OT: Biotech bargains may be out there
Bernadette Tansey, Chronicle Staff Writer
Sunday, January 11, 2009
Biotechnology dealmakers are swooping into San Francisco this week for the industry's annual kickoff conference, sniffing for opportunities in a financial landscape transformed by the market implosion of 2008.
J.P. Morgan, one of the investment banks that survived while other titans of finance staggered, will host thousands of life sciences executives at the 27th Annual J.P. Morgan Healthcare Conference at the Westin St. Francis Hotel. For four days starting Monday, participants at the invitation-only event will rehash events of one of the most dramatic years since the meeting originated in 1983.
Biotech startups have been uniquely vulnerable to the credit contraction that followed the collapse of over-leveraged financial institutions such as Lehman Bros., once a strong competitor with J.P. Morgan for biotech banking business. Though some have retreated from the world of biotech finance, the continuing market shakeout has created a ripe field for deals. Larger pharmaceutical and biotech concerns are hunting for bargains among distressed smaller companies that can't raise enough cash to support their drug-development programs.
At the J.P. Morgan conference, 300 public and private companies will formally make their case to investors, potential partners or buyers in scheduled presentations. The bank will also facilitate about 7,000 private meetings for companies looking to team up.
Robbie Huffines, co-head of global healthcare investment banking at J.P. Morgan, said the firm is still firmly behind the biotech sector and its annual showcase event. The banking unit is a division of JPMorgan Chase, which substantially expanded when it took over foundering Washington Mutual in September.
"We're coming through this relatively well and we are maintaining our commitment to our clients, and therefore have not even given a second thought to whether to hold the conference," Huffines said. The number of attendees, aside from companies making presentations, is 4,153. Last year, 5,787 signed up. Two lessons about the biotech sector have emerged from the general free-fall of market values amid the financial turmoil. First, biotech companies can offer a sheltered haven for shareholders during drastic downturns - once they have become big and profitable. But until they do, biotech companies can be perilously risky holdings.
Stark contrast
Steven Burrill, chief executive officer of San Francisco life sciences venture firm Burrill & Co., tracked the stark contrast between the fates of big biotech companies and their small- and mid-cap cousins as the economy unraveled.
Shares in the sector's two largest companies delivered substantial gains in 2008, while the Dow plunged by 35 percent. Amgen of Thousand Oaks (Ventura County), riding good news about its experimental osteoporosis drug, rose 24 percent. Genentech of South San Francisco, buoyed by revenue from its cancer drugs and a purchase offer from majority shareholder Roche, finished the year up 23 percent.
Such gains were not universal among larger biotech companies, but as a class they outperformed the wider market, Burrill said. His weighted index of 20 biotech blue chip companies dropped 9.4 percent in 2008, while the tech-heavy Nasdaq fell 42 percent.
On the other side of the biotech size gap, many small- and mid-cap companies delayed drug projects and slashed staff levels to conserve cash as their share prices plummeted. Burrill's index of small-cap firms dropped 43 percent in 2008, while his mid-cap index fell 31 percent.
Scoring a partnership
But again, the gloom was not universal among smaller biotech firms. Some continued to raise money and score advantageous partnerships even as the Dow whipsawed, banks stopped lending, layoffs hit in waves and consumers refused to part with their money.
KaloBios Pharmaceuticals of South San Francisco managed to complete a $20 million financing round in September, a deal that almost unraveled when Lehman, one of its major backers, filed for bankruptcy. The small biotech, a developer of human antibody drugs, raised an additional $12 million in late December.
In recent Bay Area partnership deals, Mountain View's MAP Pharmaceuticals will receive a cash infusion from British drug firm AstraZeneca to support its work on an experimental drug for asthma in children, and Plexxikon Inc. of Berkeley struck a deal with Swiss pharmaceutical giant Roche to co-develop a remedy for polycystic kidney disease.
Still, smaller biotech firms remain under intense pressure as the capital available comes at a higher cost. Shareholders may see their stake diluted by new investors who are in a position to demand larger equity positions for their cash.
Geoffrey Meacham, senior biotechnology analyst at J.P. Morgan, said young biotech companies may be more open to acquisition because the capital markets are so tight. "Historically, small-cap biotechs have not been willing sellers to pharma or big biotech," Meacham said.
But the alternative in this economic climate, he said, may be a death spiral of dilutive capital-raising and selling assets at low rates to survive. "I think you'll see a lot more M&A. In the past they would have said, 'Let's ride it out.' "
Lower purchase prices
The purchase price for those acquisitions could also disappoint shareholders, Huffines said. While buyers may offer a substantial premium, share prices are sagging. "You'll see them get a higher premium, but the aggregate purchase price will almost always be lower than it would have been in a robust market," he said.
On top of financial pressures, the biotech industry faces uncertainties on the policy front. President-elect Barack Obama administration's health care reform proposals could lead to demands for lower drug prices. Congress may pass legislation allowing the approval of generic versions of biologic drugs such as antibodies, opening the door to price competition as these expensive drugs lose patent protection. And new leadership at the Food and Drug Administration could demand more rigorous testing before drugs are approved.
That said, Huffines is optimistic about the industry in the long term. People are less likely to skimp on health care than on other purchases in hard times, and the population is aging. "The demographics are favorable; the unmet (medical) needs are still very significant," Huffines said. "True innovation will be rewarded."
Health care conference
What: 300 biotech and life sciences companies showcase their work.
Who: An audience of about 4,153 venture capitalists, other investors and experts is expected. By invitation only - not open to the public.
Why: Financing deals and partnerships can be forged at the conference and related meetings.
Where: Westin St. Francis Hotel, 335 Powell St., San Francisco.
When: Monday through Thursday
E-mail Bernadette Tansey at btansey@sfchronicle.com.
This article appeared on page C - 1 of the San Francisco Chronicle
