StreetTalk: Hello, It's Me: VCs Once Again Wooing Biopharm Companies

Hey, this investing game is easy. Consider Nebraska's Warren Buffet, the billionaire financier who recently made billions betting against the US dollar. He once famously said that successful investing was based on two rules: The first rule is not to lose money. The second rule is not to forget Rule #1.

Brian O'Connell

So it goes with the venture capital industry. VC firms have gone to great lengths to follow the Buffet Rules. Some might say that venture capital companies have spent the first years of the new century clinging to those rules like a barnacle to the hull of a boat.

Can't blame them for not wanting to lose money. Venture capital firms were annihilated in the early 2000s by poor performing investments. Not just in the biopharm sector, but in others like technology and telecommunications too. Many VC firms lost so much money they went belly up. Others merged just to survive. But now, scores of venture funding companies are lining up and waving their checkbooks at promising life sciences firms.

According to BioCentury's Financial Center, the biotech industry has raised $112 billion since 2000. A separate report from PricewaterhouseCoopers Health Research Institute shows venture capital groups poured a record $6.33 billion into life sciences companies in 2004. The IPO industry is heating up as a result. The biopharm industry has launched 56 new IPOs since January 2004, at a collected value of $2.8 billion. Sixteen more biotech firms are lined up on Wall Street for IPOs in 2005. "Money typically follows strong fundamentals, and there's good reason why the biotech industry continues to draw new investment," says Dennis Purcell, senior managing partner with Perseus-Soros Management, LLC.

Clearly, something very positive is happening here. "VC investment in the health sector has steadily increased, even through the post-Bubble hangover as investors have, on one hand, sought to diversify their IT-heavy portfolios, and on the other come to recognize the long-term potential of the sector," explains Tracy Lefteroff, global managing partner for Life Sciences Industry Services at PricewaterhouseCoopers. "We believe the aging population in the developed world and recent commercial successes of life sciences companies will continue to fuel investment in this sector to a point where investment in health-related industries will rival or surpass IT investments." Among the most heated sub-sectors of the biopharm market, adds Lefteroff, were cancer drug development, new types of stents, pain management therapies, insulin delivery systems, respiratory disease therapies, elder-care services, and physician-owned specialty hospitals.

BULLISH ENTHUSIASM

For their part, biopharm companies are growing downright giddy about the renewed interest from venture capitalists.

Fresh off from deals involving Aska Research and Syrion ($1.1 million), Inimex Pharmaceuticals ($8 million), Burnaby's Xenon Pharmaceuticals ($200 million), and ID Biomedical ($2.5 billion), a British Columbia-based biotech fund recently sent me a press release touting "The Top Ten Reasons to Invest in B.C.'s Biotech Sector." You know when industry capital providers start mimicking David Letterman, the good times are indeed a-rollin' again.

A "PERFECT STORM"?

Why the surge in vendor funding for the life sciences industry? And what does it all mean in the long run?

Well, for starters, the venture capital folks look at the biopharm industry and once again see home run potential.

"Large pharma is now dependent on biotechnology; the proximity to large pharma is now a major advantage to industry development; and clinical-development and commercial-development talent pools are in high demand," explains Sherill Neff of Quaker Bioventures and manager of the Garden State Life Sciences Venture Fund, in touting the growth in biopharm funding in the Mid-Atlantic states. He says, "There is a core of experienced serial entrepreneurs emerging; the flow of federal funds into academic medical research is stronger than ever; technology transfer efforts are improving; and venture capital resources are growing."

Neff adds that with biotech valuations at the lowest point in years, the resulting investment opportunities are multiplying — seemingly by the hour.

His point about big pharma partnering with biotechnology firms is a good one, as well. The more sizable pharmaceutical firms need smaller biotech companies to seed the market with new products — thus the ramp-up in biotech buyouts and mergers by pharmaceutical companies. That increases the value of the big pharma firms and provides nice payouts to investors who were smart enough to plow money into the biotech firms that are now being bought out.

Appealing new technology breakouts in the industry have generated a great deal of VC enthusiasm as well. We've seen the completion of the human genome project with a new pipeline of products flowing into the marketplace as a result. Some estimates place the number of new drugs from genomics at 10,000. That means thousands of new drugs coming from firms that need financing.

There are political reasons for the increase in VC activity in the biopharm sector. The Bush administration has finally shed the rust that inhibited FDA approval for drugs and medicines and is now running on all four cylinders. To show drug companies that Uncle Sam is on their side, many firms are earning patents of more than 20 years for their products. That ensures enduring profitability and mitigates uncertainty about the cash pipeline running dry after patents expire before their time (in the opinion of industry companies and their capital providers).

In the fourth quarter of 2004 alone, the FDA approved a slew of new drugs, including an earlier-than-expected approval of Tarceva, a drug jointly developed by OSI Pharmaceuticals, Genentech, and Roche for the treatment of metastatic non-small cell lung cancer, and subsequent approvals for multiple sclerosis drugs from Biogen and Elan, along with an insomnia drug from Sepracor called Lunesta.

The market is there for new drugs. Demographically, those amazing baby boomers — 77 million strong — are getting along in years and thus are providing a huge market for drugs and therapies to both treat and forestall disease. The most health-conscious generation the world has ever seen, the boomers will spend billions on drugs and therapies provided by the biopharm sector. And don't think venture investors don't notice. If you have a ready-made market of 77 million regular customers clamoring for your products, the champagne and caviar can't be far behind.

So what we have is an almost "perfect storm" of good indicators for the sector. As Jane Brennan Henderson, managing director, Healthcare Investment Banking, CIBC World Markets, puts it, "Positive news should drive the biotech sector over the next 12 to 18 months. The biotech financing window is robust; M&A/partnering activity is significant; and 2005 will be a transformational year for many companies."

It's funny when you think about it. Only a few months ago many industry pundits — including . . . ahem . . . me — were wailing and gnashing our teeth over the life sciences industry's myriad problems, including the Vioxx and Celebrex scandals, the encroachment onto brand name biopharm turf by generics, and the slow pace of progress in hot-button areas like genomics and stem cell research. My what a difference a few months make. The industry has seemed to weather such storms and now sees smooth sailing ahead.

It reminds me of an old trader I used to know on Wall Street. "Brian, my boy," he'd say. "Times are flush. It's like walking down the street, turning the corner, and finding yourself knee deep in money. May it last forever."

I wonder what Warren Buffet would say about that?

Brian O'Connell is the Celebrity author and business/finance commentator for CNN and Fox News.He has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive, Doylestown, PA 18901, 267.880.3144, fax 267.880.1939, brian.oco@verizon.net.