Executive Editor Drew Armstrong sat down with Bayer’s business development leader Marianne De Backer, PwC’s pharma deals chief Roel Van den Akker, and Sofinnova Investments General Partner Maha Katabi to talk about the IPO environment, trends in public and private fundraising, how negotiations between companies have changed and where capital markets are headed in 2023. This transcript has been edited for brevity and clarity.
Drew Armstrong:
I am incredibly excited about this panel. We’re going to be talking about capital markets here today. We have a wonderful group of panelists with us, Roel van den Akkar who’s the Pharmaceutical and Life Sciences Deals Leader at Price Waterhouse Coopers. Maha Katabi who is the General partner over at Sofinnova Investments, and she has also been serving on the boards of Gyroscope and Amplix until they were both acquired recently. And last, and certainly not least, Marianne De Backer, who’s the Head of Strategy, Business Development and Licensing at Bayer, and who has done some events with us before. So it’s a pleasure to welcome her back. Thank you all very much for being here. Thank you to our webinar listeners for tuning in today. We have a nice stretch of time to talk about the capital market’s environment, where we have been, where we are now, where we are going.
I want to kick this off just with a bit of a table setting question. So we have all been through this period over the last year or two of the downturn in the public markets, falling valuations in the private markets, rising interest rates, and are now beginning to see, unfortunately, what that shakeout means, especially at a lot of smaller companies where the balance sheets have been a bit more stretched. And clinical news is either providing a lifeline or a reality check. Let’s go one by one. I want to hear what you all think this moment is, or how you would describe where we are now at this particular moment. And I know we’ve all been having conversations, for those of us who are in San Francisco with everybody here, about where are we in the cycle, and what is the way out? So, Marianne, can we start with you? I would love to get your perspective and then we’ll go down the list and then open up the discussion to some of the great topics that we have to get into today.
Marianne De Backer:
Yes. Okay. Thank you so much, Drew. It’s a pleasure to be joining you and Endpoints here again. Yes, where are we? Well, almost everything has changed from where we were, I guess, six to 12 months ago. From a big pharma perspective at Bayer, we came of a number of years of incredibly intense deal making. So we acquired four companies, we entered into 60 alliances. And it was actually a time where it was a seller’s market. It wasn’t that easy to convince companies to consider an exit through M&A, et cetera. And then, of course, everything last-year. And now we are in exactly the opposite environment. So we talk, of course, with a lot of bankers that analyze capital markets for a living and what they are telling us is that the likelihood of a recession is still relatively high, somewhere between 60% and 70%. So it could be that it goes down before it goes up again.
But in any case, from a big pharma perspective and looking at the partnering environment, there’s an incredible amount of opportunity, of course, with valuations having gone down, with a lot of the both public and private companies are now much more eager to enter into partnering discussions. So there’s always a silver lining. Obviously it’s a crisis for the industry, but I think it also will help to maybe facilitate more partnerships and progress innovation, nevertheless.
Drew Armstrong:
Roel, to you.
Roel Van den Akker:
Drew, thank you, and thank you for the invitation. It’s great to be here. Listen, I agree with what Marianne said. Listen, there’s been a lot of dislocation in the market last year. We spent a lot of time tracking the statistics. Volume and value from a deal’s perspective is down significantly over 2021. I do think that talking point gets a lot of attention. But if you look at it over a longer period of time, I think we still had a pretty healthy level of activity in FY ’22. Deal value was about 150 billion across the sector, the way we tracked. Volume was down 30% relative to FY ’21. But if you see it in a larger historical context, you got to remember that we’re comparing to FY ’21, which was really a boom year by every measure. So there’s been a general risk off sentiment in the public markets last year. The Fed hiked 425 basis points in, I think, a little under nine months. So if you stack that together, that’s a level of dislocation that makes deal making a little bit more challenging and the capital markets a little bit more challenging.
The IPO market has been shot. I think that’s all pretty well publicized. Looking forward, I think, where we are with this, is we’re cautiously optimistic that we’ll see a reopening. I think if inflation starts to get under control a little bit, we’ll see what the readings will be tomorrow. If the base of rate hike slows down, I think we can cautiously see a reopening. On the M&A front we’re optimistic. We’ve all heard the stat that there’s about $200 billion of currently patented pharmaceutical sales that is going to go off patent by the end of the decade. Those gaps in pipelines need to be filled. And internal innovation is not going to suffice to get us there. So I think, looking forward, we’re optimistic that we’ll see a rebound in the capital markets reopening and M&A picking back up. When will that be over the current calendar year that we’re in? It’s hard to really put your finger on that. But I think as we thought about this and have been thinking about this, we’re cautiously optimistic about where we see things going forward.
Drew Armstrong:
Maha, your turn, and I’d love to get your perspective here. How is what we’re seeing in the public markets flowing through under the private side and the companies you deal with and the conversations that you’re having?
Maha Katabi:
Yeah, absolutely. Great to be here with you this morning, Drew and Roel and Marianne and all the folks who may be running around the streets in San Francisco, as I think we all are, over the last few days. So yes, 2022 has not been pretty. And we’ve all summarized, I think, some of the key highlights on the transactional end. I can certainly share my perspective on the financing side. So the biotech here, in general, has been one where the financing raised by the industry as a whole is closer to that $20 billion to $25 billion mark, which had been essentially the average if you look at the years from 2016 to 2019. So everything that’s before the COVID pandemic. So with a little bit of perspective, this is not the disaster that people sometimes feel it may have been. I think it is a reset back to normal levels.
Certainly in a rising interest rate environment, one can expect that liquidity sources are going to be less available, certainly to sectors with longer duration like biotech. And so that’s not unexpected. Nobody can determine with certainty what the trajectory of interest rates is going to be over the course of 2023. But as soon as we see that flattening to potentially starting to calm down, capital will be available as a whole to growth sectors and certainly will start going back into biotech. But how I feel about it, starting here in 2023 and talking to my peers on the financing side, both public and private, there’s certainly a lot of capital ready to be deployed in biotech. But there’s a much more both disciplines and creative and collaborative approach about how to deploy that capital. So discipline on the one hand is important because, for those of us that have lived through prior downturns in the biotech market, the name of the game is to have the runway to hit key inflection points that then represent value both to shareholders, to other stakeholders like pharma, to regulators. This is how you demonstrate the value of your products.
So securing runway is key. And then on the collaborative and creativity side, it was somewhat formulaic, I guess, over the last two years. How you start a company, how much you raise in a series A, how quickly you get crossovers involved and then tap into the public markets. There have been a number of opinions and views shared by others as to how that played out. So I’m not going to belabor that point, but all that to say is now we’re back to basics. And basics being how do you prioritize your spend without necessarily thinking about the fact that you’re going to be able to raise about 300 million over two years between a large private round and a large IPO. So one has to be creative, certainly partnerships and deal making have room to contribute capital, but also management teams are much more inclined to put on a very rational thinking hat and prioritizing how they spend capital and how quickly they can demonstrate the value of the products and the technologies that they are bringing forward.
Drew Armstrong:
I want to go back to something you said and spend a little bit more time on this. And thinking about these capital cycles as stretching out and how exactly that works and what it means. Because obviously when we have fewer exits or capitals locked up for longer, we’ve got less capital being returned back to funds and LP. Talk to me a little bit about the timing through which that cycle can play out and it’s relation to what we see in the public markets that we know lots of people pay very close attention to. But what are the implications as we think about recovery or more money coming back in or an IPO window opening back up or just in general a lot of liquidity freeing up? The moment that we’re in and some of those cycles being put out longer, can you give your perspective on that and how the best way for us to think about that from your seat is?
Maha Katabi:
Sure. So there are two sources of liquidity obviously for biotech investments, M&As, IPOs. So when M&A happens, certainly money is either returned back to LPs on private funds and public fund managers now have new sources of cash to allocate to new investment ideas. So it is a virtuous cycle and that’s why the market participants and everybody is keenly focused on transaction volume, what pharma might be interested in stepping into or how quickly they might be able to accelerate capital deployment given the needs in terms of filling out pipelines and the like. Now, from our perspective as fund managers, especially on the private side, our typical fund cycle is over two and a half to three years. What we have seen over the last five years is an acceleration in that cycle down to 18 months to raise a fund, deploy it, and then be back to the well, asking LPs for additional commitments.
The new environment that we are in will certainly dictate certain participants from the LP side like pension funds to rethink their allocation to private equity. Venture capital obviously is a sub allocation within the private equity portfolios. We might expect that LPs will slow down their deployment and certainly look for managers to return significant capital before allocating to the next cycle. So that is going to, I believe, put some more discipline back into deployment pace adventure funds. And so what it means is that it might definitely take longer as entrepreneurs go out and companies seek capital to get financing grounds closed. In addition, I think the fact that the IPO market is going to probably recover somewhat in ’23, but certainly not to the levels that we have seen before. That liquidity cycle is also going to be stretched out.
So when you are putting together a series B syndicate, for example, you need to think about who are the syndicate participants that can sustain the time period, which might be 18 months, before they are able to see a liquidity event. And so, all of that is going to take a bit longer for rounds to come together. We might see some non-traditional participants in these rounds. So for example, where crossover investors were really active over the last 18 months before February 2021. We may see less of those participants and more capital that is ready to be deployed either in co-investment relationships with existing GP and manager relationships that some pension funds or other larger asset managers have already established. So back to my initial point, I think a lot more collaboration but also thinking through a longer cycle before rounds get done.
Drew Armstrong:
Marianne, I want to come to you on this because obviously you all do participate in a lot of these. You guys have been engaged in some of these funding rounds and things like that. The conversations that you all have had this week and then going back over the last few years, how are you all seeing the impact of that private capital cycle in the conversations you are having, what people are asking for, what their needs are, what balance sheets look like when you have them? I’d love to hear from you and then Roel on that.
Marianne De Backer:
Sure. Yeah, so beyond my role at Bayer, I’m also on the board of two public companies, biotechs, in California. And of course we see, just here at JP Morgan, over 300 biotechs across the broad spectrum and the scenario’s everywhere the same. So obviously the correction has happened. The companies are focused on cash preservation, on extending their runway as much as they can. And they’re sometimes rationalizing their programs and they’re thinking much more creatively about partnering. And so, the conversations that we are having, there’s much more openness to consider partnering. There’s a lot of demand, of course, for really prioritizing upfront cash and near term milestone payments as much as possible. And the companies are much more lenient to giving up value that is further away. That is a clear trend. There’s also a much heightened volume of companies that want to partner.
We see, I think, about three times more companies coming in, reaching out to us on a weekly basis, not just JP Morgan. And then there’s also a lot of interest in alternative financing. So one of the companies that I’m on the board on is Arrowhead Pharmaceuticals, and so they recently announced that they did a deal with Royalty Pharma to sell royalties that they had from their Amgen deal on a cardiovascular drug. That got them 250 million upfront payment, 160 million in milestones. And again, these types of deals and also deals with private equity who’re looking into financing of R&D programs is getting much more traction. So I think the companies are really looking at a much, I think, more creative way to access cash and to extend their runway and there’s much more openness to partnering. And for us, nothing has changed. The fundamentals are the same.
We need innovation, so innovation requires partnering. As was already mentioned by Roel, also on our side, but across the industry there’s a lot of loss of exclusivities happening in the next five years. 30 of the top drugs are going to go off patent, so there is a need to replenish our pipelines. As Maha was saying, it’s a buyer’s market because the IPO and SPAC exits are largely closed, so there isn’t much alternative there. And there’s a lot of balance sheet money available across the bigger players. And with evaluations going down, I think it’s an ideal environment for partnering. And I think we will see certainly more M&A this year. The only other thing I wanted to mention is that corporate VCs, of course, such as our leaves by Bayer, because we take a much longer view on return, I think you’re going to see much more engagement and activity from corporate VCs.
We ourselves have committed to deploy over a billion in the next couple of years to companies. And in general there isn’t a shortage of private VC money. I think more than $20 billion was raised last year. It’s just a matter of people being much more cautious as to where to deploy it and when to deploy it.
Drew Armstrong:
Roel, are you seeing the same thing here?
Roel Van den Akker:
Yeah, I think so, Drew. I think the points that have been made by my Marianne are very eloquent. And I think a couple points maybe for me to double down on. I think there’s plenty of capital out there for the right ideas. I think there’s a little bit of a return to discipline, I think, coming. And that’s naturally a byproduct of an interest rate environment that has materially shifted from where we were in ’20 and ’21. I think if you look at the IPOs that happened in the 2021 window and the performance of those classes where those companies are trading today, I don’t think those results are very pretty. Those classes have been somewhat underwhelming in terms of performance. We also had SPACs that drove a disproportionate amount of IPO activity in ’20 and ’21 windows and that was really a late cycle phenomenon, from my perspective, reflective of a low interest rate environment.
So I think those types of things we’re not going to see return and FY ’23 and forward when the IPO market does open up. As Maha pointed out, there’s going to be a focus on the data, what are you focused on, and a little bit better risk reward balance that people are going to be seeking. And only the real compelling ideas are going to get funding and advance and attract the investor interest. That return of discipline I see coming in ’23. And then the other point I would double down on is Marianne’s point on private equity. I have observed the same phenomena. It’s a little bit different from venture funding, but mega PE has increasingly shown a very keen interest in our sector, which I think is phenomenal that they’re interested in this.
They’re having a lot of dry powder to spend and more and more is getting earmarked for our sector, which I think is a great thing. It’ll help get the right ideas get funding. And it’s not a new phenomenon but definitely something that’s gaining more prominence, which I think Marianne pointed out and I fully agree with her. I think that’ll be interesting to see how that sort of unfolds from there as well.
Drew Armstrong:
Where in the company cycle are you seeing large PE firms come in? Are they entering all throughout the company life cycle? Are they much later, in that growth phase or once ideas have been a little bit more tested by some of the specialist firms.
Roel Van den Akker:
There’s two areas where I see it. They have some interest for later stage, late phase two maybe in phase three and take some of those programs forward. That’s where I see them. They’re also looking at clearly equity markets have not performed great, so are there underperforming companies that perhaps can be taken private? So P2P is something that we’ve talked about in our outlook that that’s that we’ll see more of going forward because there’s a lot of dry powder to spend and performance may be better in private hands rather than being public. So that’s the two areas where I see them play. I don’t think they’re going to play in very early stage necessarily, but curious to hear, perhaps, Maha’s perspective on that as well.
Drew Armstrong:
Yeah, I was going to ask, Maha, you’ve been doing this long enough. How has this evolved up until the present moment?
Maha Katabi:
And certainly the appetite from private equity players into healthcare is new. We haven’t seen that in prior cycles. So I think that’s definitely room to be optimistic that there is a way out despite the fact that public capital markets might be closed for a bit longer than anyone had anticipated. But back to where the activity might be. What we have seen both on the M&A side, and definitely now on some of these transactions that Roel is referring to, is what I would call, say, a late stage premium. So late stage companies in the public market have traded at about 4x in terms of EV to some of the preclinical, clinical phase one, and even some of the phase two companies. So there’s definitely a focus and more value being attributed on companies that have de-risked and have delivered clean data sets.
So we’ve seen that play out in the public market. Now, in the private market it is much more challenging to find these opportunities on the private side. We certainly have been doing it for a long time at Sofinnova. There is certainly interest in taking forward products that pharma companies may have deprioritized, actually, and putting together private capital to continue developing these for longer and creating value in this way sometimes all the way to approval. And these are also transactions that we’ve been active in, in the past. And so, that’s where I see that type of capital being deployed because these are programs that will require $100, $200, $300 million or more in capital to take them to fruition. And so, private equity players, pension funds will partner up with specialists that can help them identify these assets and certainly put development strategies together.
Marianne De Backer:
I think what’s interesting, also, is that also in private equity, there is actually much more creativity. So the types of deal proposals that we are seeing through some of our portfolio companies or for our company, the mothership, Bayer, it’s talking about potentially doing joint acquisitions, it’s about funding late stage programs, yes, but not necessarily deprioritized programs. Also, really high priority programs where there’s a lot of investment needed. And then also a lot of proposals around creating NewCos or bringing private equity funding into some early portfolios. So I think, as Roel was saying, I think it’s great that some of that money is coming to this sector. And we’ll have to see how some of these great ideas turn into reality.
Drew Armstrong:
I do want to remind our audience that we have a Q&A function and you can certainly feel free to ask questions of our panel. I am watching the chat there and we will try our very best to get some of those to you. So please go ahead and if you do have questions, put those into the Q&A and our team here will sort those and get them in front of me. Maha, a question for you. What are your conversations been like with LPs in this cycle? Obviously expectations change, timelines change. Can you talk to us a little bit about as you’re talking to your investors, what those conversations have looked like and what their expectations and level of understanding is about the cycle that we’re in right now?
Maha Katabi:
Yeah, certainly we’re in a cycle where it’s time to deploy capital. So valuations have reset to a rational level by and large. And so the conversations that we are having with LPs is to remind them that despite the dislocation on the public market side, given that we have the expertise and the industry certainly remains open for business, we are able to identify assets where with the right funding can create significant value over the next two years, whether or not they are able to access the public markets. So these are the types of conversations that we are having. Obviously when markets are positive, everybody wants to continue investing. It is counterintuitive to continue deploying capital when there is more uncertainty, but it is absolutely the best time to be investing in biotech. If folks remember, funds that are from the vintage years of 2007, ’08, ’09, before biotech became a hot sector for capital deployment starting in 2012, are some of the best performing vintage years in venture.
So this is definitely not the time to be shy about deploying in this asset class. We were actually fielding significant more questions over the last two years as to whether we are in evaluation bubble for biotech. And so, on the valuation side, I think there is definitely a message that resonates as to why now is the time to invest. As I said, there are a few questions about generating liquidity and how you do that. And again, for us, the key driver is fully funding programs to generating meaningful clinical data. Because as Marianne and role highlighted, there are multiple options to create value and generate liquidity for LPs once you hit these key events in a product lifecycle.
And then lastly, the creativity that both Marianne and Roel refer to is going to allow us to deploy capital in very creative deal structures. So company creations around assets is something that we and others in the venture community have done over the years. The sources of assets come from pharma, they also come from biotechs that have too large a pipeline to continue funding their own on the public side. So there are numerous assets that are available and opportunities to structure relevant transactions.
Drew Armstrong:
Marianne, I want to come to you on something that you mentioned a little bit earlier in terms of large pharma balance sheets right now and how to think about those. Because I think a lot of people look at it and they see, you all or Pfizer or Moderna and sitting on large piles of cash. And I know you made a comment I think when we saw you at BIO that just because things are on sale doesn’t necessarily mean we’re going shopping. And how is the current environment, we have obviously inflationary pressures across the board, how do all of those outside pressures, or if you’re a pharma company running all sorts of other priorities, affect how you’re thinking about cash deployment back into the BD environment? And what’s the right perspective for people to have if they can be in your shoes for a minute about how you’re thinking about the cash that you all do have on the balance sheet?
Marianne De Backer:
Sure, yes. We had some conversations yesterday, some people were saying there’s $600 billion available across the industry to deploy, some were saying $1.4 trillion. In any case, there’s a lot of potential money available to deploy to M&A, for example. But as I said indeed in at BIO, we have been very disciplined and strategic about what are the types of companies that we would want to acquire. For example, we have set ourselves a goal to become a leader in the cell and gene therapy space. We analyzed the entire set of technologies and companies out there. And then we acquired two platform companies, BlueRock and AskBio. So we are very strategic and disciplined as to what it is we need and what it is that we think we need to bring in. And M&A’s then just a tool in the toolbox.
It depends on what you want to achieve. In the case of BlueRock and AskBio, because we had zero capability in the field, it made absolutely sense to acquire the companies, to get the expertise, to get the people, the knowhow, et cetera. But in some cases it’s absolutely fine to just do an alliance or a license or take an equity investment and watch the space. So that doesn’t change. We are not going on a shopping spree because things are cheap. But I think what has changed is that, as we have set our strategies and we know what we want to go after, it’s easier, actually, to get access to some of the things that we really wanted to get. Because there’s more leniency, there’s more willingness to partner. And I think that that opens, certainly, a perspective for more deal making this year.
Roel Van den Akker:
And, drew, maybe what I would say is, listen, if you take a step back, certainly there’s some dislocation we talked about. But none of this is anything new to our sector. We’ve been through these cycles before. There’s a full toolkit to deal with this. I think there’s ample liquidity and balance sheet cash available. Whereas licensing and partnering, listen, we’ve pivoted a little bit to a bit more of a buyers market away from a seller’s market, and there’s still valuation disconnects, but there’s a way to bridge this. By my count, the deals that got announced this week all had CVRs in them.
As an industry we have a way to deal with this level of uncertainty, ultimately. And what’s really exciting for me to see is that there’s great science coming out everywhere in various areas. I think that’s a point that’s been talked about a lot this week. But it’s really something that rings through for me and it’s exciting to follow that. And listen, that’s really what will drive the sector forward. The bar will be ever higher and there’s plenty of instruments in the toolkit, to Marianne’s analogy, that will make us get through this and continue the push forward. That’s really my belief.
Drew Armstrong:
You answered the question that I was going to ask you, in part, but I want to spend a little bit more time here since we do have it. When you think about the mechanisms that are available or that you are seeing, or that people are asking you about in these conversations, be they CVRs or something else, what are people looking at in the toolbox as they’re thinking about potential transactions to deal with the uncertainty here? What are the differences in the asks or the conversations between buyers and sellers? The appetite for who wants to take risk and who doesn’t, can you talk a little bit more about that and the conversations that you’re having and what we should expect in the coming months.
Because I’ve been through this long enough to know that we see the deals that get announced here and then three months from now we see the deals that got made here and then finally diligence far enough. So I’m sure we’ll be having this conversation again in April about something new, I hope. And I’ve been looking for people shaking hands or nodding over beers and things like that here in San Francisco. But talk to me a little bit about what the toolbox looks like right now in terms of what people are picking out of there.
Roel Van den Akker:
No, I’m happy to demystify it a little bit. And it’s everything you would expect it to be. Clearly the public markets have reset at a base that’s a little bit faster than the private markets. And I think in deal making there continues to be a bit of a gap between what buyers and sellers want. But clearly if people have conviction in biotech science or data sets, whether either read a read-out, post a read-out, and have really conviction behind that, there’s always a way to get a deal done. But obviously there’s valuation gaps. We’ve talked about the CVR. I’ve seen that come, like I said, in the deals that did get announced. But we saw it in the latter half of the last fiscal year already, also. So it’s not new, this past Monday, it’s been there for a little bit longer.
I think it’s a reflection of exactly that gap. So that’s certainly an instrument in the toolkit. Marianne’s talked about partnering, equity investments, licensing deals. That that’s not new either, but that’s a way to structure through that. I think, in private equity, private transactions in the bio-pharma, SPAC pharma space, we’ve seen some seller notes where people just leave a little bit of equity or money in or take installment paper to effectively bridge the value gap or the funding gaps that may exist. So there’s a wide array of instruments available to effectively bridge that. And people are clamoring for all of those to effectively get deals done. But I think it’s all predicated on the fact that there’s conviction and strong data and science that buyers are going to lean in. If that’s non-existent, then obviously the gaps will exist and no deals will get done. But there’s plenty in the toolkit, Drew, to make those gaps effectively be bridged.
Marianne De Backer:
Yeah, I would-
Maha Katabi:
What I… Oh, go ahead Marianne.
Marianne De Backer:
Now, I would just quickly add that a good crisis always beheads creativity. The type of things that we are seeing here at JP Morgan, there are some things different. Sometimes two partners approaches at the same time because they want to do a deal with three parties and they have really thought this through. So I think we are just seeing much more creativity and, again, leniency on the type of things that we could be doing.
Maha Katabi:
And what I was going to add on the private side, certainly deal structures whereby not the entire amount of capital allocated to a deal is invested in day one have been popular in our industry for quite a long time. But in terms of aligning interests and vision on valuations, there’s always the capacity to invest tranched against key de-risking milestones and certainly subsequent tranches of capital can come in at slightly higher valuations with a step-up that reflects the value that’s been created. So if you require a hundred million just to give a number to move to the next step and you are not able, today, at your current valuation, to take in all that dilution, there’s a way to soften the blow in a way whereby the management team is still excited about moving forward. And current investors that are participating in these rounds are certainly supportive.
It does become more challenging when you are looking at private companies, worker and investors are not necessarily looking to deploy more capital going forward, and these discussions can take longer. But again, with a structured deal with significant upside, should the programs play out as anticipated, can also be thought about. And then, one more thing I would add, given that public markets are going to be unpredictable for a little while, some of the small cap publicly traded companies could also consider strategies where if there is more capital available in private funds, the ability to go private, not necessarily in large private equity type transactions, as Roel was describing, but in transactions that venture funds are interested in putting together.
Drew Armstrong:
I want to ask the panel a question from the audience here. And it’s an IRA related question, to one of our earlier panels that we had here today. And we spent an hour on the IRA, my colleague Zach Brennan. Lots and lots of conversation. I’m sure it has come up with all of you. In your conversations with people, how much is that affecting the earlier stage valuation or investment environment that we’re seeing? Is it something that’s part of the conversation as an overhang risk benefit economics or the valuations you’re thinking about. And I’m happy to start with Marianne on that.
Marianne De Backer:
Sure. Obviously, given some of the IRA measures, the business cases for assets are just going to look differently. The timeline that you have to extract value is going to get more limited and the sequencing of indications needs to also change because you cannot start with a small indication and then gradually go to the bigger ones. Because then, for example, for a small molecule, your nine years will be up and you will be losing a lot of value. So the way you think about sequencing of indications for drugs, the way you think about how the business cases are going to look like as is just changing. And so, we are building that into our analysis as we look for, obviously, our internal assets. And the same is true for the external opportunities that we are evaluating.
Roel Van den Akker:
From my perspective, Drew, I think Marianne said it well, I think people are digesting this, it’s the law now and I think there’s more guidance on how certain things will actually get implemented. It’s going to come out over the course of the year. So this topic is going to be with us for a while. I think Marianne summed it up well. From my perspective, clearly the runways of patent protection have been changed and it’s different for small molecule versus biologics. I think what it means, in perhaps somewhat of a backend way is it could be a little bit of a stimulus to M&A as well. Just as I think about how long of a runway products will have from a top line perspective, may create gaps in company’s portfolios and will drive them to M&A quicker to fill some of that up from a volume perspective, which I think could, I’m an optimist but, be a little bit bullying for the SMID cap biotechs where some of that innovation exists and maybe push us to a little bit more M&A going forward.
Again, TBD, we’re all still digesting this a little bit and what it means. But that’s certainly a way where I’ve seen clients think about this and we’ve been internalizing and strategizing internally about that. So I think more to come. But yes, this is a real topic. It’ll feature in deal making, it’ll feature in deal models, it’ll feature in pricing curves very extensively and it will have ramifications on ripple effects throughout, from my perspective.
Drew Armstrong:
Maha, do you want to take this one?
Maha Katabi:
Yeah, certainly very similar thinking on our end. Some of the questions that I think that are still unanswered, how is it going to trickle down in the entire patient population? So obviously the patient population that is directly targeted by the measures that have been announced and are being implemented in the IRA. But for example, if you are developing a product for a pediatric population, is the impact going to be the same as if this is specifically targeted towards an elderly patient population? Certainly the comment that Marianne made about going after an orphan indication first and then a broader indication will change that is definitely going to be impacted. And as well as the strategy of taking a product forward for one orphan indication and then adding a second and a third and then creating a much broader portfolio of indications for the same product.
These are all questions in my mind. We don’t have answers to any of those today, but they’re factors to consider. And as you’re building a model today for future cash flows, you risk adjust maybe more aggressively than we would’ve in the past and don’t consider as many sources of upside. So it obviously decreases the net present value. But hopefully over the course of 2023 as we understand exactly how these things might be implemented, there will be a way to refine and figure out just how broadly applicable these measures will be across private pay markets and different parts of the patient population.
Drew Armstrong:
I want to stay with you and pivot to a question about the IPO market and, one, I would love everybody’s thoughts or guesses or pontifications about when the window opens back up. But just to stick with you for one second here. When you look out at the current class of companies that are out there, whether or not they’re IPO ready, but the class of private companies that we’re dealing with compared to the group of companies that have gone public. And I think a lot of companies obviously did go public, some that should have and some that maybe were not quite ready to. The number of those companies, the readiness of those companies, how should we be thinking about that cycle? Not necessarily from the demand side of things from public market investors, but from the stage of readiness, just from a clinical and balance sheet and progress standpoint of what the available potentials are to go into that market when the demand side does turn back around?
Maha Katabi:
I think it will likely be very similar to in the past where we did have periods of shut IPO windows. When they open up the first ones to go are the later stage companies. So those that have taken advantage of the fact that the market had been shut down but secured capital to continue advancing their programs. And so they are likely to be companies that now have phase two proof of concept, for instance, before attempting an IPO. Or IPO at a point in time where in very close proximity. So once you IPO, you have to think about what’s going to keep investors interested in your stock. So those that have very meaningful clinical milestones within six to 12 months of an IPO are usually the best performing IPOs. And obviously assuming the clinical data is positive, these also become the best performing companies from these IPO cohorts over a five, six-year period.
So if we go back, and we did an analysis at Sofinnova over the last seven years, 80% of the top performing IPOs for each of these seven years had been companies that worked clinical at the time that they IPOed. And so, that is certainly a theme, I think, that’s going to stick with us. So once the window is open, the ones that are first to go are those that have been able to move their programs into later stages. In terms of what type of syndicates are there to support the IPO, as you know, over the course of 2021, the best IPOs or the ones that were in largest demand had insider participation that was less than 50%. And when we go back to the time periods where it’s more challenging to complete IPOs, the insider coverage at the time of launch is usually at 100%.
And so, that’s the range that companies and bankers and market participants are going to need to think about. If you need full coverage on an IPO at launch, I suspect that’s going to be the case. Once the market starts opening and as folks get comfortable with how these new issuances trade, this is what creates excitement about the class and about more people wanting to participate in the IPO class. And then perhaps one last thought, in the past, the availability of capital to follow-ons is a predictor of when markets will be back for IPOs. And right now, yes, there are a number of follow-on transactions that have been completed, but they have been very selectively skewed to companies with late stage clinical data and late stage programs.
There haven’t been as many follow-on transactions that are not catalyst driven. And what we mean by that is that there hasn’t been a specific data event ahead of a company launching a follow-on offering. And that, to me, is an indicator, at least that we watch once there are more of these follow-on transactions across the board. I think that’s what we can expect it to filter down to the IPO market.
Drew Armstrong:
Marianne, can you put on your board member and venture investor had here as well? I would love to get your perspective.
Marianne De Backer:
Yeah, I must say I was very surprised over the past time to see how early companies were actually going public. And of course there was a possibility to do it so you could argue why not. They were just accessing capital in a different way. But often, certainly, we thought, wow, that’s maybe really an immature company to go about and do this. So now I hear there’s about 50 or 70 companies that filed an S-1 and they are sitting in the green room before going public and that might take some time now. And to the point that Maha is making, I think it’ll create a greater selection of companies that have more maturity, that ideally have assets that are closer to the clinic and that have a greater chance of them being successful in really getting financed.
Now, if companies do an IPO or, yes, SPAC is now, it seems, entirely out of the picture, maybe Roel can comment on that later, but for us of course, if companies access through an IPO, it closes a window for us to look at the company to be acquired for a while. So again, there’s always a silver lining in what is happening and I think it creates more opportunity for looking at companies to potentially acquire
Drew Armstrong:
Roel, are you seeing any of those dual track processes where a company is thinking about an exit and they’ve got an S-1 that they’ve secretly filed and they’re also pursuing the deal? I know there was a period of time where it felt like we saw a lot of that. And obviously I’m curious to get your perspective on what you’re seeing.
Roel Van den Akker:
Yeah, and I think that’s right and I agree with what Marianne and Maha have said as well. Just if you think back, it’s just interesting to see the pervasive effects of what a near 0% interest rate environment does to do which of these will get funding. I think now we’re starting to see the effects of that, the levels of me too innovation, perhaps, and those types of things. I think the bars being raised. I think I’ve heard that said a couple times here, which I think is generally a good thing. And Marianne said the same thing. It’s just maybe somewhat surprising to see what level of backing certain companies got. I think we’re seeing a little bit of a return to discipline.
I think that’s a byproduct of a different interest rate environment, quite generally speaking. And we’ve talked about that before here. So listen, I think you’re right, Drew, some of that will play out. Again, it’s back to the basics, what Maha was saying, if there’s good science and timing that right, those are going to be the ones that are going to be in the front line of the green room, as Marianne just called it. And I think that’s what we’re going to see play out over the course of ’23
Drew Armstrong:
Prediction time, everybody. I know everyone hates predictions, but I’m going to make people make one anyways. The conversations, I feel like I’m hearing a lot of buzz, at least the last couple of days about optimism around a soft landing. And so, I would love to hear people’s thoughts on that sentiment, whether or not you’re picking that up as you’re in your conversations. And also any predictions on when we will open the IPO window back up and what it will take for that to happen.
Roel Van den Akker:
Yeah, maybe I’ll go for this. It’s hard to pick.
Drew Armstrong:
You’re generous to go first. Now they can-
Roel Van den Akker:
The prediction business is dicey. But listen, everybody is looking for those. And what I’ve heard a lot, and I think it’s probably right, I think we talked about the inflation read out tomorrow. I think people are just going to be glued to the macroeconomic indicators for a little bit. And if we see a little bit of progress there and the monetary economic overlay can loosen up a bit and we get closer to a terminal rate. I think we can see that opening up. When will that be? I don’t know exactly. Some people have said maybe more latter half. I think it’s going to depend a little bit, inflation’s a multi-headed beast. We’re just going to have to wait and see when that comes out.
But I think generally, against the backdrop of all the things we’ve just talked about, the great innovation in our sector, ample corporate balance sheets, [inaudible] latter half of the decade, still plenty of VC funding available. There’s going to be activity and people will find a way. When will it be exactly? Drew, I don’t know, but at some point between here and December 31st. How about that one for a prediction?
Drew Armstrong:
Anybody want to go narrower than that?
Maha Katabi:
The World Bank has put the probability of a recession certainly in North America and EU for around 65%. So I guess if we take the view of the glass third fall, then hopefully we can get a soft landing and avoid a recession. Obviously if we enter into a recession, it’s a much longer time period. So my prediction would be for 2024. And if we manage to avoid it and get a soft landing, I think a number of market participants are thinking through what is the timing that the Fed might feel that it can slow down on interest rate hikes. But it feels like second half of the year before we can start thinking about that being available again.
Marianne De Backer:
Yeah, I would agree. I think I expect that the first half of this year will be a little tough. And of course the whole macroeconomic situation, how is the war in Ukraine going to further develop inflation, et cetera? Of course that’s really out of our hands. But I do think that end pandemic, new variants, how is that going to evolve? But if that is under control, then there’s still the factor about our sector, specifically. And I think what investors are asking us, it’s a little bit of a show me case again, in contrast to the past. And so, I’m really incredibly energized by the fact that there’s incredible science. What we are seeing here is unbelievable, and not just at JP Morgan, we see it on a weekly basis. So the innovation is very high and there is also a lot of creativity. So I think that combination can really rally us into, hopefully, a better second half of this year.
Drew Armstrong:
Maha, I want to come to you. You mentioned that ’07, ’08, ’09, those vintages of companies and the very good performance that they have. And that obviously spans a significant change in interest rates and the sentiment environment across those years. We’ve been through not something quite so dramatic here, but just personally as an investor, which of those types of environments would you rather be in? Do you have a personal, I really like when I get to invest in this. Obviously, it’s great to have a lot of capital and LPs who are willing to send stuff over. But I’m sure it’s also unpleasant to be dealing with exceptionally high expectations and valuations and crowded fields. So what’s your just personal preference in terms of how you like to operate in which you find most rewarding?
Maha Katabi:
Well, I think we all thrive on innovation and enthusiasm. To me personally, over the last 15 years or so, 2014 was one of the most exciting years. And if you look at the numbers of IPOs in 2014, there were over 80 of them after a period where 30 was the norm. So yes, when there is tremendous effervescence and momentum and excitement, certain types of innovation that wouldn’t have otherwise gotten funded do get the funding. And that’s how they ultimately see the light of day. Moderna, for instance, obviously was created in the 2012, ’13 timeframe. So there’s something to be said about buoyant markets.
Now, if I go back to just putting my investors and thinking about our LP base, investing in years where you have high visibility on what is a rational price to pay for an asset, given the historical data on what is the market opportunity for certain types of drugs? How can you differentiate and be a winner in a category? And that’s how you price a deal today. It’s a much more natural environment to be competent to deploy large amounts of capital. So rather than writing smaller checks, I’d rather be writing bigger checks and having conviction in what we’re investing in. And this environment is much more amenable to that.
Drew Armstrong:
First of all, let me get your answer to that question as well, Marianne, if you don’t mind, since you’ve been through these cycles before as well.
Marianne De Backer:
Yeah, you mean I’m rather old already.
Drew Armstrong:
We have all done this. And I hate to say it, none of us are in our first economic cycle.
Marianne De Backer:
Right. Some are reminding me that there have been four or five and so, luckily not that many yet. Yeah, I agree, actually, with everything that Maha was saying. We take our investments’ thesis a little bit differently on the Bayer side. So with leaps with Bayer, we always make bigger investments. So we want to fund the things that are really out there, the things that could leap a field forward to the example of Moderna, those type of technologies that wouldn’t as easily progress if they had to go for 2 million and then 5 million. So we really try to write bigger checks and give some of these companies the opportunity to really, hopefully leapfrog into a given area.
And if the market is doing great, I agree that it creates more opportunity for innovation to flourish. On the other hand, I think it’s not a bad thing that we have a little bit of a correction and that not everything gets funded because there’s a lot of me too things that are being funded because there’s just this environment where that was possible. So I think this more disciplined approach is actually healthy. And it has shown from prior the 2008 crisis that indeed some of these opportunities drive the most value. Someone was, yesterday, referring to us coming out of something similar that happened, what was it Roel, in the 16th or 17th century with the tulip crisis? Where everyone wanted a tulip bulb and they were paying incredible amounts of money and then everyone calmed down and realized it was only a tulip bulb.
Roel Van den Akker:
I like that analogy. As a proud Dutchman, Marianne, I like that analogy a lot.
Marianne De Backer:
I can imagine.
Drew Armstrong:
For our audience, before you all joined us, we were finding out who spoke Dutch and we’re varying and they threatened to do part of the panel in Dutch. And we’re getting dangerously close once we entered in tulip bulb territory here. So, had to steer us back. I want to first close by thanking you all enormously. This has been incredibly interesting. I’m interested to see what you all have in the months to come. And hopefully we can have this conversation again a year from now.
Just as a closing question, this came up earlier and I meant to come back to it and we’ve touched on it a little bit, but in the deals that we are seeing happening right now, either funding deals, partnership deals, where are you all seeing buyer and seller appetite for who wants to hang onto risk versus taking money off the table upfront, and how you all are thinking about that and how the sellers that you’re in conversations are thinking about that as well? Maha, we can start with you please and then we’ll go down. And then we’ll say goodbye to our audience.
Maha Katabi:
I certainly feel that investors on the public market side are bracing for certainty. Once there is clarity on where the trajectory is on the macro side, I think they’d be much more willing to deploy capital. So I’d say they are the most risk averse at this moment. While private investors that do have a longer time horizon and can certainly navigate through that cycle do have a much higher interest in deploying capital right now. And everybody here, especially at JP Morgan this week, I think there’s a high degree of energy and a desire to stop talking about 2022 and look forward to the types of deals that we want to be making in 2023. So I suspect that the most volume that we’re going to see deployed is definitely on the private investment side.
Drew Armstrong:
Roel, your thoughts on that as well?
Roel Van den Akker:
Yeah, and I agree with Maha. Listen, I think there’s tremendous enthusiasm around certain breakthrough and data readouts. We’ve talked about advances in certain cancer types, we’ve talked about advances in CNS, there’s great traction in NASH. So there’s just a lot of great science coming through. And I think once the macro backdrop stabilizes, as Maha said, people are going to be comfortable on both sides of the public and the private markets to take those risks, particularly when there’s really good science behind this. Some of those end markets that we’re talking about, there’s a lot of movements, I think, in obesity and cardiovascular disease where there’s a lot of unmet medical need.
I think people are going to rally around that grow more comfortable with the environment and the macro environment that we’re in once the relative level of dislocation tapers a little bit. And I think Maha said it well, we’re done, we’re talking about ’22 here soon enough, once we all fly home. And let’s really go after the science and think people will come to the table to make deals in advance or the science. That’s what everybody’s really excited about.
Drew Armstrong:
Marianne, I assume you’re ready to put 2022 behind you as well here.
Marianne De Backer:
Absolutely, yes. But I think, on the one hand you have all the big players that are sitting on a mountain of firepower, and on the other hand you have companies that are maybe getting strapped for cash and where also the boards are really pushing them forward and saying, go and find partnerships. So, in that environment there must be an opportunity for a lot of matchmaking. So, I think, there’s an opportunity for more collaboration to progress all the great science that Roel was mentioning, maybe in an accelerated way.
Drew Armstrong:
Well, an enormous thank you to all three of you for spending time with us today. I know how busy schedules are. And a huge thank you to our audience for tuning in. It’s been a wonderful conversation. And I’m looking forward to having it again next year. We’ll talk to you then.
