Panel: “The Great Divide – Public vs Private Investing in Life Sciences”

Panelists:

Patrick Heron, General Partner, Frazier Healthcare

Evan McCullough, Portfolio Manager/Analyst, Franklin Templeton

Oleg Nodelman, Managing Director, EcoR1

Srini Akkaraju, General Partner, Sofinnova

Doug Fisher, Partner, InterWest Partners

Moderator:

Chris Ehrlich, Managing Partner, Locust Walk Partners

Summary:

The Allicense 2014 provided a unique venue in which both public and private investors engaged in a robust discussion around investing in the life sciences. We heard from seasoned investors from Frazier Healthcare, Sofinnova, and InterWest on the venture capital side, while also hearing from leaders at Franklin Templeton and EcoR1 representing public investors.

Panel members had differing perspectives on where they see the sector heading in the near-term. Doug Fisher, Partner at InterWest Partners, felt that life sciences investing still will continue to contract. It’s no secret – 2013 and early 2014 were both encouraging periods of time: the biotech IPO boom and the Biotech Index continue to rise, but invested capital from VCs in these companies has not yet been returned. Life sciences LP funding will be constrained until LPs get their money back and experience reasonable returns. To counter, Patrick Heron, General Partner at Frazier Healthcare, took a more optimistic view. “We only have up to go from here,” he said, believing that we’ve already hit rock bottom in the space. Srini Akkaraju, General Partner at Sofinnova Ventures, had a more moderate view, believing that the decrease in funding and investing has stabilized for now. Regardless of whether your glass is half-empty, half-full, or just has some water in it, everyone is very interested to see how this IPO boom plays out and how this will affect future LP funding.

Regarding the IPO boom and the Public markets, the Public investors were more consistent in their views, namely with regards to a deceleration of the momentum from the past 18 months. As Evan McCullough, Portfolio Manager / Analyst at Franklin Templeton Investments, stated, we’re starting to “see some air come out of the balloon” because the returns are not as good as expected given the lower-value of certain recently-debuted stocks. “The stock market in the short-term is a voting machine, and in the long-term is a weighing machine,” said Evan, “with a bunch of voters left and fewer buyers.” As such, he expects to see a decline in the public capital markets for life science issues.

One of the themes through the conference was the contrast between public and private companies and investors, especially in today’s environment. Do companies prefer to be public or private, and do they prefer to seek funding from Public or Private investors? As Oleg Nodelman, Managing Director at EcoR1, points out, valuations are always higher with public companies because of a lower cost-of-capital and a greater variety of financing sources (among other reasons). The question of being public vs. private may also be related to timing in terms of the abundance or dearth of public funding.  As Oleg points out, “the IPO window is always open, just for the right valuation. If you are a good company, you will get public funding in any market,” but the supply of capital is directly related to the relative valuations of those going public. The panel discussed how the recent IPO boom may be related to the “weighing machine” that Evan McCullough discussed – that we are finally starting to see quality companies advance their pipeline candidates and generate significant value from their assets.

For the private investor, an IPO can be seen as an exit, but the panel also discussed other sources of exits beyond the public markets.  Investments can still provide great returns in unique structured deals with strategic partners.  Relatively long investments can hold out for significant ‘biobucks’ that come in future achieved milestones, especially with current deal structures incenting key value inflection points. Furthermore, the panel pointed out that Big Pharma’s trend towards externalizing R&D provides exit opportunities for venture investments. In conclusion, the panel was quite optimistic on the opportunity for exits, pointing towards continued success for Life Sciences investing going forward.