Investment Opportunities to Watch in Biotech

Biotechnology companies have faced turmoil in the public markets in the first several months of the year amid concerns about pricing, and growing global macroeconomic and political uncertainty. Notwithstanding these volatile conditions, large pharmaceutical companies have continued to bet on smaller biotech companies. And while IPO activity hasn’t matched the robust level of public debuts seen throughout 2015, the life sciences sector represented the vast majority of public offering activity in the first half of 2016.

David Rosenthal, Co-head of Dechert’s Capital Markets Practice, joined an esteemed panel to discuss the biotech sector at The Deal’s live webcast held on July 13, 2016.

Some of the key takeaways include:

• Factors to keep in mind when deciding whether to buy a biotech company
  
  
  • With biotech indices down 19% year-to-date, biotech companies are relatively cheap.
  • There is currently an abundance of innovation in the sector.
  • Biotech companies are better funded now than they have been in recent years so they have enough money to see the next data points, which means large pharma needs to make a convincing argument for why a takeout now is in a biotech’s best interest.
  • As valuations have been under pressure, companies should consider antitakeover measures to make sure they are prepared to fend off any unwanted advances.
• Attractive biotech and drug development targets include:
  
  
  • Large pharmaceutical companies are interested in both later stage and early stage assets.
  • Orphan drugs, because they have attractive economics and are insulated from current pricing debates given that they affect relatively few people and provoke a great deal of sympathy, as the patients are often very ill.
  • Inflammation and central nervous system (CNS), because the economics are lucrative given the thousands of patients although the cost per patient tends to be very high as they are diseases that are life-threatening.
• Challenges when identifying promising prospects:
  
  
  • Exploring alternative capital raising strategies to the highly diluted equity markets, such as debt capital markets, royalty monetizations, reverse mergers and other alternative financing arrangements. 
  • Evolving competitive landscape of the product’s market – particularly the pace of innovation and the possibility of others coming up with something better.
  • Understanding the likelihood of approval and the probability of getting to market.
  • Current market uncertainty posed by the 2016 U.S. presidential election.
• Biotech sector outlook:
  
  
  • Companies are doing small financings now to tide them over to 2017 when there is a general perception that the markets will be more receptive to financings.
  • We are now able to assess, detect and monitor diseases more effectively than in the past – this capacity, coupled with an aging population, bodes very well for the industry.