The Last Word: Place Your Biotech Bets on Solid Management and Hot Therapy Areas

The Life Sciences Report  |

Who got the last word at the 2014 Biotech Showcase? A portfolio manager specializing in healthcare, an award-winning analyst, and a pair of venture capitalists with global viewpoints and a focus on clinical-stage companies. In the closing event of the showcase, cohosted by The Life Sciences Report, this panel of experts offered insights into trends that will influence the biotech universe in 2014.

San Francisco was the center of the life sciences universe last week, hosting three industry conferences under shockingly blue skies. In addition to the JPMorgan Healthcare Conference, Biotech Showcase 2014, with its focus on small- and mid-cap public and private biotech firms, drew thousands of participants.

The Life Sciences Report launched its 2014 Biotech Watchlist at the showcase, and cohosted the closing reception, "The Last Word," a panel discussion on the state of the industry from the perspective of earlier-stage biotech and medtech companies. Moderated by Kimberly Ha, BioPharm Insight's global editor, panelists included Steve Brozak, president of WBB Securities LLC, a boutique investment bank and research firm, Fabrice Egros, managing partner with RMI Partners (cohost of the panel), a global life sciences venture capital investment firm, Dhesh S.K. Govender, portfolio manager for healthcare with Cedar Lane Enterprises and Anthony Sun, a partner with Aisling Capital, a private equity fund.

The first words of the Last Word panel addressed the wealth of potential in smaller, nimbler biotech companies, and how a burgeoning number of acquisitions and partnerships in 2013 reflected the interest of big pharma in ideas generated by these smaller enterprises. As Brozak pointed out, the "scarcity of new products and new technology" within the pipelines of larger pharmas had brought "people from JPMorgan shopping for ideas" at the Biotech Showcase.

The biotech boom has been good to small-cap firms with innovative technologies and the ability to move their products to market. As these companies progress through clinical trials and clear regulatory hurdles, their stock prices typically increase. Stock prices also jump when bigger pharmas and biotechs become interested: With partnerships and pending acquisitions come increases in valuation.

Govender expects the partnership and acquisition theme to continue into 2014. In fact, within the next few weeks, he said the market could expect to see "18–22 deals." Will the doubling and tripling of valuations continue as those deals are made? "The next couple of weeks will tell," Govender said, adding that companies run by management teams with experience as dealmakers, good fundamentals and a product that addresses a good market, will be premium targets. Big pharma, he predicts, will set records for amounts paid for early-stage assets in oncology, especially checkpoint inhibition.

But the panelists agreed that, barring partnership or acquisition, financing early-stage biotechs would not get easier any time soon. Sun cited a lack of appetite on the part of venture capitalists and the public market for companies with products in early days. In addition, it's difficult to "nail down a valuation" for early-stage companies, Govender said.

The panelists were universal in their belief that biotechs with good management are an investor's best bet. Investors who get to know a company's management team will be able to find a deal they can get behind, Brozak said.

Those management teams also need to hone their pitches when looking for financing. In terms of the "X-factor" that the panelists look for when considering a company, Sun wants to see "a clear plan, with a clear number of milestones or an exit." For Brozak, management has to be able to deal with regulatory setbacks, personnel problems and the like. Govender likes to see a "clear understanding of the marketplace across the globe," an idea that Egros echoed, citing his desire that management have a "worldwide vision" for an idea.

The panelists also agreed that they liked to see companies led by teams that have track records of successful exits. While sometimes "first-timers have done other things that bring new perspective" to a biotech, there is great comfort for investors in knowing they are "dealing with someone who has succeeded before," Brozak said.

While individual small companies with no proof of profitability may not interest venture capitalists (VCs) at present, Brozak said that therapy areas might garner "more of a sizzle," with VCs picking a basket of preclinical or phase 1 companies.

2013 was a "record-setting" year for drug development in oncology, Egros observed, and he expects that trend to continue into 2014. Following on this idea, Sun mentioned targeted oncology as a field with great potential.

Brozak was enthusiastic about the prospects of companies working in the antibiotic space. With bugs becoming resistant to the "simple antibiotics" currently available, companies looking for new solutions using new technologies offer great promise.

The prospects for personalized medicine, especially given advances in gene sequencing—and in particular the promise that costs associated with sequencing will decrease as numbers reach "critical mass"—were intriguing to Govender.

Ha piggybacked on the mention of gene sequencing, asking how the "$1,000 genome" will affect drug development.

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If small companies are able to pass that price on to a partner, Brozak said, they'd have the "best of both worlds," both reducing development costs and gaining access to a "quicker model of discovery." An inexpensive genome would impact trial design as well, Sun added.

"It levels the playing field," Govender said.

Emerging global markets present a challenge for biotech investors, in part because the matrices used to calculate valuations for companies vary from country to country. Sun delineated two issues investors would want to investigate prior to investment: Generally accepted accounting practices (GAAP) would need to be addressed, and the device or drug would have to be differentiated from devices/drugs on the domestic front.

In addition, Brozak noted that in some cases, cultural uses for therapies are very different, which affects valuation. He cited Japan as an example, where the use and design of antivirals are different from what is found in the United States.

Still, international markets, particularly those in Australia, Israel and Europe, will present opportunities for investors going forward, according to Govender. Likewise the BRIC (Brazil, Russia, India, China) market, which Egros noted "is moving ahead much faster than Europe, and is becoming a fast follower of the U.S."

The "new buzz" surrounding wearable medical devices capable of monitoring and transmitting personal health information, such as the Fitbit wristband, prompted Ha to ask the panelists how they felt these devices would affect the industry.

Reaction was mixed. Brozak noted that the technology "lends itself to personalized medicine," providing real-time information about whatever is being tracked by the device, whether the monitoring of symptoms or the dosage and/or effects of drugs. But, "How do you control data mining?" he asked.

Sun felt the adoption of wearable technology by providers would be "slow." The technology would have to be economically viable, and insurance companies would have to buy in. As for the use of wearable devices in clinical trials, Sun said a company likely wouldn't want that kind of data until it knows its drug works.

Ha ended the session by asking the panelists if they came away from the San Francisco conferences having been struck by a particular insight. For Govender, it was the idea that investors should be "going long" with regard to biotech, since the "shorts are getting crushed."

Sun was struck by the stunning increases in valuation of Intercept Pharmaceuticals Inc., maker of therapeutics that address chronic liver disease, which could portend explosive growth for some companies in 2014. Intercept has since retreated from its high point.

Egros cited the abundance of initial public offerings, both past and future, as "excellent news" for investors and the industry.

And Brozak concluded with the story of Celgene, which was a tiny company in 1999 when it started investigating thalidomide, at the time a much-maligned drug. But research revealed a "different paradigm" for the therapy as a cancer fighting agent, and the company rocketed from a $150 million market cap to a valuation of almost $70 billion.

"This is America," Brozak said. "One company at this conference—maybe one of the regenerative medicine companies—could do the same thing. . . .It can happen again."

Source: Tracy Salcedo-Chourré of The Life Sciences Report (1/23/14) January 2013 Biotech Watchlist

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Steve Brozak is a top-ranked analyst in biotechnology according to the Starmine ranking system. He has been in the securities industry for more than 20 years, where he has held positions in sales, management, investment banking, and research analysis. He has been intimately involved in providing research on a number of companies. Brozak has a bachelor's degree and a master's degree in business administration from Columbia University and is a retired lieutenant colonel in the United States Marine Corps.

Fabrice Egros, managing partner with RMI Partners, has more than 20 years of international experience of work in the pharmaceutical industry. Prior to coming to NovaMedica he held managerial positions at Xanodyne, UCB (in Belgium, the U.S. and Japan). Egros also worked at Parke-Davis/Warner Lambert in Germany and the U.S. and Sanofi-Aventis in Japan and the U.S. His responsibilities have encompassed clinical development, marketing, market access, sales, business development and general management functions. Egros received his Pharm.D and Ph.D in pharmaceutical sciences degrees at Chatenay Malabry University (Paris), a diploma in business administration from Schiller International University (Dunedin, Florida) and studied in the advanced management program at Harvard University.

Dhesh S.K. Govender is a portfolio manager for healthcare and life sciences with the Cedar Lane Fund, a division of New York-based Cedar Lane Enterprises.

Anthony Sun joined Aisling Capital's Fund I in 2002 and currently serves as a partner. Previously, Sun was an adjunct instructor of medicine at the Hospital of the University of Pennsylvania. Sun currently serves as a director of Paratek Pharmaceuticals Inc. and Versartis Inc. Previously he served as a director of CeNeRx BioPharma Inc., Dynova Laboratories Inc., HerbalScience Inc. and MAP Pharmaceuticals Inc. Sun received his M.D. from Temple University School of Medicine with honors. He received his master's degree in business administration from The Wharton School at the University of Pennsylvania, and his bachelor's degree in electrical engineering from Cornell University. In addition, he is board certified in internal medicine.

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1) Tracy Salcedo-Chourré prepared this article for The Life Sciences Report and provides services toThe Life Sciences Report as an independent contractor. She or her family own shares of the following companies mentioned in this interview: None.
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