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

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 fifth and final blog of the series, we bring you the questions from the floor and the audience, with contributions from each of the 4 panellists.

Biotech and Money [B&M]: What are your views on the importance and quality of management teams? Would you say there is a real dearth of quality teams in the UK? Also, I wondered if the panel have any comments regarding how they see the progress of companies in terms of creating a more sustainable corporate place in terms of commercially viable ideas rather than just let’s go out and just place it for funding?

Paul Cuddon [PC]: I see that as 2 different questions, there’s one which is recycling of previously successfully management teams and the other is the quality of IP and it’s critical mass by the time it gets ready to IPO. One of the big advantages of Circassia was that Steve Harris, previously at PowderJect had been through a cycle and ultimately delivered a favourable exit for investors and that has certainly gone down very well with a couple of the key cornerstone investors that came into that IPO, the reason they took a meeting is because they remembered Steve from PowderJect. That kind of successful management team coming back in was a key factor in how Circassia was able to raise £211m. The next element is the capitalisation of UK science and that’s where we continue to see a valley of death for start-up companies in that there is just not enough specialist pre-IPO investors, VCs who can properly finance companies through key phase 2 interface de-risking events. It’s one of the frustrations that we only see on occasion, companies that have gone through that process and we have ideas as to how this can be addressed but it always seems to result in allocating more money across the sector, generally from government funds and spreading it across hundreds of companies rather than focusing on winners and it’s the key issues I have had for 6 years and probably will continue to have for another 16.

Chris Mayo [CM]: It’s not just an issue for biotech it’s an issue across the board with access to more private capital pre-IPO it’s just much more abundant in the US across most sectors so what you’ll find is that companies will be much larger when they go to IPO. That IPO will be $75m to $100m whereas AIM to a certain degree fills that gap in the UK so you’ll have a lot of companies which are smaller going public in the UK versus the US| and also as a result of that the profile of these companies in the UK tends to be slightly different in that they need to be a little bit more de-risked in that they may have some drug development angle to them but often they’ll be a hybrid model where they have other activities which are generating cash-flow and that’s a backstop just because of the different nature of the industry in the UK versus the US.

Simon Allport [SA]: Let’s compare it to 2007 where I think it was the minority. We can say now that it is vastly the majority from unlisted. One of the mechanisms by which private companies seem to be capitalising themselves now is through IP commercialisation vehicles so you look at the IP groups, Imperial Innovations, and we’ve now got a couple of US IP commercialisation companies that have come across and one of the features of the companies that come through those models of which Circassia was one and we see Oxford Nanopore and a range of others being funded through IP group is he quality of the management teams they are putting in place, incentivising them well and putting together very strong pre-IPO investor syndicates but Imperial Innovations has only got £150m to invest which it’s looking to spread over dozens of opportunities so how far can that really go if it’s just Imperial. The model is evolving and if you look at that Imperial portfolio there are some very good management teams in there so firmly the majority.

Karl Keegan [KK]: I don’t think you can make a judgement call on management teams because I’ve spent quite a bit of time over in North America, US and Canada. There’s good management teams everywhere and having been an analyst and also now having had a few operational roles, it’s very easy to malign those, particularly in hindsight and say those guys got in wrong because a lot of things impacted. There are some very good management teams in the US and there’s very good management teams here but one of the things you mentioned about investors having this legacy, a lot of the investors have changed. You look around now and I don’t recognise half the analysts because they were probably in shorts or at school when I was around and it’s the same when you go to investors, some of the ones I was dealing with have either left, retired or doing something else. There is that change and I don’t think that institutional memory is there, it is in some, particularly in some of the small cap focused funds but people who have made investors money are always more welcome.

The management teams here are limited because the story has to be very refined and very particular. The liquidity is not so good, the money that they get pre-IPO and post-IPO and there’s numerous examples of companies that have come back year after year to raise the money whether it’s private or public investment they get drip fed and they need more shots on goal. The other interesting attitude is people can make mistakes but who doesn’t and if you make mistakes based on the best information available at the time you should be allowed to have another go. That attitude is probably a little bit more prevalent in the US where you can have a go. If you’re batting average really sucks you’re not going to get it but you should have another go and we just need to be a little bit more open.

CM: I’m just going to put the cat amongst the pigeons. Some people would say there’s a big role to play here in terms of the investment banking community and the LSE as well in the sense that previously some people would say that the quality of companies has been allowed to slip. It’s pretty clear from what everybody is saying here that there are lots of good biotech companies out there that are capable of coming to market but they have to be good and there are others which in previous years, decades hopefully might have come to market and probably shouldn’t have done and there’s a big lesson that helpfully The City has learned to a degree but of course the reality is we’re all here trying to make a living and sometimes the desire to make sure that happens can impact on judgment on quality of companies coming to market.

B&M: It’s interesting to hear the focus on companies having a product in phase 2 or beyond because they have a choice - they can sell to the industry or they can go public; why should they go public?

PC: Again, one of the big drivers in the sector has been retaining your assets for longer. The BTG story over Varithena, a varicose vein treatment is one that has been going on for many years but one of the key attractions for investors these days is that BTG owns that product outright, investors are getting the full economics on that drug which could potentially be a very highly profitable drug for BTG that turns them into that shire like speciality pharma business. Investors like backing companies to retain their assets for longer and again Circassia is certainly one of those that has had options to partner with pharmaceutical companies and even trade sale. That just gives their current investors more confidence to back it further and the IPO market facilitates raising money to take your products through to commercialisation and the Circassia story is one that’s very much raising the £211m to take 4 drugs through phase 3 trials to sustainable profitability. Investors are fed up with the models coming through looking to out licence drugs, pre-phase 3 in return for a very small royalty and waiting for big pharma companies to take 6 years to complete a phase 3 trial that could actually be done much quicker. That’s one of the reasons really why Vectura has pursued Activaero because it brings a later stage pipeline that you own outright so rather than looking to Novartis to drive your future investment case you’re taking more control.

KK: I think it’s mainly decided by the backers if there’s an IPO window that’s hot and you get an extra valuation kicker on an IPO they’ll push you as the management team down that road and if there’s a trade sell going and it looks good and depending on where they are with their funds it works. I do think the slight caveat is it’s fine if you’ve got a very clear route to market but phase 3 and going to market is getting more complex in terms of the reimbursement and we’ve tried to put that up in our investor data but we will still continue to partner with some of the assets we have; we’ll invest with some of them to get a higher economic return and in certain cases we’ll consider self-commercialisation but they’re going to be very few and far between because the reimbursement that pharma economic requirements now is wanting to get the drug approved and it’s another thing to make some money out of it and that is a factor that you’ll see less companies doing a phase 3 or you’ll see an announcement where a company has partnered what looks like a late stage asset and then you’ll find out that the pharma company is actually re-doing some of the trials that tells you they might have done it quicker but maybe not necessarily the way to extract the most value. It depends on timing and the exact asset.

B&M: One last question to end the panel on. If you could give a single piece of advice to UK biotechs in particular what piece of advice would you give if they were looking to raise capital today?

SA: I’ll go with what I said at the outset which is very careful and meticulous planning. Making sure that when you take the decision to come to market, you have everything in place and you’re able to deal with those things like organising the management structure so that it has the bandwidth to be able to deal with everything that’s coming its way and making sure the right people are doing the right things at the right times.

PC: Very simply be more ambitious, back yourselves and see the IPO as a start of a journey rather than the end of one.

KK: Create a good equity story, sell it with conviction that people actually see that you believe in it and get yourself some good advisers, ideally that you’re friendly with to help you through the tough moments.

If you would like to see the entire transcript of the panel click here to access it.

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