As 2016 came to a close, the biotech index was down 39% in US and 27% in Europe. How is this year looking? Our panelists at Refresh weigh in.
While last year may have been the worst year for biotech in a decade from a financial perspective, our panelists at Refresh in Berlin last month were optimistic as the first half of 2017 was coming to a close. Their feeling? The biotech sector has stabilized.
Karl Nägler, Partner at Gimv, saw the downward trend as part of a financial cycle. He joined venture capital in the early 2000s, just after the the genomics bubble burst. He described that period in the sector’s history as “a phase of nuclear winter,” because the indexes were down 70 to 80%, there were no IPOs, and early-stage funding had come to a standstill. But as the industry looked around for new asset classes that seemed less risky, finances began to look rosy again.
“Today, that [nuclear winter] is not the situation at all,” Nägler said, citing that indexes are down but they’re still as high as they were in 2013 or 2014, the respectable number of IPOs and the continued availability of capital. “We have come down from some of the high valuations, but fundamentally things are still ok,” he concluded.
Nägler believes this resilience is because “People have realized that biotech delivers.” Large cap biotechs still growing faster than those in other sectors, many products now available on the market are from biotech companies, and Germany may be pouring the largest amount of institutional money into biotech in its history.
“What is different [this time] is that maybe it’s not a bubble but maybe just heightened enthusiasm which is now back to fair valuation,” Nägler concluded.
Cédric Moreau, Managing Director of the French bank, Oddo & Cie, agreed with Nägler’s broader assessment of biotech’s financial situation but remarked that US investment in European companies evaporated last year. “In 2013 and 2014, a number of European companies benefited from US investment, but all the capital disappeared last year,” he said.
“Now, we’re coming back to a more positive trend,” as there are several deals in the pipeline, the indexes are positive again, and NASDAQ changes have returned to single digits. It’s “clearly a more stable environment,” Moreau said.
This turn is good news for entrepreneurs like CEO Bernard Gilly, whose latest company, Gensight, went public immediately after the UK voted for Brexit. He discussed how the uncertainty drives out the US and generalist investors with enough cash to propel late-stage companies like his through increasingly expensive clinical trials.
“The market is driven by the specialist funds but the valuation is driven by the generalists,” he said. “In Europe, we only have specialist funds driving the market…so the window [for generalists] is never completely open.”
Gilly continued that most successful companies go public on Euronext and then move to NASDAQ as soon as they can for a higher valuation, “probably by a factor of at least two or three.” Moreau followed up that this disparity is why gene therapy companies like Bluebird and Spark are seen as much more successful than their European counterparts like uniQure, even though the Dutch company brought the world’s first gene therapy to market.
The banker advised companies eyeing a US IPO, “NASDAQ makes sense, but having said that, you have to be well-prepared, because it’s a lot of work and you have to find the right time.” Moreau recommended pursuing one in a two-step process: first, list the company in Europe and second, attract US investors who will serve as cornerstones in the IPO on NASDAQ.
There are some drawbacks to a dual listing, however. Moreau said, “It’s not always easy to manage the cost – more costly to maintain two listings – and sometimes you can have more volatility,” which is rooted in how investors react to news differently, depending on where they’re based.
Another gap to be closed in late-stage financing lies with crossover investors. As Nägler described, “probably one of the reasons why you see less later-stage rounds particularly in the US right now is they’re stuck…As crossover investors become more active, we’ll have later stage funds.”
According to Nägler, VCs may not go for mature biotechs because buying into a pioneering company when it’s in Phase II or III trials may not make sense from a strategic standpoint. That said, VCs in Europe like Sofinnova are increasingly building crossover and IPO funds in addition to their traditional money pots. Silly said that “this will really help us and change the scope of what’s happening in Europe, perhaps with a foot in the US.”
The panel then discussed the need for ‘champion,’ as Moreau put it, to help build momentum to build a larger base of specialist funds. BPI France has started, but as Gilly remarked, “they can’t do this on their own.” Nägler commented that in this respect, “we don’t have the same elements [as France] in Germany…they’re not as broad or as deep.” There is some state investment in biotech but not nearly as much as in France.
Government influences, particularly with respect to pricing, are arguably what drove the index down last year, but Moreau believes the worst of the storm is over. He noted an “acceleration of appetite” for biotech with the election of Macron, and looking ahead to the German and Italian elections, he believes “we’re not as sensitive to these macroeconomic events [as we were with Brexit].”
Nägler spoke to the focus of venture capitalists on whether or not a drug will succeed on the market rather than politics. “If I look at an investment case, I don’t worry about Macron; I worry about will this drug be paid for or will it prove to be too expensive on the market,” he said.
Perhaps non-intuitively, according to Moreau, is that generics are the hardest hit by pricing issues, pointing to Teva’s loss of 45%. With this observation, he remarked that “innovation is still protected [from political influence] at this stage…but what is sure is that valuation has gone back to being fairer.” Instead of being a bad year for biotech, 2016 may just be one for normalization.
Watch the whole panel in the video here: