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BIO Investor Forum: Bubble, boom or just robust; biotech financing's recent revival
11 October 2013
Mandy Jackson

Biotechnology company executives are feeling pretty good about their chances of raising capital and health care investors seem to think they are some good opportunities to make money, since more than 30 drug developers have launched initial public offerings this year.

The general excitement regarding the financing environment was apparent in all of the conference rooms, hallways and cold, dark corners of the Palace Hotel in San Francisco on 8 and 9 October during the Biotechnology Industry Organization's BIO Investor Forum. Many attendees remarked that the annual conference's tone was more upbeat this year.

But don't call it a bubble, many investors said. It's just a boom, they insisted. It's a "robust" market, they preached.

And companies planning their next clinical trials or anticipating near-term regulatory filings clearly want to believe that this year's spike in IPO activity won't taper off in 2014. They hope there will still be money at the altar when they have early-stage data that justify further development of antibody therapeutics or novel small molecules.

Options abound

Zafgen president and CEO Thomas Hughes, whose company is moving from a Phase IIa clinical trial to a Phase IIb trial for the weight loss drug belonarib, is facing some attractive options for financing the obesity therapy's next stage development without having to license most of the company's commercial rights to a big pharma partner.

"Right now, we're very happy to maintain our independence," Dr Hughes told Scrip.

Zafgen reported up to 22lbs of weight loss for the first 19 patients treated with belonarib in Phase IIa data presented at the American Diabetes Association Scientific Sessions in June and will report additional results at the Obesity Society's annual meeting in November (scripintelligence.com, 25 June 2013).

With the final Phase IIa results in hand, the company is seeing keen interest from prospective investors for a $40m venture capital round to fund Phase IIb, according to Zafgen chief financial officer Patricia Allen.

"We continue to be backed by high-quality investors," Ms Allen said.

While Zafgen is not looking to the public markets just yet, she said the company's recent private fundraising efforts have attracted the types of investors who would be able to support Zafgen in an IPO at some point in the future.

Several companies in interviews with Scrip during the BIO Investor Forum were confident about their funding and partnering prospects.

Ambit Biosciences president and CEO Michael Martino, for instance, said the newly public company has had a lot of interest from potential Phase III development partners for quizartinib in the treatment of acute myeloid leukemia (AML) patients with FLT3 genetic mutations.

"We're not in a hurry to sign anything prior to regulatory guidance," Mr Martino told Scrip. "We've got good options outside the US."

Ambit will present Phase IIb quizartinib data at the American Society of Hematology annual meeting in early December, but the company will speak with the US FDA in November about its Phase III trial design and the potential for accelerated approval based on the Phase IIb results.

But when Ambit went public in May, the company had to cut its IPO price from a range of $13 to $15 per share down to $8 per share to entice investors. The discount probably had something to do with Ambit losing its partner Astellas a month after the company registered its IPO with the US Securities and Exchange Commission (SEC) (scripintelligence.com, 12 March 2013). But Ambit eventually raised $85m in net IPO proceeds and its stock price closed at $16.44 on 10 October.

"Our team takes a lot of pride in being able to complete an IPO after our partner dropped out," Mr Martino said.

Optimistic investors

It's hard to be humble when even discerning investors get on stage at a conference and admit they're not as discriminating as they used to be when biotech IPOs cross their desks – an admission that might raise the eyebrows of bubble believers.

Franklin Templeton Investments portfolio manager Evan McCulloch said the investment management firm sometimes looks beyond individual company IPOs and puts money into the biotech sector more broadly, because the industry's stock prices are performing well and it's sometimes difficult to put a value on a single early-stage company.

"We are taking a bit of a basket approach," Mr McCulloch said during an 8 October BIO Investor Forum panel discussion about whether the "go-go" biotech IPO market is here to stay.

Individual companies may exist in a bubble that's likely to burst and leak a lot of value, but Mr McCulloch said there is no bubble in biotech.

The stability of the IPO market will depend on venture capital investors, who've had to hold or increase their ownership in companies to make first-time offerings attractive to public market investors. Venture capitalists must wait until the end of so-called "lock-up" periods to sell their stock in companies after the firms begin trading in the stock market.

"VCs want to exit over time in a very structured way," Bay City Capital managing director Ashley Dombkowski said during the same panel with Mr McCulloch.

IPO returns, venture capital hope

It's important to young biotech firms that venture capital investors cash out of newly public companies with attractive returns on their investments. Higher returns mean better venture fund performance and happy investors give venture firms the confidence they need to raise capital for new funds.

Delphi Ventures general partner Deepa Pakianathan said mergers and acquisitions used to provide higher returns for venture capital investors than IPOs, but that's changed over the last 12 months, since private companies can get higher valuations from going public than they can from big pharma partners or buyers.

"Right now, the public markets are valuing companies higher than Merck or Amgen, so that's where we're going," Dr Pakianathan said during an 8 October panel discussion about crowdfunding for product development in its earliest stages.

Venture capital funders are putting their money into mid- to late-stage companies rather than early-stage startups, because their investors can't wait 10 to 15 years for returns from drug development firms.

But that's where Poliwogg CEO Gregory Simon's crowdfunding service comes in to play. Mr Simon said there are a lot of private individuals who can afford to invest in early-stage science as angel investors. Only 3% of people who quality as accredited investors make angel investments, because Mr Simon said most of the other 97% would rather invest $2m in several companies via crowdsourcing rather than put it all in one company as an angel.

"We're creating a market for investors to get out of a Phase I company when it gets to Phase II when venture capital and pharma are interested," he said.

Pharma in the early stages

But venture capital and big pharma interests have flip-flopped during the past few years with venture investors funding fewer early-stage companies and pharma chasing more preclinical and Phase I assets.

Eli Lilly's president of Lilly Research Laboratories Jan Lundberg spoke with Scrip before his 9 October "fireside chat" at the BIO Investor Forum about the company's approach to licensing or buying external research.

Lilly's Capital Funds Portfolio has two key strategies – venture capital investments on the one hand and acquisitions or licensing deals on the other hand. Lilly Ventures is a corporate venture fund that participates in biotech firms' venture funding rounds. As a company, Lilly also has alliances to invest alongside three venture capital firms – Health Care Ventures, Atlas Ventures and TVM Capital – in exchange for an exclusive option to buy private biotech firms.

Whether Lilly invests venture capital or acquires an asset directly, each compound is handled as if it is a new startup company. Then Lilly's Chorus group runs human clinical trials to determine early on whether the molecule is likely to be successful.

"The key principle continues to be that if you can get it right earlier it will increase the speed of the program and reduce the cost of failure," Dr Lundberg said.

All compounds are judged under Lilly's new research and development mantra: timely, valued medicines to patients. In other words, drugs in the company's pipeline are judged by whether they are differentiated from existing therapies in a way that adds value in the eyes of regulators, doctors, payers and patients.

Preclinical strategy

Pharma giant Pfizer recently negotiated a preclinical collaboration with South San Francisco-based CytomX, which is eligible for $25m in upfront and preclinical research fees as well as up to $610m in milestone payments plus royalties under an agreement to develop probody-drug conjugates that link CytomX's engineered antibodies to certain Pfizer drugs (scripintelligence.com, 6 June 2013).

CytomX CEO Sean McCarthy told Scrip that the company has enough capital to fund its operations through 2014 between the $45m in venture capital that CytomX has raised to date and income from the Pfizer partnership.

CytomX plans to negotiate "a limited number" of additional partnerships, but the company also will consider other funding opportunities.

"The financing market is robust," Dr McCarthy said. "We're looking at a range of opportunities that could put more shots on goal."

That's a notably optimistic sentiment for a company that doesn't plan to take a drug into the clinic until 2015. Just about the only option for an early-stage firm a year and a half ago was a partnership or acquisition, since the IPO window wasn't open yet and many venture capital investors weren't backing preclinical companies.

But Dr McCarthy is a pragmatist, not an evangelist. He knows the relatively positive financing environment won't last forever, so CytomX may raise money long before it runs out of cash.

"We don't need capital, but given the financing market and our needs over the next few years, it makes sense," Dr McCarthy said.



EVENTS
21 January 2015
Marriott Regents Park Hotel, London UK
21 January 2015
Marriott Regents Park Hotel, London, UK
03 February 2015
ETC Venues, 155 Bishopsgate
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