Top tips on raising capital and 3 warning signs your biotech is not investable
Biotech and Money caught up with one of the leading life science analysts in the UK, Paul Cuddon at Peel Hunt. In a sector where analysts have a propensity for over-optimism, Paul leads a team that is not afraid to highlight concerns and has a reputation for independence and quality, backed up by the results of the 2013 Extel Survey which ranked Peel Hunt’s Healthcare and Life Sciences Team 1st overall.
Paul was talking to us about his top picks, his concerns for the industry and his advice for biotechs looking to raise capital.
Biotech and Money: Tell me a little bit about Peel Hunt, and specifically your role here.
Paul Cuddon: We’re focused on small and midsized UK companies as a firm and the equity markets in particular.. Our key customers are UK and International investors and we also provide corporate advice and broking services to companies.
Health care and Life Sciences has become an important focus for Peel Hunt and we’ve established a very small but committed team on the sector, where we are the top-ranked team on several measures. I’m a Research Analyst, which means I’m the guy evaluating companies, analysing the strength of the science, the quality of clinical trials, looking at the addressable market, and a company’s competitive position therein. We then put all this together into an investment recommendation and I’ve been doing that since 2007.
B&M: Let’s talk a little more about your own challenges as an analyst at Peel Hunt. What’s keeping you awake at night?
PC: Our business hinges on our strong relationships with investors, making good recommendations based on thorough research and maintaining our credibility in the market. We have raised over £350m for corporate clients over the last 18 months or so and ensuring each company’s progress is being fully communicated to their investors is one of our key roles as a broker. One of our challenges can be dealing with trial delays, setbacks or indeed outright failures, and while these can be difficult helping clients through these situations is the hallmark of a good broker.
B&M: What is your assessment of UK biotechs in the past year? How have they performed?
PC: UK Biopharma has performed very well over the last year and is up 60% significantly outperforming Nasdaq Biotech, which is up 30% after the recent correction. UK Biopharma has been driven by the strong performance of BTG, Vectura and GW Pharmaceuticals who have each made significant clinical and regulatory progress over the last 6 months. The performance of Biopharma helped pave the way for several recent deals that include the IPO of Circassia, the secondary fundraise for Vectura both of which Peel Hunt was joint bookrunner. The sector is now very well financed, which clearly demonstrates that public companies can no longer cite a lack of financing as the key reason the sector has underperformed historically.
B&M: What do you think underpins that success? What are the factors that are contributing to the biopharma success in the past year?
PC: Late stage clinical trial success and regulatory approvals. BTG for example got FDA approval for Varisolve, Vectura got European approval for its generic version of Advair (AirFluSal Forspiro) and the start of royalty payments on its respiratory products that have been licensed to Novartis. GW has also made excellent progress for an orphan epilepsy drug that 12 months ago was not factored into any valuations. Genuine progress has been made in these UK biopharma stocks as has now been reflected in their valuations. The performance of Nasdaq Biotech is heavily geared to the likes of Gilead and Amgen, that represent the bulk of the index and these stocks are driven by underlying performance. However, there is a new wave of biotech companies capturing US investor attention with $3.6bn raised through US IPOs last year. These stocks have clearly benefited from loose monetary policy, the JOBS Act and favourable appetite for risk, and have performed very well post-IPO often without any clinical or commercial catalysts. I would regard this as speculation, rather than the fundamental drivers of valuations that have positively benefited UK Biopharma.
Peel Hunt’s Top Picks
B&M: Where are you pointing investors at the moment? What are some of your favourite stories?
PC: I would say we have 4 key picks at the moment and they are in the biopharma space. Vectura is one of those and Clinigen is another both led by my colleague Stefan Hamill. We have also got a very specific view on the future of the allergic rhinitis market and the UK is fortunate to have 2 players in that space, Circassia and Allergy Therapeutics who are both developing ultra-short course treatment of allergic rhinitis. Circassia offers substantial upside through clinical success as it has retained full value of its assets, whilst Allergy operates a revenue-generating and profitable Specialty Pharma model, and is considering its strategy for the US. These two companies score very highly and we have conviction that their approaches have the potential to disrupt what could be a very large market.
B&M: What’s your feeling on why Circassia was so successful?
PC: One of the key attractions of Circassia was that it has been properly financed prior to IPO. This is a Company since inception in 2008 has raised £105m in private markets of which £70m had been invested in clinical trials. What that allows the company to do is significantly de-risk itself before IPO so it’s completed over 15 clinical trials. By the time it came to market we had a huge body of data on which to base our analysis and valuation. We got a much better sense of the Company’s position and what the risks remaining are, so you get a much better sense of the risk/reward opportunity.
Another ingredient was that their pre-IPO investors were willing to follow their money and also invest in the IPO. It gives you another sign of confidence that this company has much further to go. Add that to a very strong management team who have delivered returns for shareholders twice before and a very compelling product offering in a market that is just taking off in terms of future growth potential for the next-generation of allergy immunotherapies and I think it’s a very compelling proposition.
B&M: I think there were a lot of lessons there for biotechs looking to enter IPO in terms of what they need. What would you say are the two or three pieces of advice you’d give to biotechs that are looking or considering IPO?
PC: Firstly not to see the IPO as an exit event, it should not be seen as an end of a journey. All too often we hear private companies say our aim is to IPO, that should not be a target, that is the start of the next phase of the journey where the scrutiny on the management team just goes up another level so they cannot see it as either an exit for themselves or for their investors, they need to see it as a start of a much more public journey.
The second key point will be to make sure they’ve completed some very good trials before IPO. UK investors are generally not willing to look at very early stage companies and so you’ll need robust Phase 2 data, and be well prepared for Phase 3 trials, if not have them already started. Although if you do have an earlier stage pipeline it certainly has to have several commercial deals with big pharma and ideally revenues..
Thirdly, I think biotechs ought to recognise that in the UK we don’t have a large specialist biotech investor community, they are generalists and it is important to pitch the science appropriately. It’s important to be very realistic and not go out and expect high valuations just because valuations in the US are high.
3 Warning Signs Your Biotech isn’t Investable
B&M: If we look at biotechs as a whole when you’re making your analysis, what do you look for in terms of warning signs, what are the things that set alarm bells ringing for you?
PC: The one that always gets me frustrated is the lack of placebo controlled Phase 2 trials. In some biotech companies you can quite often do Phase 2 trials and get a positive response that looks like you’ve got the best anti-cancer drug in the world but if you haven’t compared it to a placebo then how do we really know that it’s a genuine effect? Companies over-promoting open label Phase 2 data is a frustration because what it essentially means is that they’re going into phase 3 with too many risks .
The other comment would be around the guidance over what the potential commercial opportunity for a drug would be. Getting companies to be very sensible about the commercial potential and having done proper market research. All too often we get ‘there are 350 million diabetic patients in the world, if we got 1 per cent of that patient at $1,000 a year then we’ve got a $3.5bn a year drug.’ That’s not really good enough and that really frustrates me when people rely on those type of numbers. It doesn’t show an appreciation for actually how the commercial market has changed, the way payers are focussed on value for money and also the way in which we scrutinize these numbers.
B&M: So the message is do you your homework, and do it properly.
PC: Absolutely. It’s just about doing proper market research on the opportunity because that’s going to have to go into the prospectus as how you would justify what the potential could be.
B&M: Any other frustrations with biotechs?
It’s still a frustration that in this era of personalised medicine and increased awareness over the genetic links between why a drug works on one patient and not on another, we still don’t see enough companies coming through with genetic insight into their development programs. There is sadly a reliance on “re-profiling” in the UK, which is essentially finding a new application for a previous drug. Reprofiing is the cheaper way of developing drugs and in the modern era of biologics I think, it’s the lazy way of doing drug development.
We’d love to see an era of new biologic drugs targeted to specific, specific genetic populations, either replacement proteins or specific drugs that target specific genetics and we don’t see enough of that in the UK, possibly becase these type of companies require considerably more funding than the current seed financing and government support allows.
Perspectives on Industry Trends
B&M: What is your take on the current investment and funding opportunities for Biotechs?
PC: It’s a much better landscape than it had been. Public markets have clearly demonstrated over the last 12 months that they are not shut to biopharma companies - there’s been well over £500m raised by UK biopharma companies over the last 12 months.
B&M: What is your greatest concern with the industry at the moment?
PC: I’ve long campaigned on the need for commercial science to be nutured more carefully in specialist environments instead of being encouraged to set up a limited company, which entails a significant escalation of cos, which soon dwarf R&D investments. We have got the fundamental building blocks in place for a vibrant live science community: entrepreneurial tax incentives to commercialise science, the critical mass of bigger pharma companies (assuming AstraZeneca remains independent) on which to lean on for experience. We’ve clearly also got public markets that are receptive to leading live science companies but the problem is, if early stage science spins out too early there is not the capital available to undertake a comprehensive development plan that would position a company for IPO, which in turn would allow them to retain the value of their assets for much longer. Companies take on far too much cost too early, and then rely too heavily on government grants and a limited number of venture capital investors that they end up being positioned for a trade sale as they are not fit for IPO. Underfunding these companies just leads to an environment where some of our best science is sold to larger multinationals, who in the long term make the profits on UK investment. We would like to see far fewer companies make better use of existing government resources, which would then allow a greater concentration of venture capital, which in turn would make the businesses more suitable to IPO and the long term betterment of the UK Biopharma Industry.
B&M: Does the current success of the IPO market that we’re experiencing represent a boom rather than a bubble?
PC: It’s difficult to say, although I certainly don’t think we’ve got a bubble in the UK.
I’ve looked very closely at US Biopharma IPOs between 2009 and 2014. The earlier vintages (2009-2011) have generally reached their key catalysts and the success for a few (Pacira, Clovis, Aegerion) has offset the failures for many. The more recent vintages have generally not reached their key catalysts and so the performance of the shares reflects speculation on the likelihood of success. Until we get these results we cannot say whether the recent IPOs have been a success so in this context, yes the US is in a bit of a bubble, which may well burst if some of the best performing companies (Ie Intercept, Pacira, GW) begin to deliver negative clinical or commercial results.
B&M: One last question to round off the interview, where do you see the biggest opportunity for biotechs in the next 5 years?
PC: Tapping into the increasing amounts of genetic data that’s coming out. Finding the right drug for the right patient at the right time. There is so much evidence coming out that specific genetic mutation works very differently to different mutations in the same gene. Targeting smaller groups of patients with more specific medicines is where a huge opportunity lies for UK Biopharma.
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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