What’s a Biotech Banker To Do in a Downturn? How About M&A
George Milstein is a survivor. Lots of peers in his line of work, biotech investment banking, have vanished from the scene with pink slips in hand. Yet after 15 years in the business, living through the mid-90s health reform bust, the genomics collapse of 2001, and now this mortgage-fueled catastrophe, Milstein is still doing what he has always done, flying in from San Francisco to scout emerging companies in the Northwest. Some of these people might need his merger-and-acquisition service, or maybe, someday when the clouds lift, even help with doing an IPO, he figures.
Milstein, head of healthcare M&A for Wedbush Pacific Growth Life Sciences, will be in Seattle tomorrow as one of the featured speakers coming to Invest Northwest, the area’s biggest annual life sciences investing conference of the year. I spoke to Milstein by phone on Friday to get a sense for how his firm is doing, and his outlook for the sector.
Pacific Growth Equities has longstanding ties to the Seattle area, namely through underwriting a couple of significant life sciences IPOs of the past—ZymoGenetics (NASDAQ: ZGEN) in 2002, and Trubion Pharmaceuticals (NASDAQ: TRBN) in 2006. Those deals have certainly inflicted pain (Zymo’s IPO price was $12, and Trubion’s was $13, while the stocks closed Friday at $3.83 and $1.60, respectively.) Even so, Pacific Growth had the relative good fortune —or foresight—of not getting wound up in mortgage-backed securities that have killed off bigger firms like Lehman Brothers.
Still, the investment bank is not completely independent anymore. In January, Pacific Growth was acquired by Los Angeles-based Wedbush Morgan Securities. To hear Milstein tell it, this deal has kept the firm “well-capitalized,” with no exposure to toxic mortgage-backed securities, and Wedbush said at the time it planned to keep all of the firm’s 75 bankers, analysts, traders, and staff. Milstein can’t support this activity from the once-lucrative fees generated from IPOs, so he’s positioning the firm to make a living on advising companies about mergers, acquisitions, divestitures, and other restructuring deals they will likely need to adopt to live through this recession. Plenty of companies will need to make moves—an estimated one-third of public biotechs are operating with less than six months of cash in the bank.
“We’re over the shock of it all,” Milstein says. “The long-term prospects for this industry are still there. We’re not making cars nobody wants to buy, we’re making drugs that improve peoples’ quality of life. I’m confident things will improve, it’s only a question of timing.”
He used two headline-grabbing deals from the past week to buttress his point. Swiss drug giant Roche agreed to buy the remaining minority stake in South San Francisco-based Genentech it didn’t already own for $95 a share, or about $46.8 billion. Down the road in Foster City, CA, Gilead Sciences agreed to acquire CV Therapeutics, a small maker of a drug for chest pain, for $1.4 billion in cash. The muscle being shown by Gilead, the world’s largest maker of HIV drugs, is remarkable, Milstein says. “Gilead was a small-to-mid-sized company when I was getting started,” he says. He sounded optimistic there will be more deals like this for him and his peers in biotech investment banking to stay busy.
There has been plenty of armchair quarterbacking about what should happen in the wake of the Genentech takeover. Some are lamenting the loss of independence for the biotech industry’s most valuable company, which could hurt America’s claim to leadership in innovation within this sector. Others predict talented Genentech employees will leave to start new companies, fueled partly by lucrative stock-related paydays.
Milstein doesn’t have the most bullish take I’ve heard on the implications of this deal. He predicts that some of the $46 billion going to Genentech shareholders will go “off the table” and get parked in what are considered to be relatively safe investments, like U.S. Treasuries. Another segment will get pumped into the broader stock market, because it was held by funds that weren’t biotech specialists, but just considered Genentech (NYSE: DNA) part of a balanced portfolio.
But a third element of Genentech shareholders will take their winnings and look to invest them in the next generation of biotech up-and-comers, and that should further stimulate the industry, he says. “It’s a psychological lift for the sector,” he says. But it’s also more than that, because Genentech was able to hold out for months, forcing Roche to raise its bid to seal the deal. “It shows the value of the biotech sector to Big Pharma,” Milstein says.
So who exactly are some of the emerging life sciences companies that Milstein has his eye on, which make it worth a trip to Seattle in March? He mentioned Seattle-based Allozyne, which is developing a longer-lasting, less frequently injected drug for multiple sclerosis. Its technology, licensed from Caltech, also allows the company to engineer new properties into all sorts of protein drugs to make them last longer, or make them more potent. “It’s a classic platform with real promise for drug development,” Milstein says.
Even though Seattle doesn’t have the same number of companies or amount of venture capital that flows in Boston and San Francisco, it is still one of the “regular stops” on Milstein’s travel itinerary, along with San Diego. “Seattle is right up there,” he says. “It’s a fantastic place for new science, with a lot of things coming out of the UW.”