No one can dispute that the IPO window remains wide open and, logically, one of the consequences of this influx of fresh cash should be a fall in the number of companies seeking licensing deals. Not so, according to James Sabry, global head of Genentech’s partnering activities.
“The change has not affected the number of deals we are doing. The deal economics are getting more aggressive, but what I am not seeing is a lack of interest. [Biotechs] still believe they need us to develop their drug,” Mr Sabry tells EP Vantage at the BioEurope Spring conference in Turin.
Deal values rising
Deal values remained buoyant last year, as highlighted in EP Vantage’s Pharma & Biotech 2013 in Review report, and the preclinical space, where Roche's Genentech division specialises, was one of the few segments where activity increased.
However, this increased focus on earlier and theoretically cheaper assets has introduced new buyers into the market and driven up prices, says Mr Sabry. “It’s definitely becoming more competitive for preclinical deals. Big biotechs like Biogen Idec and Celgene are now competing with Genentech, as is pharma, which traditionally was only interested in clinical assets.”
As a result of the large sums being paid for early-stage assets, many newly listed companies are seeking licensing deals rather than using their IPO money to pay for pipeline development, Mr Sabry notes.
“Unlike the last time [the IPO window was open], many of these companies are single-asset companies,” says Mr Sabry. “So they are taking the cash and redeploying it so they have two or three assets, and increasing their value by developing other programmes. That is a fundamental shift from 10 years ago when companies started with multiple assets from the beginning.”
Alternatively, newly listed companies are holding onto the money they have raised. As a consequence, biotechs have increased bargaining power when going into licensing discussions. “They are driving tougher terms, they are driving higher economics and they are driving co-promotion and co-development rights. These are things they didn’t do when they had less money,” he says.
While some in the sector might welcome this reversal of fortunes, with biotechs holding more of the whip hand, it could be argued the inflation of still very early and risky assets is just adding to what already looks like an overheated market. And if biotechs are hanging on to any money they raise it could be read as a sign that they are hoarding it for what could be dark times ahead.
Many have tried and failed in recent months to call the top of biotech market. One of the indicators that the party might be coming to an end is the quality and stage of some of the more recent IPOs that have managed to get away.
If the usual 90% failure rate of phase I assets is applied, some of the companies that have listed in recent months, including OncoMed and Epizyme, are starting to look significantly overvalued.
Although Mr Sabry insists that there is good underlying science driving some of the IPOs and the large sums being paid for preclinical deals, even he concedes that elements of the sector look “frothy”.
So what, if anything, could knock off some of the froth? Failure, says Mr Sabry.
“Historically the thing that has brought biotech markets back to normal is the fact that some high-flying companies have product failures and that is what is going to bring this market back. A few product failures in phase II that bring some of the billion-dollar biotechs down to the hundreds of millions will do it.”
But until then it looks like My Sabry will have to continue to reach a little bit deeper into his pockets and listen to increasing demands for co-development and co-promotion rights.