Facing up to the biotech IPO and financing challenge - PART TWO

Biotech and Money, the industry’s newest and most innovative virtual, online and physical private biopharma community officially launched on 12th June with the ‘Biotechs and the City’ Evening Reception at Bird & Bird‘s offices in central London.

The VIP Networking Launch Reception was open to a selection of UK Biotech and Bioscience CEOs, Investors, Industry Analysts, Pharma and Financial Services professionals and was themed around IPO and raising finance in the UK. The evening featured an exclusive hour long panel and Q&A with leading industry and city thought leaders, with ample time for informal networking.

Key panellists at the event were:

• Dr Karl Keegan, Chief Corporate Development Officer, Vectura - Raised £52m through public placement in March 2014
• Dr Paul Cuddon, Equity Analyst, Healthcare and Lifesciences, Peel Hunt - Peel Hunt Ranked 1st Healthcare & Lifesciences (Thomson Reuters 2013 Extel Survey)
• Simon Allport, Partner, Bird & Bird
• Chris Mayo, Consultant, Primary Markets, London Stock Exchange
• Neil Darkes, Co- CEO, Biotech and Money (chair)
• Terence O’Dwyer, Co- CEO, Biotech and Money (chair)

In this second blog of the series, we bring you the thoughts and contributions of Dr Paul Cuddon, one of Peel Hunt‘s lead analysts with in the Healthcare and Life Sciences division. Paul was speaking alongside representatives from Vectura, London Stock Exchange and Bird & Bird at the recent ‘Biotechs and the City’ evening networking reception.

Neil Darkes [ND]: Paul, you’ve overseen and analysed a lot of companies over the years at Peel Hunt and previous positions, but why is healthcare currently in vogue? What is driving the interest levels of both generalist investors and specialists?

Paul Cuddon [PC]: One of the key issues that we’ve had to face in this sector is the aftermath of that previous IPO window which saw hundreds of millions of pounds raised for biotech and actually very little get delivered. We’ve gone through a period of investors gradually forgetting about that and now coming around to this sector, having seen it perform so well globally. We’ve got some real winners in this sector now. For example, we’ve seen BTG go from £140m market cap company to a company that’s well established in the FTSE 250, £2bn market cap, getting close to FTSE 100. So we’ve got some real successes now to build on and a multitude of companies coming through that set the scene for a much stronger next phase. That’s where investors are now being much more selective. We’ve used the phrase in the past that 2003-2007 IPO window was essentially a barn door where everything got through and now we’re seeing institutional investors being much more selective as to what they want back and applying very stringent criteria that is certainly to the benefit of the sector.

ND: Staying on that institutional investor side, what is the criteria that institutional investors are looking for in those IPO candidates? Is Circassia a great example of what other companies should follow?

PC: One of the key requirements is the institutions are looking to the advisers to bring them the right opportunities at the right time and I would add the right advisers as well. The general request for these companies that are coming through is they’ve got to have been well capitalised prior to IPO, that was one of the issues for the last phase where you see a number of IPO candidates come through that raised a couple of million pounds and were asking for £20m to £30m valuations and we all know how much can really be done in this sector for a couple of million pounds. Circassia is a perfect example, they had raised £105m prior to IPO of which £70m had been invested, they’d completed 15 clinical trials across a multiple platform and one of the great attractions was that body of clinical data. One of the key requirements that we always ask, one of the first questions is ‘How much funding have you had to date, how much has been invested in this particular company and what valuation are you asking for now?’. You can’t come to us these days and say ‘well we spent £5m and we want a £200m valuation’ having not completed phase 2. You’ve got to be quite focused on the strength of pre-IPO financing. The added examples are it’s the quality of management that’s coming through.

‘How much funding has your biotech had, how much has been invested and what valuation are you asking for?.’

I would slightly disagree with the IP point, it is hugely important that a company has got protection in its given area and we do spend quite a lot of time going through the IP landscape, talking through the barriers to entry, it does become quite a focal point for investor communication. You’ve got management, strong capitalisation prior to IPO and disruptive technology or drug for a very attractive market and those four key elements are what gets you to the table. Thereafter it’s about delivering during that pre-IPO phase, you want to see that the timelines that have been set can be delivered and then going out into institutions you need a very concise presentation and these days it cannot major on the in-depth science and mechanisms, it has to be the broader commercial case because we simply do not have the specialist investor community on which we can understand that detailed science.

ND: Obviously not every biotech company is well capitalised, they maybe don’t have the clinical results in the bank, does that mean the IPO window isn’t open for these companies? What’s your thoughts on that?

PC: One of the issues we have is that we want to get away from this perception of there being an IPO window because although there are a number of IPOs at the moment, one of the issues is that they’ve got too many options on the table right now. It isn’t just biotech IPOs that are out there, you’re competing with consumer, real estate IPOs, capital goods, technology companies so aiming to go out during the IPO window just means you’re coming up across a barrage of other companies looking to float at the same time and unfortunately biotech doesn’t typically stack up very well against cash generative technology companies. So rushing your plans out to tap into a window is just not the right way to run a business. A good company can float at any time and we’ve seen some great examples of companies who have come through, Clinigen for one that floated during what was perceived to be an IPO window being closed and has gone on to be one of the best performers. It’s getting away from the concept of ‘I’ve got to raise money during this IPO window’ and just focusing on running the business and if you have been resource constrained the key is to deliver on the clinical and commercial elements and just come to market when you’re ready at a realistic valuation.

Part Three in this series will feature the comments made by Chris Mayo of London Stock Exchange. If you can’t wait for the next blog and would like to see the entire transcript of the panel click here to access it.

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