Can 2004 follow suit? By the looks of recent trading in biotech IPOs, the exuberance is fading somewhat and may continue to wilt through yearend, says Nick Galakatos, general partner of life-sciences-focused venture-capital firm MPM Capital. But he's optimistic that any decline will be short-lived, as approvals for some upcoming, high-profile products, such as Genentech's Avastin, fuel investors' interest.
MPM -- the biggest group of dedicated biotech VCs -- is counting on a resurgence in appetite for biotech investing and is readying several private outfits for offerings next year. In the next several years, MPM will be laying the seeds for the next generation of IPOs with investments from its latest fund, BioVentures III.
Galakatos spoke recently with BusinessWeek Online Reporter Amy Tsao about his outlook on the biotech sector. Edited excerpts of their conversation follow:
Q: What do you think the reaction to recent biotech IPOs says about investor appetite for these investments?
A: Both Acusphere (ACUS
) and Advancis (AVNC
) are trading below the issue price. But more recent IPOs CancerVax (CNVX
) and Myogen (MYOG
) are trading above their issue prices.
It's important to look at the broader picture. [Expectations were modest] for the first two companies, while the latter two are more robust, so they've had better performance. Either way, I think we don't have a very strong IPO window yet.
Q: What could open the IPO window further?
A: The biggie in the whole lineup is Eyetech, which has not emerged yet. That's the company people are focusing on to see how well it will do in the public offering. They have a very interesting, breakthrough compound in Phase III for macular degeneration [a disease that causes blindness]. They completed a $750 million dollar deal with Pfizer (PFE
) a few months ago in which Eyetech will end up keeping about half of the drug's sales in the U.S. So, it's the combination of a breakthrough product and validation by a large pharmaceutical company.
Q: Biotech has had a terrific run, up by about one-third so far this year. Where is the sector headed?
A: Having had a great year, investors in the public market seem to be saying, "Why do we want to take a risk in a new issue -- no matter how good it is? Why don't we just take some profits and call it a year, and then start again next year." If this is the prevailing attitude, then it would seem that the prognosis for the rest of the year is that it will be harder going.
Q: What will next year look like for the public markets?
A: There are very promising products -- Avastin for colorectal cancer from Genentech (DNA
), for example -- up for Food & Drug Administration review. That's in Phase III. And there are interesting products for insomnia from Neurocrine (NBIX
) and Sepracor (SEPR
). These potential approvals give me a lot of comfort [about] the industry.
Q: What about for your firm?
A: In 2004, we expect to harvest some of our investments through IPOs and mergers and acquisitions. We have about 10 companies at various stages of preparation for public offerings, including Eyetech, Tercica, Idenix, and Critical.
Q: What are some interesting investments you've made of late?
A: We have some very exciting companies in the BioVentures III fund. One of them, called Tercica, just filed its S-1. It is a spinout from Genentech (DNA
), and it's focused on developing a protein called IGF-1 for short stature. They're in Phase III clinical trials with the drug.
Q: Has it been difficult lately to find good private companies that are worth funding?
A: In 2003, we invested more than $220 million in 36 companies from three funds. This investment pace is on track with our business plan, which calls for two investments per partner per year. This is probably the best investment environment in private biotech companies [since] 1996 to 1998. Because of the closed IPO window of the past three years, there are many more high-quality companies trying to attract a constant pool of venture capital, therefore pushing valuations down.
Q: Have the type of investments VCs make changed lately?
A: The private money has seen a dramatic shift from the enabling technologies to product deals. Most people have been focused on late-stage, preclinical compounds that show promise but may be a year away from the initiation of human trials, and financing them to the point [of validation] in a Phase II human clinical trial. Tsao covers biotechnology issues for BusinessWeek Online. Follow her Biotech Beat column only on BusinessWeek Online