Wednesday, January 20, 2010

Notes From JP Morgan: Put On Your Happy Face?

For those trawling the halls of the Westin St. Francis and other nearby hotels at last week's JP Morgan confab, the buoyant outlook by most attendees resulted in an industry-wide sigh of relief.

But is the optimism justified? Or have we collectively morphed into ostriches, believing that if we squawk loud enough, our assertion that investors are returning to public biotech will make it so? To completely mash-up our animal metaphors, perhaps the positive outlook is really just due to the "dead cat bounce."

In truth the reality is nuanced. A pool of lucky "haves" add to their cash positions while the unlucky and far more numerous "have nots," which now includes smaller biotechs and VC firms, will continue to struggle.

Let's start with the good news. As we note in this January IN VIVO feature, publicly traded biotechs raised more than $6 billion in follow-on public offerings in 2009, compared with just $2.1 billion in 2008. Last year was the best year on record since 2000, when the torrid market and a NASDAQ pushing 5000 allowed biotech to raise more than $11 billion.

The strong boost in FOPOs has bankers and other Wall Street types believing that a thaw in the IPO market can't be far behind. But take heed: the $6 billion in FOPOs that's causing so many smiles was primarily the domain of more established industry brethren, including Vertex, Human Genome Sciences, and Dendreon, which all have late-stage assets facing regulatory decisions in coming months.

Indeed, those three companies alone pulled in more than $2.2 billion in 2009, one third of the FOPO largesse, according to Elsevier's Strategic Transactions database. (And FYI, according to the database, the largest single public offering in '09 went to the diagnostic and instrument maker Qiagen.)

Certainly the IPO stats posted for 2009 -- 12 health care companies pulled in nearly $3 billion --were a vast improvement on the 2008 climate, when just two companies debuted raising a paltry $92 million. But do IPOs such as Johnson & Johnson spin-out Movetis's €98 million coming-out party really translate into investor appetite for considerably riskier offerings in the queue? A J&J spinout with a Phase III asset is one thing; the regenerative play Tengion, antibiotic developer Trius Therapeutics, or anti-VEGF developer Aveo Pharmaceuticals are a different kettle. Will these start-ups suffer Omeros's fate? Will they even get out?

In that vein, we have to hand it to Ironwood. In a "grab the bull market by the horns" kind of move, on Jan. 20, the company filed plans with the SEC for a debut that could bring in nearly $270 million. Recall Ironwood first filed in November with a $173 million target. That price alone would be the most lucrative drug-related offer since mid-2007 -- not counting Talecris, the plasma producer and Bayer HealthCare spinout that raked in nearly $1 billion last fall. But Ironwood has decided to shoot even higher and sell 16.7 million shares at $14 to $16 per share.

Meanwhile there are other questions to ponder. Given the desperate straits of many VCs (more on this in a minute), is there a danger fledgling start-ups will be pushed from their financial nests prematurely, as their backers aim to demonstrate their exit prowess? And what happens if several of these IPOs go south? If Ironwood falls short of its $267 million goal, will the IPO window slam shut faster than you can say eye-pea-oh?

Maybe, but VCs seem willing to take the risk given their own financial constraints. "We need the stalking horse of a robust IPO market for deal prices to increase," one VC told IN VIVO Blog at last week's JP Morgan meeting.

Just how bad are things in VC land? On Tuesday Jan. 19, Atlas Venture, which invests in both tech and biotech, announced plans to consolidate operations, bringing its US and European teams together under one roof in Boston. Only the happy family won't necessarily be bigger -- in the process, Atlas is reducing headcount.

That news probably would have been unthinkable a year ago. Atlas actually raised money in '08, one of the lucky few to pull in money even as the economy was souring. (It closed its $283 million Fund VIII in January of 2009.) But it's hard not to raise questions about VC viability after last week's revelation that the total amount of money raised by venture firms from their limited partners fell sharply in 2009 to $15 billion, nearly half of 2008's total and the lowest since 2003.

"Our industry is going to contract in size," Mark Heesen, president of the National Venture Capital Association, said last month. Almost certainly, healthcare VCs won't be exempt.

That's troubling news for private biotechs looking for funding, especially if they aren't exactly newbies and need significant dry powder to advance a product to proof-of-concept. (Fourth-quarter VC financing stats are due out January 22, fyi.) And it means corporate venture groups like SR One, the Novartis Option Fund, and Johnson & Johnson Development Corp. will again play a critical role in new company creation. (It also means big pharma can use its cash to make VCs irrelevant.)

Either way, no one we've talked to recently predicts that earn-out heavy deals will fall by the wayside. On the rise of structured acquisitions, one VC told us unequivocally last week, "We love them." That's probably because such deals AREN'T alliances.

So what do you think, dear reader? The nascent optimism at JP Morgan last week seems rooted in the fact that 2009 ended so much better than it began. But how much does that really say?

(Image courtesy of flickrer BenSpark via a creative commons license.)

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