Lessons learned – what can the last IPO window teach us about this one?

Sam Fazeli, Head of European Research, Pharmaceutical Analyst, Bloomberg Industries, is well known as the biotech analyst guru who was at the forefront of the cutting edge analysis of the last IPO window and cycle. We caught up with him to find out what he feels were the main lessons learned from the previous cycle, his assessment of the current market for biotech investment and his predictions on investment trends.

B&M: Sam, from a European perspective, what feels different this time from the previous IPO window?

SF: I think the one thing that stands out specifically is the IPO of Circassia which I think ended up being one of the biggest fundraisings in biotech globally. Now that’s saying something because we have a picture of Europe that says that investors are not biotech friendly and yet we end up with an IPO that raises £211m! If I look at the history of IPOs you would find it would be at the very top end of biotech so that is one thing that is very different this time.

One of the other things that is important is we’ve seen a lot of medical device or devices types of IPOs but we haven’t seen anything in-between. We haven’t really seen any early stage Phase 1, Phase 2 companies which is what we used to do, so that’s where I think it will be interesting to look at.

The other thing that is quite different this time is that we did have at least 2 companies that IPO’d in the US, now we haven’t had that very often. In the old days US investors weren’t really prepared to look significantly into European IPOs but then these aren’t European IPOs that are literally going and listing their shares there, so that was another nuance or ripple that’s different this time round.

B&M: Do you think is it the number of deals and size of deals, is that significant in your assessment?

SF: Well the size certainly is, the number I don’t think has knocked my socks off yet. I think the window opened very late here compared to the US - there was a good 18 months lag, probably because the companies just weren’t ready.

B&M: You said that the number of deals hasn’t exactly blown your socks off but what are you seeing for the next quarter? Are you seeing a continuance from Q1? Are you seeing a slowdown in things happening?

SF: The market as a whole has slowed down, that’s definitely the case. You can see that in the last couple of months in terms of the total number of IPOs - I think the current risk averseness has affected IPOs. I’ve seen quite a few US IPOs pulling their listings or at least delaying their listings.

I think what we’re going to see is that the large biotechs will continue to do quite well – they have had really quite significant performance recently. However, If you look at the development stage biotechs you’ll see a very different story, with some rises but a lot of significant share price setbacks recently.

Investors are generally shying away from development stage biotechs in the past few months and you can see that there has been a pretty awful performance. I would assume that although we joined the window a lot later, if the risk aversion which is apparent persists it’s possible to see another 2 or 3 IPOs before that window probably snaps shut.

B&M: It’s the general consensus that the structure of capital markets in the UK is more risk averse. Do you think maybe the recent flow of money into biotech in the UK is a short blip and now investors are reverting to type again?

SF: It’s really difficult to read investor sentiment in the UK with regards to biotech. If you look at the case here it was only really doable because there was some very significant, or at least at the level it was done, very significant cornerstones: Invesco themselves, Lansdowne, they came in for a very significant amount of stock. Without these players it wouldn’t have happened and that’s not necessarily a bad thing but then we know that Lansdowne and Invesco are investors that look at long term and they get in early so they’re essentially supporting their own investment, not a bad thing, but this doesn’t give me a picture of the health of the biotech IPO market in the UK, it is a very special place.

B&M: What would you say are the ingredients that made the Circassia IPO successful?

SF: The company has good management, when you look at biotech you have to say that the 3 most important things in a biotech company to look for are management, management and management. You can take an excellent drug and put it in the hands of the wrong management team and you have a high probability they’ll mess it up. They’ll do the wrong trials, they’ll organise badly, the company won’t be organised correctly, they won’t be trusted, whatever the reason. You get a very good CEO and they can turn around companies that are on their knees, so I think we have here a management team who is well known with a strong background in fundraising, licencing deals and eventually M&A so these were elements and aspects that really made a difference.

B&M: What do you think should be Circassia’s next steps?

SF: I think they should use their business as a base to build on because who wants to take the risk of one Phase 3 asset or 1 technology, it’s risky, you might be the best science in the world but something might be slightly weird with the patient group you recruit or the season in which we’re testing the allergy although it’s not seasonal allergies that’s rubbish, it’s perennial allergies, but something.

B&M: What do you think some of the other biotechs currently considering IPO could learn from the success of Circassia?

SF: Make sure you have a well-known and investor friendly management team and make sure there are no skeletons in the closet.

B&M: What do you think is the main lesson learned from the last IPO cycle applied to this one?

SF: Nobody learns a lesson in the financial market otherwise we’d never have booms and busts! I think the thing to always watch out for is when you’re buying a company in an IPO is to not assume that it is a genuine IPO. A lot of the time it’s just an extension of essentially a private fundraising because all the people that want to buy it buy it, then it goes into the market and of course it sits there, really you need some other event then. Just because you’ve become public doesn’t suddenly mean that everybody’s going to start trading your shares. You need some other event to then drive the potential new buyer into the stock.

The other thing is people have to be very careful in getting excited about the value of one product or two products. People who buy them have to understand that you’ve got to wait for the long term - you are going to have failed products. If there’s anything you can guarantee in biotech it’s that you will have failed drugs.

Those eyes have to be open and you’ve got to be careful and know what it is that you are getting into. The earlier you go in development of a product, the longer you have to wait before you find out whether your product works or not so you have to have a very clear vision as to why you’re investing in the stocks.

The first lesson that everyone should learn when they go into biotech investment is: don’t get annoyed when products fail. The second lesson is that for very early stage companies, you’re going to have to wait a long time for them to become an income stream, a long long time, 10-15 years sometimes.

B&M: What do you think needs to change among the generalist investors for them to see the value in biotech investment?

SF: I think there’s got to be some incentive to invest in these companies. On a much more smaller scale, government incentives such as the EIS scheme work really well for all start-ups. There has to be some element for people who cannot assess the risk of these companies to be told that they will be helped in mitigating some of that risk. If the reason they’re not investing is because they can’t assess the risk, well give them a reason not to worry about the risk, what else can you do? You can’t force them to hire analysts or raise their risk appetite.

B&M: So do you think the Government could be doing more?

SF: I think so, although I admit I don’t know what the solution is. What’s clear is that risk mitigation needs to be offered to the public market - only government people can decide how they can achieve this.

B&M: Let’s talk a little bit about M&A and licencing trends, how do you see them responding when there’s an open strong IPO window out there?

SF: What we’ve found is that M&A for a while had cooled off quite a bit and we basically saw licencing take off and go way above in terms of numbers with M&A and that became the preferred way for pharma companies to do deals and acquire assets and build a pipeline, obviously that’s a very lower risk way of doing it and it also made sense given that with the biotechs doing what there were doing in terms of a share price, the valuations were obviously too high so going ahead and acquiring a company was too much.

B&M: What do you think underpins that, what’s driving those trends? What are the key factors?

SF: Well the valuations are clearly driving the M&A side of things, companies are becoming more and more expensive to buy. Also the level of risk these companies were taking, maybe by going with earlier stage assets they were taking a higher risk product so that’s why they wanted to do a licensing basis and acquire.

B&M: How important is the market sentiment in relation to the market valuation? Is it linked?

SF: Sentiment drives valuation so I think that the old adage is that biotech valuations are right twice a day, just like a clock, by accident. When you have no revenues there are no earnings, you don’t have a solid accepted valuation metric, you have to do DCFs and DCFs are not a science, they are an art and in art, the beauty of it is in the eye of the beholder.

B&M: What are the things that concern you most about the biotech industry at the moment?

SF: What concerns me most in the UK is how are we going to solve that particular problem of enticing more people to investing into the sector. Do we have a shortage of companies? I don’t think so. For the size of the country we have and the level of investment in basic research we have as a country, we are probably getting our fair share of technology and capital, so from that perspective that’s our key thing that we need to do.

B&M: What about the converse of that, what is exciting you the most about the industry? What are you optimistic about or hopeful for?

SF: I’m a drug guy, I’m not a device guy so I can’t talk about the device side of it, I’ve never really gotten on with devices. From the drug side I’m really excited by the fact we’re getting into a world now that we are seeing glimpses of drugs that seem to be curing things – which was rare before. I’m a pharmacologist by trade. Most drugs are there to treat symptoms, sometimes if you’re lucky they’ll halt the progress of the disease like anti tnf antibodies for rheumatoid arthritis, sometimes they reverse some of the damage that’s been caused, rarely do they cure it.

But now we have a drug for example that launched in December 2013, costs $100K per year but 99% of a particular group of patients with Hepatitis C if treated with it, get cured! Actually cured - not like HIV where you basically keep the virus at bay. It is this kind of science that really excites me.

It is the translation of science that’s been slaved over in the past ten, fifteen, twenty years: all that genomic hoo hah that we had back in the late 90s and early 2000s that was going to revolutionise everything is now finally coming good. Back then we all had this fantastic genomic stuff being done about finding new genes and targets thinking great we’re going revolutionise therapy, and now 10 years, 15 years later its baring fruit.

B&M: Your view on the markets? Are you pessimistic or optimistic for the future?

SF: I think we’ve had our excitement and we’ll be entering into a period of consolidation now.

This article was featured in the June edition of Drugs & Dealers, Biotech and Money’s exclusive magazine. To get access to 10 other executive interviews like this one and feature articles, download for free the magazine.

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