Biotech & Pharma sector roundtable

This article first appeared in Financier Worldwide's December 2007 Issue.

Click here to read this article in PDF format.

These are challenging times for biotechnology and pharmaceutical companies. It is becoming increasingly expensive and difficult to manage the process of developing a new product and introducing it successfully to the market. Yet there is growing demand as populations age in developed markets and consumer bases in emerging markets search for better levels of healthcare as their wealth expands. Going forward, the lines of distinction in the sector are likely to fade as strategic partnerships between big pharma and small biotech invigorate product pipelines and lay the groundwork for a fresh business model.

THE PANELLISTS

Claire Baldock
Partner, Boult Wade Tennant
T: +44 (0)20 7430 7500
E: cbaldock@boult.com
www.boult.com
Claire Baldock is a Chartered and European Patent Attorney. She has been a partner at Boult Wade Tennant since 1994 and heads the firm's Biotechnology and Life Science practice. She specialises in patent work in the chemical, pharmacological and biotechnological fields and has extensive expertise in EPO oppositions and IP due diligence exercises.

Christopher Bryce
European Chemicals and Life Science Practice Leader, Marsh Limited

Randall B. Sunberg
Partner, Morgan Lewis & Brockius LLP

Doug McCutcheon
Managing Director, Healthcare Investment Banking, UBS Investment Bank

Simon Gill
Co-head of US Healthcare Investment Banking, RBC Capital Markets

Ian Dixon
Director, PricewaterhouseCoopers

Juliet Thompson
Managing Director, Nomura Code Securities

Can you describe the mounting financial pressures on life sciences companies associated with funding drug development, marketing new products and retaining key talent?

McCutcheon: Overall R&D and commercialisation costs as well as timelines for new drugs continue to rise, creating issues for both biotech and pharma companies. For most smaller biotechs, this has heightened the need to find larger development and/or marketing partners. It has also meant for both biotechs and pharmas an increased emphasis on tools and processes which will help them to increase their probability of backing successful compounds as well as a shift toward more specialised therapies.

Sunberg: At the same time that the life sciences industry is spending billions of dollars every year on R&D budgets (including record investments in biologics), the industry has seen sales decline by billions of dollars in recent years due to patent expirations.

Pharma companies' margins are under pressure, and they are exploring ways to reduce costs, including outsourcing activities such as small molecule drug manufacturing, and some pre-clinical development, to lower-cost countries. On the marketing side, companies face pricing pressure from managed care and government mandates. Key talent is in high demand, with offers to move from big pharma to biotech, and to established specialty pharma companies, as well as newly-formed life sciences entities backed by private equity funding.

Gill: The funding of drug development is a major challenge for life sciences companies, especially private and small cap public companies. The clinical and regulatory path is expensive, with the FDA in particular setting high hurdles for both safety and efficacy. At the same time, the investment community for these companies has narrowed to a group of highly sophisticated, healthcare dedicated institutional investors, with little or no money available from retail investors or generalist institutions.

Thompson: There is clear evidence of significant financing pressure facing life science companies in Europe today. In 2007, the life science equities market has been stronger in the US than in Europe. However, the past few months has seen a slowdown and downward pressure on equities both in the US and Europe. Company valuations are falling and raising money is becoming increasingly more difficult and more dilutive. An inevitable consequence will be the motivational issues surrounding the retention of key talent. To encourage talent into the sector you need to be able to point people to the successes of the past. Biotechnology is already risky because of the inherent risk of drug development. By adding increased financing and market risk, the risk/reward profile alters with damaging effects to the industry.

Dixon: The cash requirements for life science companies remain high but funding market is extremely challenging. This seems to be more of a challenge for private companies than listed companies. The latter are still able to attract funding provided good progress continues to be made and there is good news flow. The private companies face more challenges as they have little in the way of news flow and are finding it hard to attract funding.

Bryce: If you take as a starting point that it takes up to 16 years to bring a drug to market, through the various stages of clinical development, and that the process of development is subject to increased scrutiny from regulators, there is already a lot of pressure built into the process. There is a lot of commentary around the role of regulators who are demanding a lot more data and supporting clinical evidence as a requirement for drug approval plus the role of government, particularly in Europe, who are looking to control the cost of healthcare. This means that even after 16 years there is no guarantee that your drug will get approved. This is causing those who finance development to seek more certainty, the talent involved in development to want to be sure that they are committing their career to therapies that will be successful, all against a backdrop of more questions being asked at every stage of development. For a developer the competition for talent and ensuring that the right incentives exist to retain what is part of the companies asset base will create added pressure.

To what extent are venture capital and private equity firms injecting much-needed capital into the life sciences sector? How would you describe activity over the last 12-18 months? What do these firms look for in a potential investment?

Gill: VC and private equity firms are active investors, but they are extremely selective. All of them do substantial due diligence before they write a cheque. They are looking for the usual attributes in a life sciences company, including a promising product or technology platform and a first-rate management team. They like to invest enough capital to allow the company to deliver value creating milestones in the future. Also, they always have a clear sense upfront of the future exit alternatives, with more now looking to position a company for an ultimate sale rather than an IPO.

Dixon: Venture capital firms are being very circumspect in their financial appraisals. They are looking for faster returns than they were five years ago and are looking for business models which support this objective.

McCutcheon: The financing environment remains healthy for good private companies. That said, while there is money available the terms can be tough, particularly for earlier stage companies. This is a direct result of the fact that the VCs have not seen their hoped for returns on exits, particularly from IPOs.

Thompson: Venture financing in Europe has been fairly consistent over many years, whereas there has been more money available for investing in US life science companies over the last 12-18 months. VC firms look for clear unmet medical needs, a good understanding of regulatory environment, clear product/technology differentiation, a strong management team and robust IP.

Bryce: The experience is different in Europe to that which is found in North America. North America does offer a wider pool of capital which the life science sector can access, but then the role of venture capital and private equity in the financing of business has been a feature of the US for longer than it has been in Europe. We still see a lot of activity from the private equity industry, which is looking to align itself with what remains an attractive industry to invest in. There have been a number of success stories in Europe where companies have developed good products and businesses which have allowed their financial backers to achieve significant value for their original investment.

Sunberg: We have seen venture capital and private equity activity holding up well in the life sciences sector, and by some accounts exceeding the prior year. Overall, however, venture capital and private equity firms continue to look for lower risk opportunities, with a focus on later-stage products. This translates also into some degree of aversion to new mechanisms of action or other 'cutting edge' technologies, where the risk of failure may be greater. Private equity firms continue to raise significant amounts of capital for investment in product assets, including building new companies around candidates that big pharma companies divest for strategic and budgetary reasons. Companies also continue to explore royalty (or revenue stream) monetisation transactions with the private equity firms that specialise in this alternative to traditional financing.