May 5, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor
This is the first of a five-part series BioSpace will be conducting with market players who can give us an insider few of what has biotech booming As the rest of the capital markets have been buoyed by an unprecedented level of strength and action in the biotech sector, investors have continued to worry if the market may be in a “bubble,” or able to support valuations that have seen an historic level of IPO activity over the last year.
BioSpace chatted with Jonathan Norris, managing director of Healthcare Practice at Silicon Valley Bank, a major cog in the venture capital ecosystem, about what he’s seeing on the ground—and what that means for the market more broadly.
1. Talk to me a little bit about the historical comparisons with these levels and if that’s remarkable.
If you are referring to IPOs, yes the IPO market is remarkable. What we thought was a red hot IPO market in 2013 became white hot in 2014, doubling the number of venture-backed IPOs. Also remarkable are the number of early stage companies that have IPO’d. 44 percent of venture-backed IPOs in 2014 were Pre-Clinical or Phase I in development.
2. How have healthcare and biotech been affected by these funding levels?
Biotech saw an increase in company formation in 2014. Since many early stage companies are finding exits through IPOs and M&A, venture firm reserves have been freed up to invest in more companies. We saw a 50 percent increase in the number of new investments by the top 5 BioPharma venture investors versus last year. The returns from these exits flow back to investors, and to their LPs, and has spurred more interest and thus more investment into the HC venture sector. This resulted in an increase of 56 percent in venture fundraising in 2014. New funds spur increased investment into companies, which helps to continue this up-cycle.
3. What are VCs and banks looking for most? Is it seed stage, early stage, clinical trial level, etc.?
I think VCs continue to look at early stage companies with novel technology. Last year, 50 percent of the venture-backed M&A exits were preclinical and Phase I. The time to exit from close of Series A for 2014 exits was only 4.3 years. Investors are getting quick exits, generating great IRRs. Exit values are also up. It makes sense to stay early stage. Additionally, cross over investors are dominating all later stage financings. These cross-overs tend to be less valuation sensitive than traditional venture investors, and provide substantial help in the IPO. Thus, most venture-backed companies would rather work with a cross over to lead a later stage round than a traditional venture investor.
4. Do you think the market is frothy?
Yes, the market in 2014 was frothy. However, that is different than saying it is a bubble. I don’t think this is a bubble. A frothy market to me means that there is intense interest in M&A and IPO, trending earlier stage at increased valuations. 2014 represented the largest returns to investors since I started tracking this data in 2005 – and 40 percent larger than the previous record. I do not believe that 2015 will be as frothy as 2014, but it will be another good year, likely better than 2013. I do predict a pullback in the number of IPOs in 2015, somewhere in between 2013 and 2014 numbers, but also think that M&A will go up.
5. How does this compare to 2002?
I think in 2002 there were more single-asset Phase III companies raising money for pivotal trials. These companies were quite binary in their prospects for success. In 2014, there were many more early stage companies, and most of these companies had diverse pipelines. Thus, with many more shots on goals, and earlier stage, the probability of near term success (and positive news flow) is much greater. This positive news flow helps to continue the cycle we are in, as good news drives stock appreciation and generalist interest in investing in Biopharma companies. Also, I think cross over interest in the sector is more intense than in 2002. Cross overs are investing significantly in pre-IPO mezzanine financings, but also speaking for a large percent of the IPO as well. Cross over support of these companies also buoy generalist interest in these stories.
Will Hungry Pfizer Make a Play for Struggling GlaxoSmithKline?
Almost a year after its $119 billion offer for AstraZeneca PLC fell apart in the face of massive opposition from regulators and internal dissent, global drugmaker Pfizer Inc. is once again being floated as a potential buyer of another marquee-name British pharmaceutical company: GlaxoSmithKline . We at BioSpace want to know your thoughts: With cash to burn, will Pfizer go hunting for Glaxo?
