Navigating JOBS, Wrangling Investors: A Biotech CFO Roundtable
In biotech, the visionary scientists and serial entrepreneurs often—arguably too often—get described as “rock stars.” The financial guys… well, not so much. But in a business where cash is constantly burned at the altar of R&D, and financial engineering can be as prized a skill as drug hunting, the CFOs perhaps deserve more time in the spotlight. On the private side, their companies are always fundraising. Then they’re “dual-tracking,” juggling the attractions of an IPO along with the possibilities of M&A. On the public side, they’re managing a variety of investor classes, including those who don’t know much about biotech but cycle in and out with the market tides.
A conference of biotech chief financial officers is meeting this week in San Francisco, and Xconomy had the chance to gather several of them for a discussion of the latest industry trends and burning issues. The participants were Robert Hoffman of San Diego’s Arena Pharmaceuticals (NASDAQ: ARNA), Shane Kovacs of PTC Therapeutics in South Plainfield, NJ (NASDAQ: PTCT), which received good news from European regulators soon after we talked; Lou Arcudi of Cambridge, MA-based Idera Pharmaceuticals (NASDAQ: IDRA), Ed Albini of Sutro Biopharma in San Francisco, and Craig Johnson, who was CFO of two San Diego-area biotechs, most recently TorreyPines Therapeutics, and is now an independent board member of several companies.
Xconomy: The IPO window is a constant topic of discussion, whether it’s wide open or narrowing as in recent weeks. But it seems the way biotechs go public has fundamentally changed because of the federal government’s JOBS [Jumpstart Our Business Startups] Act, which was signed into law two years ago. What’s the biggest adjustment companies have made because of its passage?
Shane Kovacs: I had experience as a banker taking companies public, both pre and post-JOBS Act. [PTC went public in June 2013.] Back in 2007-08 you didn’t want to get hung out to dry if the markets quickly pulled back and you had your filing sitting there. Now you can confidentially file. It allows you to do the work without anyone knowing you’re planning an IPO, then you can pop out with a month’s notice, effectively. It helps you time the biotech markets. It’s much more beneficial. As you seek investors and gauge levels of interest, as a banker and as a company, it helps you size the deals and set pre-money valuations. That’s been the main benefit. One other benefit of ‘test the waters’: For a lot of these [potential investors], it’s really beneficial for them to have two, three, or four meetings with you, rather than seeing you for the first time on the roadshow. They don’t necessarily want to meet with private companies if you’re not going public. But when they know it’s a ‘test the waters’ situation, they’ll take the meeting. They know you’ll be back and they might be participating in an offering.
X: Do you think the IPO market will be less feast-or-famine now? Will the windows be less extreme?
Craig Johnson: I don’t think one affects the other. We’ll still see windows open and close based on supply and demand in the market. But the confidential filing and stuff like that gives a lot more flexibility to the private company that could potentially go public. Ten years ago if you filed and didn’t make it out it was some sort of black mark. Even if there were good reasons, it was still a check against you.
SK: It’s a real benefit of filing confidentially. The downside, though, is the market has less visibility into how deep the IPO pipeline is. To play devil’s advocate, it could add to market swings. Maybe investors are investing in lower quality companies because they didn’t know the better quality companies were coming.
Ed Albini: As a private emerging growth company out there testing the waters, yes, you can get an audience with institutional investors if they know that you’re directed toward an IPO. The key for us is getting some informal feedback—as to valuation, potentially.
X: is it cheaper now to go public? Was Sarbanes-Oxley [financial regulation that passed in 2002 in reaction to the scandals at Enron, WorldCom, and elsewhere] really an impediment?
CJ: It was a necessary evil we all went through, but I don’t think it ever stopped anyone from going public. Still, the JOBS Act has been great for the companies I’ve worked with. It’s one of those things where government did it right for once; they’ve right-sized the reporting and regulatory requirements based on the size of the company.
X: Remember all the hand-wringing about the Big Pharma ‘patent cliff’? [The patent cliff is the period of several years this decade in which drug makers were scheduled to lose exclusive rights to many best-selling drugs. Here is one breakdown of the products going off-patent in 2014.] What bearing has it had on biotech companies?
SK: I think it still extends out a few more years. There have been different structural changes and strategies pursued, … Next Page »