The 5 finance experts gathered for the FierceBiotech Executive Summit: London found plenty of things to disagree about. But whenever talk turned to whether biotech faces an almighty hangover after three years of bubble-building partying, a consensus emerged. Sure, the nonstop IPO flow might slow, they said, but the fundamentals that underpinned the excitement of recent years are real.
Gareth Powell, fund manager at Polar Capital, gave the bluntest appraisal of the situation today: "It's nothing like a bubble, not like '99-2000," referring to the dot-com boom and bust that has cast a shadow over the rapid rise of biotech stocks. Powell's fellow panelists, who work at investment shops that collectively manage around $4 billion, were similarly bullish. Abingworth Managing Partner Tim Haines went as far as saying that talk of a "brave new world" for biotech has substance. Haines reeled off a list of reasons to be cheerful, chief among which is the potential of gene editing and other technologies.
Such technologies are closer than ever to significantly affecting life outside of research labs, but their advance is only part of the story. The valuations placed upon science and the drugs it enables have also shifted. Haines identified November 21, 2011, the day Gilead ($GILD) unveiled its $11 billion deal to buy Pharmasset, as the day this started to happen. At the time the consensus was that Gilead overpaid--82% of people polled by Mark Schoenebaum held this view--and the buyer's stock dropped 9%. Four years later, with Gilead rolling in cash from the hepatitis C franchise it bought, the deal looks very smart. Haines views it as prompting a reevaluation of biotech prices.
Of course, just because Pharmasset turned out to be worth $11 billion doesn't mean that all of the biotechs that soared in recent years can justify their valuations. While maintaining the view that the biotech sector has solid fundamentals that weren't in place 15 years ago, the panelists accepted that some overexuberance may have crept into the market. Powell pointed specifically to CAR-T and gene therapy as fields that bear some resemblance to '99-2000. A lot of generalist cash flooded in, too. Mutual funds and other generalists getting out of biotech drove recent pullbacks, but where this cash goes in a world of low inflation and what it means for biotech are harder to ascertain.
Whatever happens to that money, most biotechs and VC shops have loaded up with enough cash during the good times to see them through any lean periods. And some people certainly see such times ahead. "We're going to have a closed IPO market until we get past the U.S. election," Powell said. The fallout in such a scenario would land unevenly. Alex Pasteur, a partner at F-Prime Capital, the VC shop formerly known as Fidelity Biosciences, said several firms in his company's portfolio are in the IPO process but may decide against going public at this time. But as F-Prime has a policy of only backing companies with good stay-private options, they can cope with the IPO window closing.
Crossover investors, who back companies with big rounds shortly before an IPO, lack such a get-out route. And what happens to Europe if the U.S. IPO market slows is unclear. Pasteur sees overseas investments being the first thing to go if U.S. investors run into trouble at home. Haines is more sanguine. "It's not as if the U.K. will suddenly fall over because it wasn't standing up anyway," he said. For all the gains made by biotech in the U.K. over the past 18 months, this view, when applied to the IPO market, is commonplace. And the lack of a fully functioning IPO market is a problem for VCs trying to build sustainable businesses and public investors looking to place diversified bets on biotech.
Haines thinks tax breaks for pension funds could trigger the arrival of the big money needed to sustain a thriving IPO market. In a separate session, Bloomberg Intelligence's Sam Fazeli and Silicon Valley Bank's Nooman Haque both said the long-mooted pan-European biotech stock exchange is a good idea but impossible to achieve politically. In two years, the U.K. might be preparing to leave the European Union and almost certainly won't be trying to tighten its ties to its neighbors. The prospect of the U.K. voting to leave the EU in the upcoming referendum brought more consensus among the gathered VCs. "No question," "unequivocal" came the responses. The VCs want to stay in Europe.
The reasoning is clear. Whatever volatility lies ahead, in the mid- to long-term the southeast of the U.K. is as well placed as anywhere in Europe to become a continental biotech hub. As with biotech as a whole, it has the fundamentals in place. Deep scientific expertise, improving early-stage financing and an inflow of talent from all over Europe are key to the hub-building plan. As Haines and Pasteur see it, severing the link to the mainland would threaten the latter of these fundamentals, the magnetic attraction the "golden triangle" exerts on scientific talent from across the EU.
And while biotech can survive for a while without fresh funding, it will wither quickly without talent.
-- Nick Taylor (email | Twitter)