Despite the poor Q1 economic data that is beginning to be released, the equity markets are stabilizing.
First quarter earnings reports are coming out, the stock market remains volatile and much of the world is still on lockdown. In this challenging environment, there are business opportunities abound, “but investors are taking a hard look at their checkbooks,” Keith Bliss, managing partner and CEO of iQ Capital, told BioSpace.
Despite the poor Q1 economic data that is beginning to be released, the equity markets are stabilizing.
“The money allocated for biotech investments will be there, but will come with more scrutiny,” Bliss said.
Even though seed stage and early-development companies aren’t directly affected by the swings of the global stock exchanges, they will experience the side effects of market volatility.
“Private investors, including family funds and high net worth individuals, have a fair amount of exposure in their portfolios to the public markets. Public market volatility affects investors’ mindsets, so they will pull in on everything,” Bliss said.
This may not be the ideal time to start a company. In a “two guys and a lab” scenario, “I’d be concerned about finding funding sources. If my company was funded and I had to take time off because my lab was closed, I’d be comfortable about proceeding with my work, but I’d be wondering where my exit was,” he said.
Early stage companies that are past the bootstrap phase are a bit better off. “They already have backers who – typically – will press their bets in subsequent funding rounds,” he said. As long as they meet their milestones, continued funding is likely.
“The healthcare sector, including the biotech, biopharma and biomedical subsets, is not immune from the crisis but, looking a year out, I think their prices will maintain some stability. The outlook for biopharma and biomedical devices is strong and getting stronger,” Bliss said
His optimism is based upon global demographics, not the current crisis. Short-term, he points out, “COVID-19 affects all age groups, but mainly those with co-morbidities. Biotech is servicing that entire demographic.”
Longer-term, the COVID-19 pandemic eventually will end. Yet, the global population is aging and cancer and diabetes incidents are increasing. Companies addressing those needs will attract investors. The economic winners, going forward, will be companies that address chronic disease, immunodeficiencies, and metabolic syndrome, he predicts.
That prediction is as true for Asia as for the U.S. and EU. “In 2018 and 19 there was a lot of investment in the U.S. from Asia, but it was a little outsized. There will be more scrutiny moving forward,” Bliss said.
For example, Chinese investment in U.S. companies slowed with the 2019 trade war, more stringent Committee on Foreign Investment in the U.S. (CFIUS) regulations, and the current concerns regarding timely data sharing regarding COVID-19. He predicted it will continue to slow.
But, other countries are helping fill any void left by China’s changing investment interests. “There’s a lot of capital coming out of Vietnam,” Bliss noted, “and we have lucrative trade deals.” Singapore, Thailand, Japan, and Australia also are looking to U.S. companies as potential investments. “Investors are looking for good investments.”
The strength of American biotech companies is attracting U.S. funds, too. “There’s a lot of liquidity sloshing around the global economic system, and has been for many years,” Bliss acknowledged said. “It’s not being rewarded by sitting in a bank or being parked in Treasury bills. That’s why we’ve seen capital funds with more than $1 billion in assets launched in April.”
iQ Capital is evaluating investment opportunities, too, talking with prospective portfolio companies despite the pandemic. Its parent company has two portfolio companies: OncoTEX and GBS Inc.
OncoTEX is developing a conjugated drug to target ovarian and other solid tumors. Its lead candidate platform, TEXCore delivers OxaliTEX (texaphyrin and oxaliplatin molecules) to a tumor without the systemic toxicity normally associated with platinum-based chemotherapies. Early tests show an ability to overcome multifactorial resistance.
GBS Inc. is developing a saliva-based glucose test for diabetics based on organic thin-film transistor technology. When commercialized, it can eliminate diabetics’ need for daily finger pricks. “We’re raising capital for an IPO in the US to take it to the clinical trial phase,” Bliss said.
“There are a lot of good products being discovered in labs right now, and they’re attracting investors,” Bliss said. “Good assets will continue to receive seed funding.”
Eventually, of course, investors need exits. Bliss foresees vigorous merger and acquisition (M&A) activity. “M&As have been robust and are likely to resume at an even greater pace once the crisis eases, he said. “The COVID-19 event is such a shock to the system that it probably will lead to big pharmas and second tier companies looking for assets to strengthen their product lines.”
Innovative biotech companies, therefore, can access seed and early stage financing now, and can expect a reasonable exit strategy in the next few years.
