Earlier this month, San Francisco once again played host to thousands of investors who wanted to take the pulse of the biotech industry for 2017 and to see if they can find the most worthy companies or areas deserving of investment. Yes, the 35th Annual J.P. Morgan Healthcare Conference came and went—as did the rival 9th Annual Biotech Showcase held just down the street—so now it’s time to reflect on what those investors learned.
PM360 spoke to Nate Gallon, Partner at Hogan Lovells LLP in Silicon Valley, as well as his colleague Asher Rubin, Global Head of the Life Sciences Industry Group at Hogan Lovells LLP, who were present at both conferences and spoke to plenty of attendees. Additionally, Rubin also moderated a panel at the Biotech Showcase on “Partnership and Alliance Models with Tech, Pharma, and Medical Devices,” which featured speakers from Qualcomm Life, Johnson & Johnson Health and Wellness Solutions, Verily Life Sciences, and Proteus Digital Health. Together they share their perspectives on the conferences, what themes emerged, what company presentations interested them the most, how the industry plans to handle Trump, and much more.
Asher Rubin, Global Head of the Life Sciences Industry Group at Hogan Lovells LLP
Nate Gallon, Partner at Hogan Lovells LLP
PM360: What were your general impressions of the conferences? Were people talking about any big trends to expect in 2017?
Asher Rubin: I heard a lot of talk about doing deals, but not as much deals are actually being done as in some past years. The 2015 conference was exuberant with lots of IPOs and other deals of that sort. Then last year was probably a little bit quieter. This year it seemed as if people were talking about transactions and financings again. But ultimately, I felt like it was more talk and less “do.”
As far as trends, anything in the world of immuno-oncology is still hot. That’s been a trend going on for a couple of years, but I feel it is still the biggest trend out there. Also, some interesting work is happening around allergies and infectious diseases.
Another thing to keep an eye on: I heard a lot of excitement about Chinese investment coming into U.S. life sciences companies, as well as U.S. companies forming partnerships in China to try and open up the China market. The talk was more sophisticated than in years past.
Nate, did you have any impressions that you would like to mention?
Nate Gallon: I would second Asher’s observation about lots of talk, certainly on the non-life sciences side, but I am seeing some venture activity on the life sciences side. But on the whole, there is a lot of expectancy. On the life sciences side, I don’t know how much is based on the macroeconomics of the various sub-industries within life sciences and how much is based on the more macro environments in terms of the eight years of a very tepid bull run and now the expansion of uncertainty around the impending presidency of Donald Trump. That is keeping people wondering what to do from a deal perspective. But on the venture side, where the stakes are much lower and the dollar size is much smaller, a lot of activity was happening at the end of 2016, and that continues on in the early going in 2017.
In regard to Trump, I know both conferences had sessions discussing what to expect. Did anyone express confidence in a plan yet or is it just uncertainty all around?
Nate Gallon: I met with a group of life sciences bankers from an investment bank, and I asked them: “What are you guys doing? What are you hearing from your clients? And what are you doing internally in terms of forecasting and sketching out what the next couple years might look like under a Trump presidency?”
And one of the bankers turned to me and said, “When it comes to a potentially lower corporate tax policy we can sketch that. We can roleplay and come up with various models that show what that looks like.”
But when it comes to the whole discussion around the ACA potentially being rolled back, either partially or fully, he said, “We don’t even know how to get our arms around that. We can’t plan for that. We’re just stopped dead in our tracks. We have to see how this plays out over the next several months before we can even start to think about this intelligently from a modeling and forecasting perspective.”
Asher Rubin: I’m probably focused a little more on the policy than the company side of the uncertainty. And the answer still is we don’t know. There is just a ton of uncertainty. On the one hand, a couple of the people whose names have surfaced that Trump might appoint as FDA Commissioner are both venture capitalists, which would lead you to think that it’ll be an era of innovation. But then every third day he’s tweeting about drug prices.
I don’t think people are going to start moving money around until there is some certainty around what the policies are going to be. From a tax standpoint, as an example, we spent the last several years doing inversions for pharma companies, but that abruptly ended last spring with Pfizer. However, if there will be the ability to put money to work in the U.S., then we can probably expect to see pharma M&As in the U.S. But if the money is going to stay overseas, then probably not. Right now, we just don’t know what that’s ultimately going to look like.
Focusing more on the heart of the conference, did either of you see any interesting company presentations?
Asher Rubin: What I thought was interesting: Several companies gave presentations highlighting strategies around what are called FDA Priority Review Vouchers. These vouchers [established back in 2007] are given to a company when they develop a drug and get it approved for what the FDA considers to be a priority disease. The voucher can then be used to go to the head of the class for your next drug. In other words, you get priority review on your next drug in any therapeutic class—just getting approved six months early could mean $1 billion in revenue.
Additionally, I saw several strategies around what’s called a 505(b)(2), which is using somebody else’s data to get approval. It is interesting to see these alternative approval pathways gaining a lot of traction.
Digital health was also a big focus at the Biotech Showcase. What are the biggest areas in digital health right now and what kind of movement is being made in this space?
Asher Rubin: The panel I moderated was sort of a blue sky session of where the industry is going. Jim Mault, with Qualcomm, was talking about how they released the first medical grade blood pressure monitor that is a wearable. So we are getting to the point where these are becoming more than toys. Then George Savage of Proteus Digital Health was talking about encapsulating a chip into a pill in a way that you can actually show biodistribution. So if you were a 250 lbs. 6’2” guy you would probably need a different pill then a 5’2” woman. And that is where the next generation of medicine is headed. In addition to these examples, you also have the sort of collaboration that Verily and GSK are doing with implantable neuromodulation devices.
I want to turn this part over to Nate because he knows more about the high-tech side than I do. But it’s definitely moving away from just putting a Garmin on your wrist and saying that’s a healthcare device.
Nate Gallon: From the corporate and transactional side, Silicon Valley has tried to create standalone wearable companies—and it’s been challenging. There is so much in terms of making sure that there is sufficient demand in the market, that it’s priced right, that you have the regulatory compliance in place, etc. And in many cases, you have straight tech engineers trying to start medtech companies, and they are not used to the life sciences industry and its regulations. So it makes it more challenging on a number of fronts.
But what we are seeing now is the evolution of medtech 2.0 to medtech 3.0 in which it’s more focused on functionality. Now it’s about technology that actually has a place in a larger multinational corporation’s strategy, whether it’s incorporating those products into their own homegrown products or using them as the basis for delivering services or products that the multinational corporation already has. And this is especially true of multinationals that historically have not been as focused on this space. They are looking at it very actively and we’re seeing a lot of term sheets and deals getting done.
Asher’s panel focused on these kinds of tech-health partnerships. What goes into partnerships like these? And will we be seeing more multinationals partnering with pharma companies, similar to Google, now Verily Life Sciences, partnering with Novartis?
Asher Rubin: The message in digital health is that it is going to take partnerships in order to make them work right because no single vertical really has all necessary capabilities. For instance, Verily has medical device knowledge, the ability to crunch data, build programs, and miniaturize electronics. But in order to complete the circle, they partner with drug and device companies.
On the smaller-company side, going back to Proteus Digital Health, they invented this microchip that can be co-encapsulated with a pill for medication adherence purposes. But that chip is not useful without a partnership with a drug company, so there is naturally a partnership to be completed.
What we’ve seen in the past, where there is a misstep in the medtech or digital health space is when a company tries to do something as if it’s just a tech company and forgets about the FDA. That’s why I really do think that it takes partnerships to make this field work.
Moving from partnerships to M&As, you both mentioned in the beginning that there was a lot more talk than deals being made this year. According to J.P. Morgan, the global healthcare M&A volume was $724 billion in 2015 vs. $321 billion in 2016. Will that continue to decline or should we expect more big deals this year?
Nate Gallon: We’re too early into 2017 to be able to tell. In the capital markets and IPO side there is clearly a lot of backup in terms of demand in a big pipeline. And while the M&A side has seen more activity, people are still uncertain about what 2017 is going to bring both in terms of the macroeconomic environment and also from a policy perspective. I suspect that people are going to continue to wait and see how things play out before they go whole hog into it. You’re still going to see opportunistic M&A and the normal cadence of smaller ticket M&A, but I wonder about bigger ticket M&A and whether that will pause as people wait to see what the fiscal and policy environment is going to look like.
Asher Rubin: In my view on pharma and device, I see a couple of things. Companies hit highs in their stock prices maybe a year and a half ago. The memory of those highs is still in their minds. For example, Bluebird Bio hit somewhere around $200 a share and they’re right around $70 now. I wonder if Bluebird is still emotionally at $200 a share? So what does this mean? I think it means there needs to be some approvals in pharma before you see acquisitions. So we are waiting on approval for things like the CAR-T programs I mentioned before, as well as cell and gene therapies.
Two years ago, I interviewed Michael Griffith of inVentiv Health as he was just coming off the J.P. Morgan Conference and he mentioned the potential for a biotech bubble to burst. Where do you think we currently stand in terms of investments in the biotech space?
Nate Gallon: The last couple of years have been a tough time for biotech IPO exits. And in the last year and a half it’s been a very tough time for any type of IPO exit whether it’s a life sciences company or a tech company. Right now, there is so much pent up demand in terms of the pipeline when you look at the quality and the types of companies both in and outside the life sciences that have filed confidentially.
So there has to be an exit for some of these companies in the near term. And I’m not talking about the unicorns that have billions of dollars in cash. I’m talking about the $1 million to $500 million valuation companies. And if this turns out to be a choppy and volatile year for capital markets, then it’s going to make it very challenging to price IPOs.
We just need to have some sort of sense of stability. If there is a lot of volatility and some of these companies are starting to push their limits in terms of working capital and cash flow, then they may need to look at a sale transaction. That’s something we saw a lot of in life sciences and technology generally back in the early 2000s. So if the IPO valve continues to stay very narrow, then that could ultimately result in more M&A activity with acquisitions of technology and life sciences companies at a fraction of what they might otherwise be valued. But as I have been saying, there is just a lot of uncertainty right now.