Recent Episodes
Watch recent episodes on
The Financial Channel
Scroll Left
Scroll Right
PiperJaffray: Can UK Biotech Survive the Current Financial Climate?




Episode Loading...




PharmaTelevision requires Javascript enabled and Adobe Flash Player to watch our programmes. If you do not have Flash installed, you can download it for free from the Adobe Flash homepage.

Improve your Internet experience and start watching exciting new video content.

Video title: PiperJaffray: Can UK Biotech Survive the Current Financial Climate?
Released on: September 16, 2008. © PharmaVentures Ltd
Share/save this page:
Email
Bookmark
Facebook
Twitter
LinkedIn
Follow us:
RSS
Twitter
  • Summary
  • Transcript
  • Participants
  • Company
In this edition of ‘The Financial Report’ brought to you by PharmaVentures Business Review, Fintan Walton talks to Sam Fazeli, Managing Director of European Equity Research at PiperJaffray.

They discuss issues in the biotech industry with reference to the current financial climate and the need for governments to nurture the scientific and technology industry sectors. Sam Fazeli gives us an insight into the cyclic nature of the biotech industry and its relation to product success, share prices and investor risk appetites. Although voicing some concern about the number of biotech companies lower down the pipeline in the UK he finishes with a look at all the positive aspects of the industry.
Position of the UK biotech industry in the current financial climate
Fintan Walton:
Hello and welcome to PharmaVentures business review here in London. On this show I have Sam Fazeli, who is Managing Director of European Equity Research at Piper Jaffray. Welcome to the show.
Sam Fazeli :
Thank you very much. Good morning.
Fintan Walton:
Sam Fazeli, you have a significant amount of experience from a investment banking perspective of what's going on in the biopharmaceutical industry particularly here in the UK, but also you have obviously a good eye and experience with the European markets as well. And how would you describe Sam Fazeli, the – from your perspective the state of biotech here in the UK, okay?
Sam Fazeli :
Sure. We've had – we are obviously the markets in general, equity markets in general, capital markets, or financial markets are in turmoil at the moment. So it's difficult to make conclusions about the state of the industry from just looking at it today.
Fintan Walton:
Right.
Sam Fazeli :
But what we've basically been seeing is biotech tends to go in cycles much like most other sectors do and it tends to go hand-in-hand with risk appetite. A lot of people think that product failures or product successes are what drive changes in sentiment towards biotech. I really don't think that's the case, I think when you see rises in share prices across the board when companies are raising money et cetera, that's because investors risk appetites has gone up they are looking for ways of creating so called alpha. And when you see people not being able to raise money and companies having difficulties just because their financial system as a whole is having problems with the risk so they are looking for lower risk approaches to investment, that takes away from, from biotech and other sectors which require – which require certain degree of risk here. So, really from the funding perspective it's difficult to be – to be making a diagnosis of where the UK biotech sector is at the moment.
Fintan Walton:
Right.
Sam Fazeli :
I think, perhaps the better way to look at it is to look at the continuum I mean you know – the story has to be that public companies -- companies come to the market, raise money, they become successful and there is some kind of either they grow up and they become -- Shire Pharmaceuticals for instance or they get taken out which is often the case. So you need then other companies to be replacing them. The problem I see at the moment is we do have a number of UK biotech companies in a very strong position irrespective of where their share prices may be. I don't think it's fair to judge the strength of the sector by where its share prices is. I think we actually have the -- one of the healthiest current states in the biotech sector in terms of levels of cash et cetera, within the balance sheet of the companies, product portfolios et cetera. But what we need to look at is, is the continuum there. I don't see enough private companies coming through to potentially replace the public ones that are been taken out.
Fintan Walton:
So it's a pipeline of biotech companies, you already talked about?
Sam Fazeli :
That exactly, that to me is the way to measure the health of the sector. And you look around and you don't see very many potential Quote in quote IPO candidates, whenever the window so called opens.
Fintan Walton:
Right.
Sam Fazeli :
And that I think is something that we have to think about very hard.
Fintan Walton:
Well, not just IPO but also acquisition talk it's also, this is also what actually gets sells--?
Sam Fazeli :
Well actually -- but to a degree one goes against the other. So a lot of VC's are looking at – I am saying look the valuation is there, equity market is prepared to give us in the UK aren't good enough. We are gonna dress our companies up for want it to be a better price for sale, to be sold private companies.
Fintan Walton:
Yeah.
Sam Fazeli :
So my then because you know the equity market gives us a half X return when we put it into the market, okay we have to wait four, five-years hopefully things will work out and then our return will go up, clearly time has a big factor on that. But if we sell it to a trade sale we get six times our money for example, and my question of course to them is what is is pharma paying too much? Potentially maybe the equity markets have got it right to a degree, have you over valued your private companies? this is a hangover from the 2000 bubble time frame. But it doesn't matter, the realty is they think they can get a better exit by trade sale and we are not getting the public companies hence we are not seeing the flow through to the market, hence the sector is, is the longevity of the sector is under questioning at the moment.
Biotech companies facing acute problems in funding cycles
Fintan Walton:
Now you talked about the sentiments of risk and the sentiments of risk extend from seed capital all the way through to series A, all the way VC and so forth, that the funding cycles of biotech companies need to go through, where is the – it sounds from what you are saying that some of the acute problems are at the earlier stages of funding?
Sam Fazeli :
Yeah. Okay, that's a – that is a popular view, that seed financing is the problem here. I think the whole continuum is an issue here. Seed financing produces the companies to be then financed by VC's through the series A, series B, series C fund raisings. That level of funding and the correct valuations of those then positions the companies for a good IPO. If the chain breaks down at any point you lose the continuum basically. So if there isn't enough companies being seeded correctly with enough money and clinical trials are not cheap, doing cheap clinical trials doesn't get you anywhere, you do a 20 patient single-arm cancer? trial really doesn't get you to where you want to be to get the enough data to either entice a pharma company to buy it or the public to buy it. Too many little companies come along with trying to form on the lack of small amounts of seed capital. They don't end up in the hands of the bigger VC's, so the deep pocketed VC's which should be financing these to the 30, 40, $50 million before the capital markets, the equity capital markets look at them and there – that's where it all falls up – it's not just a seed issue, I think seed is a popular view, but I think there is enough entrepreneurs and angels around for good technologies. The problem is taking, making the next step.
Comparison of UK biotech companies with the rest of the Europe
Fintan Walton:
Right. But when you compare the UK biotech industry with the rest of Europe, and you know rest of the Europe we can isolate certain pockets of the Europe the Switzerland, activities in Belgium, Medicon Valley and so forth. Where does the UK fit in relation to those activities?
Sam Fazeli :
Okay. Well I certainly think that we have fallen – now, I don't know whether we are ranked number, say it is a 1 to 10 range.
Fintan Walton:
Yeah.
Sam Fazeli :
Whether we are ranked number 9, 10 or 8.
Fintan Walton:
Yeah.
Sam Fazeli :
But we are definitely at the bottom of that.
Fintan Walton:
You are not – you are not number one?
Sam Fazeli :
We are not one and two anymore.
Fintan Walton:
Okay.
Sam Fazeli :
So Belgium has done a fantastic job.
Fintan Walton:
Yeah.
Sam Fazeli :
They've got some good companies there, there is the -- the capital markets although it's a small country it's got reasonable depth to it. They have some successful stories there, you've got Switzerland obviously. Germany, still questionable probably at the same level as the UK is in terms of where they are in getting things moving forward. Scandinavian area has done a good job they have some decent companies and people – people don't seem to have the same negative attitude towards biotech that you feel to get, they seem to get from newspapers from just about every angle here.
Fintan Walton:
Yes.
Sam Fazeli :
Newspapers in the UK cannot help themselves, but write negative things about biotech. And if there is a positive outcome it's really hardly touched.
Fintan Walton:
Right.
Sam Fazeli :
So we –
Fintan Walton:
Are we suffering from the fact that we were the early entrance into biotech probably?
Sam Fazeli :
Possibly I think – I think that was, that was the case and I think also that was abused by some –
Fintan Walton:
Yes.
Sam Fazeli :
I am obviously not going to name any names.
Fintan Walton:
Yeah.
Sam Fazeli :
But I think some people have used the opportunity to make a quick return or ….
Fintan Walton:
Or mislead may be, like that?
Sam Fazeli :
Those are big words at the end of the day. But obviously not naming anybody specific but there is, there – one feels when you look back and then – that was all obvious one.
Fintan Walton:
Yes.
Sam Fazeli :
So a part of that probably the case. But I don't know what this – where this. I think the problems are across the board. I think the issue is you know the public, the general, generous fund managers to a degree also – were never given the right tools to look at biotech's. They were told give me 10 million pounds I will do some clinical trials and I will make a big difference.
Fintan Walton:
Right.
Sam Fazeli :
10 million pounds, if you are lucky you can get the right clinical trial done to get the data that you need to move to Phase III or that's actually…
Fintan Walton:
But isn't the other problem is that fund managers and it's just not the fund managers but the sources of fund money to create funds, there are better deals to be done elsewhere you know in the end biotech sits there as a, as a high risk potentially low return option when you can look at other sectors and you know you're gonna get a better return. So the bigger the – the bigger the markets they are, for example in the UK you could argue well you more likely you get a tougher time than in some of the specialized markets like Belgium and Switzerland?
Sam Fazeli :
Okay.
Fintan Walton:
Will that be a fair comment?
Sam Fazeli :
Okay. So the problem with that analysis is if you take to its full conclusion the US should have never had a biotech sector.
Fintan Walton:
Right.
Sam Fazeli :
But they do.
Fintan Walton:
Yes.
Sam Fazeli :
Because that is a very deep capital markets, they have many biotech companies. I think the approach to risk is very different. And the companies in the US, I guess let's not forget that the capital market they can address is the same size as the European capital markets put together. The depth of money available is much larger in the US than it is here. If you are a US biotech company, San Francisco, you can raise money in New York without any problems. If you are a UK biotech company you have – you can only go to the specialist in Switzerland, you can't go to the generous in Switzerland, because there job is to invest in Swiss companies or whatever they are mandated. So the – this United Nations of Europe, if you like to call it that are a draw back to our investment in companies that, that clearly need lots of cash to get to it and biotech is that. If you think about the usually business model, a generous fund manager usually sees a company when it's already generating some revenues and cash. A software company, a tech company and – and even in the area where tech companies needed money to get to a particular stage, the timelines where much shorter. So this is where I go back to the, that education thing. Somebody should have been much better at telling people look you put 20 million pounds to work here this is gonna get you a fifth of the way. You need to this needs more – this is like oxygen phase. This is a baby, this is not an adolescent and it's going to take 10- years, 15-years for it to come to a point. So, perhaps there is some issues with that and certainly the depth of capital markets in each country isn't big enough to make it a thriving sector.
Government nurturing the scientific and technology industry sectors
Fintan Walton:
But, okay so we can see – we can see that's there is a problem. We can see that there is a – there is a problem that could go in the wrong direction let's say, getting worse and if you want to make it better what can we do, is that a government issue or is it a pharmaceutical industry? do the pharma companies get involved, do the government get this government involved? who – how we're going to turn this – this sector around or can we turn it around?
Sam Fazeli :
We, I really can't, I don't think that's an easy question to answer.
Fintan Walton:
Or may be the markets will turn it around?
Sam Fazeli :
The markets, basically this is about investments, there is no, you know ethics are nice. You know it would be good to have new drugs et cetera, but at the end of the day the money goes where the potential for return is as you rightly said earlier on. The – the question is who can change it? I don't think it's one, one group, but government is got to be the start of it. The question really we need to ask ourselves is does anybody want to change it? Does anybody care? Why should we care? You know we've not cared about manufacturing, why should we care about biotech? For example, I am not saying that some of the people do or don't, but it's not unknown that the country decides it's not interested in that. You know we have great science but that's fine. If they decided to do it they should do it whole hearted, not half, half baked. So the key to it is to make sure that the science and technology is sufficiently correctly nurtured and not handed out to short-term easy ways out for pharma – for academia to find a way of may be financing some IP and literally think about what you need to get a piece of technology to a point that then makes an angel or a -- you know whoever a seed capital investor interested in doing it. And there has to be in my view incentives or pre-emption rights is it big issue for biotech? because these are cash hungry companies and pre-emption rights were set up 150-years ago, whenever it was I don't know.
Fintan Walton:
Yes, yes.
Sam Fazeli :
A long time ago for shareholder rights and I think they are good things, but they – they were not for cash hungry companies. These guys need to be able to access cash that's a good start, let's get rid of them, I know there is discussion about it now. But sadly it came about.
Fintan Walton:
There is no action.
Sam Fazeli :
But it came about because of this scenario that happened with Halifax, where the share price was moving so much around the subject of them doing their rights issue, they couldn't price it.
Fintan Walton:
Yeah.
Sam Fazeli :
Exactly what happened I can't remember. But I am sad about that because the biotech industry has been going only about for 10-years…
Fintan Walton:
Yeah.
Sam Fazeli :
Saying this is an issue for us, because we can't go and raise money with an American, because they want to get ex-amount of stock and they say well look here -- if I – even buy it in a fund raising what I think I am buying 4 million pounds you are then telling me actually I may not be getting 4 million pounds, I am not interested. And then I am locked for 21 days, I can't trade this stock for that after committed capital it's too arcade for them. So we have to think about it and not just for biotech any cash hungry industry. I am not particularly I am not saying change the rules for biotech. We have to have some relaxations of it at the lower end of the markets size because the companies who are cash hungry have to get away from it. These are two good starting points.
Fintan Walton:
Right. So there is a role that government can make in a way…
Sam Fazeli :
Absolutely.
Fintan Walton:
It passing certain …
Sam Fazeli :
If you assume, if you assume that they pre-emption rights are basically a government set rule, then yet…
Fintan Walton:
But also people traditionally look at British [ph] inventors and business men as entrepreneurs, is it the culture of having that well?
Sam Fazeli :
I know it's definitely there, you go and you know may be it wasn't there many years ago. But I see you know I still have quite a few contacts in academia guys [ph] hospital these people, these guys are hungry for it. The system is in there to help them do it as easy as they would be able to do it in the US.
Positive aspects of Pharmaceutical industry
Fintan Walton:
Right. And going to the pharmaceutical and you mentioned you know deals that a pharmaceutical companies doing some of the acquisitions they are doing and so forth, can pharmaceutical companies may play a role in this --?
Sam Fazeli :
They do, they fund their academic research, they buy academic IP, they do. It's early stage for them they are much more interested normally in technology that's been developed to a certain degree or products that have been moved forward. So I don't want to leave this conversation with a negative view, there are some very strong companies in the UK that have come through, Vectura is one of the key ones in my view. I am not -- I don't know if you know -- I am obviously not giving investment advice here, but if you look at the business they've built, pharma relationships they've built and their product pipeline, their cash strength and Antisoma same, BTG the same, (indiscernable) the same, there are companies that have their pipeline, their products, their cash and their business relationships to
Fintan Walton:
And their management?
Sam Fazeli :
And their management obviously, but those elements would not have come into to – in place if the management where not the right people.
Fintan Walton:
Sure.
Sam Fazeli :
So there is quite a lot of opportunities, what I am worried about is that they will get taken out which is fine for shareholders, there is nothing behind. That's where I think we – I think we are in danger of having a vacuum in 2011, 2012 taking all the stories that pharma patent scenarios or situations is gonna, is going to began to really hit them in the 2011, 2012 time frame, how are they gonna – the one way of dealing with it is to take out the partnerships they have, because they immediately gain on the margin if this products that are coming through.
Potential ways of altering Investment risks
Fintan Walton:
Yes. And I suppose one of the things here really is we've talked about biotech being risk, you know is a risk business altering the environment for investing in risk, you mentioned the pre-emption right, this component and you talked about incentives, other tax advantages that could be introduced from your perspective?
Sam Fazeli :
Look, I am not a – I don't know about the rules and regulations of the treasuries and whether it's legal or illegal against the rules of the EC rules or not. But one simple minded view would be, would be good if for, for earlier stage companies a little bit like VCT's but not like VCT's where you are incentivized to have funds set up that's specifically invested in biotech, healthcare, medtech, software, IT whatever, whatever it is cash hungry companies are. Funds that if they did and people put money in them, they got a tax break. So you immediately you know the reason people love putting money in pensions is that they immediately earn a significant return by getting them income tax back. Why can't we have something of that kind, and then you have to tie up your money for five-years say, VCTs are not far from that, but they have these very strange rules as to what they can invest in.
Fintan Walton:
Yeah.
Sam Fazeli :
But if you have a public fund that can invest in across the board aim, not aim small, big, biotech companies 100 million, 200 million, 300 million market cap companies without those kind of restrictions. I am convinced if you allow that the fund managers will set the funds up. And then you begin to potentially see more dedicated funds et cetera.
Fintan Walton:
So based what you've said, we've – we got ourselves into a condition here in the biotech, but there are potential ways in which we can –
Sam Fazeli :
But they have to act soon.
Fintan Walton:
We can turn that? Okay.
Sam Fazeli :
I think we are running out of time as I said that vacuum is going to potentially come. And maybe I am wrong, may be non of the companies will be taken out, may be they will all end up being fantastic about 1, 2, 3 billion pound companies. But the reality of life is as we see around us.
Fintan Walton:
As we said now. yeah.
Sam Fazeli :
Right. If you have a 25% royalty deal with Novartis for example and they comes up products coming into market they weigh up 500 million pound cash from my balance sheet or 25% adding some item out of my P&L.
Fintan Walton:
P&L.
Sam Fazeli :
The equation is a very simple one to solve.
Fintan Walton:
Yeah.
Sam Fazeli :
That's the problem. When those companies go, the greater ones that we've got today whoever is the winner I've no idea.
Fintan Walton:
Yeah.
Sam Fazeli :
And then whose gonna fill behind it? And that's, that's a – so it's kind of a self preservation here, right?
Fintan Walton:
Sam Fazeli , it's very good to talk to you. And thank you very much indeed for coming on the show. Thank you very much indeed.
Sam Fazeli :
Thank you. Thanks for the opportunity. Thanks.
Sam Fazeli
Managing Director of European Equity Research
Sam Fazeli , Ph.D., is a managing director and senior research analyst focused on U.K. biopharmaceutical stocks. Sam Fazeli joined Piper Jaffray in 2005. His initial coverage focus is on U.K. biopharmaceutical companies, but will expand to cover continental European biopharmaceutical companies. Sam Fazeli has 10 years' experience in the biopharmaceutical sector. Previously, he was at Nomura where he was part of a team that was ranked No. 1 in the U.K. in the September 2004 Institutional Investor Survey of U.K. Small Cap Fund Managers. In 2005, Sam Fazeli was ranked eighth in the Extel Pan-European Biotech Survey. Sam Fazeli has a Ph.D. in Pharmacology and seven years' post-doctoral experience.
Piper Jaffray
Piper Jaffray Companies is a middle-market investment bank and institutional securities firm, serving the needs of middle-market corporations, private equity groups, public entities, nonprofit clients and institutional investors. The Company provides a set of products and services, including equity and debt capital markets products; public finance services; mergers and acquisitions advisory services; high-yield and structured products; institutional equity and fixed income sales and trading; equity research, and asset management services. The Company's operations consist principally of four components: Investment Banking, Equity and Fixed Income Institutional Sales and Trading, Asset Management and Other Income. Piper Jaffray operates predominantly in the United States. It also provides investment banking, research, and sales and trading services to selected companies in international jurisdictions in Europe and Asia. It markets its investment banking and institutional securities business under a single name, Piper Jaffray. Its asset management business is marketed under the name of FAMCO, which is derived from its subsidiary, Fiduciary Asset Management.