By Seth Yakatan
Last year I wrote that it was clear that 2013 was one of the best years ever enjoyed by the Biotechnology industry, in the financial markets, ever. Well, I was wrong - it was 2014. I hope to be wrong too in 2015.
LIFESCIENCES IN THE EQUITY MARKETS
In 2014, large cap biotech outperformed the market, with many of these companies being the best performers in the entire market as per Geoffrey Porges of Bernstein in their "The Biotech Year in Review."
In 2014 we also experienced a record biopharma M&A market, as aggregate transaction values exceeded over US$200 billion, twice the historic average. This trend was fueled by increasing equity valuations and historically low interest rates. http://bit.ly/1AmHbdE
There were 79 Life Science IPO's in 2014 making it far and away the best year the sector has ever seen. Potential returns, (as calculated by Silicon Valley Bank), reached $18.5 billion in 2014, by far the best performing year since Silicon Valley started tracking this data in 2005," as per Jonathan Norris, a managing director at Silicon Valley Bank.
Norris also stated that early-stage biotech’s accounted for 41% (26 preclinical and Phase I companies) of the 63 biopharma IPOs that dominated the scene, up sharply from the 24% average for the two previous years, as the IPO window opened wide. With IPOs running stronger, Series A venture rounds for biotech companies have swelled as competition for new technology sharpened. Corporate venture arms helped support private venture groups in driving a big increase in the amount of Series A cash flowing to early-stage ventures, many of which are planning earlier than ever on going public or executing an M&A deal.
We expect that the IPO window will stay open but the pace will slow down to 2013 levels. High-profile biotech failures could still send a chill through the markets, Norris adds, but the underlying strength in biotech looks solid--for now. "Overall, it's just a fantastic exit environment for private equity-backed backed companies," he sums up. http://bit.ly/1DFfDRO
MERGERS AND ACQUISITIONS
The rising stock market has created a surplus of cash for large pharmaceutical and medical device companies. This has led them to look carefully at their existing portfolios and fueled the acquisition of new companies, technologies and drugs.
Tax incentives have also driven M&A activity, as companies look overseas to take advantage of lower tax rates. This also allows acquirers to penetrate international markets that they may not have necessarily benefited from previously.
This spree of consolidation will continue to squeeze out players who are unable to compete and other potential acquirers. It will be interesting to see pricing for venture-backed companies in 2015 as the number of buyers has diminished. For the past several years R&D dollars have decreased in an effort to increase the bottom line. Many companies have relied on purchased growth from the acquisitions of early stage companies.
PRIVATE FINANCINGS/VENTURE CAPITAL
What will this mean for VC investment in life sciences?
Biotechnology companies ended 2014 with $6.0 billion new venture capital in their pockets, which was the biggest annual total since 2007, including $2.0 billion in the fourth quarter alone. The total for q4 2104 was the biggest single-quarter total in at least 19 years.
The Money Tree Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) with data from Thomson Reuters, which goes back to 1995, shows no other quarter in which biotech companies have exceeded the $2.0 billion mark. And 2007's $5.99 billion full-year total was the only other year to exceed or come close to 2014's $5.97 billion total, and we all know what happened in 2008.
The course set for 2015 remains to be seen, however the pace of VC in 2015 is not slowing down. First quarter biotech company fundraising announcements neared $800.0 million halfway through January, including $715.0 million in VC for the first full week of the year (scripintelligence.com, 10 January 2015).
With the larger biotech companies now migrating to the more commercial efforts and no longer investing in research and development, there is a void that is just being recognized by VC’s and angles. Nano investing is like old time venture investments with angels and selected VCs. These nano investors look at start-up enterprises, whose core is a research and development project based on a "seed investment." This investment should lead up to a prototype designation, “proof of concept” or roll out.
From this nano marketplace will come the next opportunities for investors to invest in Series A & B rounds and in IPO’s. It is also where many new drugs are going to be produced.
It’s not a market for the faint of heart. As Jonathan Norris of SVB stated earlier in this piece, Series A venture rounds are now where new technology is being sharpened and that is where the money is flowing, with the promise of earlier IPO’s or M&A deals.
OUTLOOK FOR 2015
2015 should be a very good year for investors in the life science/biopharma industry. However, it will be challenging for big pharm firms to find acquisitions to meet market growth expectations.
As M&A competition across the sector continues, big biotech’s and specialty pharma's now have the capacity to do the kinds of major acquisitions that were mostly within the grasp of only big pharma just a few years ago.
Growth still matters: Continued stronger shareholder returns from biotech and specialty pharma, combined with overall market growth projections, are expected to put additional pressure on the many big pharma's with growth gaps to do deals in 2015.
Higher premiums are likely to persist: Greater competition for high quality growth assets due to the strong buying power of both specialty pharma companies and big biotech’s means high valuations for target companies will continue into 2015.
More focused deal-making likely: Given the high premiums expected for attractive assets in 2015, transformational M&A will be an option only for a select few. As a result, big pharma companies may continue pruning portfolios, while pursuing bolt-on acquisitions, to develop – or maintain – critical mass in key areas.
Shareholder activism on the rise: Shareholder activism is increasing at a time when several companies that announced divestitures in 2013-14, generated superior returns for investors. http://bit.ly/1AmHbdE
Editor's Note: Seth Yakatan is currently serving as Vice-President of Business Development for Invion, Ltd. (ASX:IVX). Seth has been professionally involved in the biotechnology industry for over 15 years through his work with Katan Associates.
Invion is a clinical-stage drug development company focused on the development of treatments for major market opportunities in inflammatory diseases including asthma, chronic bronchitis and lupus. www.InvionGroup.com
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