'm very concerned about the innovation gap, because you do need to start and fund new ideas to produce new companies in the long haul. I'm very, very encouraged, on the other hand, by the robust nature of the current market we've had, because, in effect, what we're doing is renewing the money supply for the venture funds and therefore for the companies. And I think that virtuous cycle really needed to happen.
We effectively went through a near-death experience between 2007 and 2012. And now that we've survived that and we have created a lot of new companies in the near term that have gone public and created a lot more wealth and a lot more capital, I think that will trickle down and create more new companies. At the same time, the market has gotten more aggressive about the maturation cycle of these companies. I think even though companies may have been founded as recently as 2011, they may actually go public in this cycle.
So you're going to see a little bit of companies going public sooner, companies getting more mature. It's going to depend on the company and the science involved.
ERIC PIERCE: So there has been a lot of IPO liquidity. That's going to take a while to sort of find its way back into the limited partner mix. Jonathan, what's your take on that?
JONATHAN LEFF: I am actually optimistic for the very reasons that Jamie was talking about, that this situation is poised to get better. Now, it's going to take some time, and we're going to see that curve begin to stabilize and begin to improve. But what has to happen for that to occur is for life sciences venture funds to begin raising more money. There was some data published recently by Silicon Valley Bank, which found that the amount of money invested in life sciences venture capital over the past three years has very significantly exceeded the amount of money raised by venture funds to do life sciences venture capital.
That's obviously not a sustainable picture, and it reflects the depletion of the funds available to start these new companies. That will start to change when new funds are raised. New funds will be raised when the limited partners, the investors in this area begin to see the returns trickling through from the public markets and robust M&A activity.
ERIC PIERCE: Jonathan, what's your take on what lies ahead. And are we actually moving into an innovation gap here in the U.S.?
JONATHAN LEFF: I think the discussion we had about the decline in new company formation and first-time venture investing points to the potential for an innovation gap. What can we do about it? Well, I think we first need to understand where it comes from. The basic underlying problem, and what's driven capital away from investing in the sector has been, over the course of decades, a relentless increase in the time and cost of developing new drugs, as well as a very high failure rate.
Now, we need to address those things in order to bring capital back into investing in innovation. We made a lot of progress on that, as we talked about earlier, with the FDASIA - the Regulatory Reform Act - last year. What more can we do? I think number one, we need to recognize that we do need robust government funding of key institutions like NIH and FDA for them to do their job and provide the supportive framework for investment in this area.
Obviously with all of the budget gridlock in Washington, that's a major concern. Additionally, we need to think about how we're going to pay for innovation that really brings value to patients, and as we look forward, as we think about the goals of trade groups like the National Venture Capital Association and BIO, there's a tremendous emphasis on thinking about how we pay for the drugs that really make a difference for patients.
ERIC PIERCE: And Jonathan and Ed, you both sit on the BIO board. What's your take on who's responsible for changing the dynamic, changing the culture around, funding basic science, because what's caught in the shuffle here is that healthcare has become sort of a cost. But at the end of the day, healthcare really truly is a benefit.
So what's the talk amongst BIO and some of the other industry leaders?
EDWARD MATHERS: Well, obviously BIO and the NVCA is focused on that, because in the absence of the NIH getting their funding, we need to fill that gap. If you look at it from that regard and then also from what's going on in the pharmaceutical industry, pharma right now is backing away from the research side. So they're not even focused on the innovation side.
So from the NVCA's side and even BIO I think this is a perfect opportunity for the venture community to step in, which is historically what we've been very good at, funding the groundbreaking ideas. And I think what you'll see is we saw that curve where new companies were not being funded. I think going forward, you'll start seeing that flip around and start seeing it'll fill a gap, but it might take a little bit more time.
ERIC PIERCE: When we return, our Affordable Care Update finds out what investment professionals have to say about the Obamacare uproar in Washington. First, here's what the President had to say about the situation last week.
BARACK OBAMA: The Affordable Care Act is a law that passed the House. It passed the Senate. The Supreme Court ruled it constitutional. It was a central issue in last year's election. It is settled, and it is here to stay.
[MUSIC PLAYING] ERIC PIERCE: At its core, BioCentury This Week is about advancing innovation in healthcare. This past week, Washington has been in an uproar over the Affordable Care Act and the launch of the Obamacare insurance exchanges. Caught in the middle of the argument: funding for science at the NIH.
I'd like to raise the question. We have a lot of focus on what's going on within Washington right now, Obamacare, ACA exchanges getting launched last week. But at the same time, there's a lot of pressure on the NIH budgets. You guys are really responsible for funding innovative companies and finding unmet needs that have an investment bearing.
What's more important to you guys? Is it now getting the budget back on track, so the FDA and the NIH can get properly funded? Or is it getting Obamacare and the exchanges off the ground? Ed, I'll start with you.
EDWARD MATHERS: Yeah. I think, while the Obama exchange will have significant impacts on what's going on in the healthcare environment, from my point of view, I think making sure that the FDA and the NIH, and even, to some extent, with the capital markets, any issues with the SEC, maintaining the smoothness of what's going on there, I mean we need those institutions to be continuously funded to make sure, A, we're getting innovation. But B, regulatory reviews, if that slows down it will just stop up everything going on. It will just have a domino effect going backwards in time. So from my point of view, we need to get those maintained, what's going on in those institutions, right now.
JAMIE STREATOR: At the risk of being somewhat controversial, I think everyone's noticed that the stock market really hasn't, frankly, been overly concerned with what's been going on in Washington. I think, actually, what's even more interesting is, if you talk to the analyst community, which I did in anticipation of some of this discussion, the analyst bank, frankly, aren't factoring in ACA into their projections. And so as a result, it's basically neutral from the near-term.
It's going to depend on how that enrollment goes, what happens to the actual demographics and the sheer numbers of people involved. And then they're going to begin to adjust their numbers. So in many ways, I think the Street views this as neutral, and maybe going to positive over some period of time, if it does, in fact, turn out to more active than expected.
ERIC PIERCE: Because at some point, if you take a step away, eventually, this will end up having more patients, granting more patients access to healthcare, which would have to be a net positive for biotech and for pharma. But so there's this question of when is that going to happen? And I think there is also some pricing issues as well. So Jonathan, what's your take?
JONATHAN LEFF: Well, I would agree. I would certainly agree with Ed that, while the Affordable Care Act is an important development, a major change in the way healthcare is delivered and paid for in this country, that from the point of view of an investor in biotech innovation, we're looking out what's the environment going to be like for the investments that we're making five years in the future. And I think everyone understands that the Affordable Care Act represents a change that has been taking place for quite some time and will continue to take place.
We're in the first week of Obamacare. But regardless of how quickly the exchanges get off the ground, the world has changed. And the environment that we were in of healthcare costs rising faster than GDP year after year after year, while tens of millions of people don't have healthcare coverage, that that was an unsustainable environment.
We're now moving into a new world where we're trying to address that. And core to how we get there is a recognition that the system is going to have to pay for those things that provide real measurable value to patients and pay less for those things that don't. I think that those of us who invest in innovation, in the end, think that that's a good thing, because we want to invest in the things that make a big difference for patients. And we want to figure out how to prove that and then enter into a marketplace that pays for that innovation.
Back to your original question, what's more important? I actually think it is tremendously important that we iron out these constant budget battles and allow the NIH to fund the underlying science that creates the opportunity for us to invest in innovation and that we fund a robust FDA that can create the regulatory framework we need to do what we do in this industry. That's absolutely essential and, I think, somehow gets lost in this debate.
ERIC PIERCE: Yeah. So we need to refocus the discussion around really getting the budgets back in place for the necessary agencies.
JAMIE STREATOR: Consistently predictable.
ERIC PIERCE: Yes. Yeah. Absolutely. When we come back, what everybody wants to hear. Our investment pros make their predictions for the rest of 2013.
NARRATOR: Healthcare is changing. And we're changing too. Each week, watch BioCentury's Affordable Care Update, a special part of every show dedicated to keeping you informed about this unprecedented transition. And watch all of the weekly updates in one place at any time, only at biocenturytv.com.
ERIC PIERCE: We're back for the predictions for the rest of 2013. First off, can anything derail the current biotech bull market? I mean Jamie, let's start with you. What can get in the way of this freight train that's the biotech market?
JAMIE STREATOR: Well, hopefully nothing, but I think what we are going to have to weather is there's been a tremendous amount of value created by the venture capitalists and their portfolio companies that have gone public. And historically, this capital hasn't necessarily been recirculated efficiently. And I think what we've going to see and we actually just saw yesterday with the filing of a follow on offering by a company called Intercept, which is essentially a secondary share offering for existing investors.
ERIC PIERCE: Brand new IPO.
JAMIE STREATOR: It's not even an IPO now. It's basically the first company to actually do nothing but sell shares for their existing shareholders, which is unusual in an industry that depends on access to capital. So it tends to crowd out the ability to sell that stock.
The Street's ability to absorb that stock and to recycle it from long-term venture hands to long-term institutional hands will have a big effect on the IPO as they go forward. So it's very important how we handle that -- not just that transaction, but what I perceive to be another five, six, seven deals that'll happen in fairly short order of the companies that have already gone public this year.
ERIC PIERCE: Yeah. So there's really dealing with that sort of transitioning of the VCs that -
JAMIE STREATOR: Correct.
ERIC PIERCE: - early stage investors that own the now publicly traded shares, how those transition into the current market when there's -
JAMIE STREATOR: - and the VCs lock in their gains. And everyone declares victory.
ERIC PIERCE: Yeah. Jonathan, what's your take?
JONATHAN LEFF: Well, as an investor in private companies and the private markets and venture backed companies, I'm not going to try and predict the rest of 2013. I want to take a longer view and talk about the next five years or even the next 10 years. And I actually believe, notwithstanding the challenges that the venture world has faced over the last five years, we've got a great future.
It's going to prove to be a great time to be a venture investor over the next five to 10 years, and three reasons for that. One, is something we've talked about here today -- a much better regulatory environment that reflects a recognition by all players in this ecosystem that we need to do things differently in drug development to develop the drugs that make the biggest difference for patients faster and more efficiently. And that's leading to better economics for investing in drug development.
Another reason is the opportunity for great science that has come out of the past 20+ years of research into the mechanisms of disease, much of it funded by NIH and NIH grants, that has led to a better understanding, better predictability of the kinds of impacts we can have with therapies and targeting therapies to the right patients, again, leading to better investment opportunities.
And then finally, for better or worse, a less competitive environment for venture deals than we've seen really at any time over the past 15 years. And that is the case for those firms that are able to raise new capital and create new companies, make new investments in the private markets. It's a tremendous time to be an investor.
ERIC PIERCE: And so we have about a minute left, but you bring up an interesting dynamic, which is on one hand, you have maybe fewer VCs left. But at the same time, that also raises the question of who's going to step in to fill the breach?
And Ed, we were talking earlier about the corporate VCs being very active, and you were formerly at MedImmune. How much longer can they continue to shoulder the weight, if you will? What's your take on that?
EDWARD MATHERS: Yeah. I think, as Jonathan said, it is a less competitive environment. And actually, what we're seeing is a lot more of the corporate VCs are stepping up to fill that void. Historically, a lot of corporate VCs were not tied into their strategic purposes. And now, what we're seeing is the Pfizers, the GSKs, the Shires, the Genzymes, they're stepping up and not only participating, but leading rounds and filling the gap, so to speak.
And they're taking the place of some of their absence in the pure R side of the business. So I think you'll continue to see that. And I think I agree with Jonathan. There's not a better place right now than to be in the VC community in this space.
ERIC PIERCE: And that's this week's show. I'd like to thank my guests, Ed Mathers, Jonathan Leff, and Jamie Streator. For more on the industry's performance, you can read our 3Q stock market report. It is available now on biocenturytv.com.
And remember to share your thoughts about today's show on Twitter. Join the conversation using hashtag #BioCenturyTV. I'm Eric Pierce. Thanks for watching.