Biotech IPO Performance: Discerning Market Or Rising Tide?

Posted in Exits IPOs M&As, VC-backed Biotech Returns | Leave a comment

As anyone following the biotech sector knows, the market for new public offerings has been incredibly strong over the past couple years. And the larger cap stocks in the sector have also outperformed, propelled by product launches and exciting clinical data (like Biogen’s aducanumab data today). The strength of the biotech sector has led many to raise the concern of a BioBubble in valuations (here), and sound the alarm.

While it’s certainly fair to say we’ve been experiencing an extended bull run in biotech, it’s unclear to me how much is driven by the evolving view that the fundamentals of biotech investing are changing. Specialist investor ranks are deeper and more sophisticated than ever before. More emerging biotech stocks are posting positive and compelling clinical data. The fruits of the genomics revolution of the last two decades are finally ripening, enabling better and more targeted therapies. And more mid-cap growing biotech firms are launching their own products, gathering revenues, and, dare I say, delivering profits, than ever before in the history of the industry. So it’s clearly a maturing sector in many respects.

One measure of a mature sector, though, is pricing discipline. Mature markets are by definition more discerning and efficient markets. They should punish companies that have bad data or lackluster stories, and reward those with great data or more promise – rather than simply move with the sector’s overall ‘beta’ with market sentiment. A rising tide shouldn’t just lift all the boats in a disciplined market.

Interestingly, discerning that difference appears to be what is happening in the post-IPO biotech marketplace today.

Taking a look at the 121 biotech IPOs that occurred from January 2013 through February 2015, as tracked by BMO Capital Markets, the distribution of post-IPO performance is quite broad. As depicted in the pie chart below, nearly a third of the offerings are below their IPO price, and many well below. Another third are up over 25%, and the remaining third are in between. This is a reasonable distribution of outcomes. A more detailed breakdown as a dense column chart with each offering is shown here.

Post IPO Performance Pie Chart_Mar2015

Full Column Chart of IPO Perf_Mar2015

Taking a look at the specific circumstances, the vast majority of the companies that have at least doubled since their offerings (up over 100%) are up because they released great clinical data (rather than just holding onto their first day euphoric “pops”), for example:

  • Receptos ($RCPT): Since their IPO in spring 2013, they’ve released multiple positive data updates, including the TOUCHSTONE trial last fall (here) with RPC1063, a sphingosine 1-phosphate 1 receptor (S1P1R) small molecule.
  • Agios ($AGIO): Both AG-221 and AG-120 programs have delivered positive results since the company’s spring 2013 IPO, including last fall with the latter deliving single agent activity in AML (here).
  • Bluebird bio ($BLUE): In addition to prior data updates, in December 2014 announced striking data in beta-thalassemia (here) with their LentiGlobin BB305 drug product
  • Tetraphase ($TTPH): Similar to the other examples, the company reported positive newsflow over time but late last year reported positive pivotal Phase 3 IGNITE trial data (here).
  • Many others with strong post-IPO performances have also had significant and positive clinical progress since their IPOs, including Portola ($PTLA) with ANNEXA (here), Zafgen ($ZFGN) in hypothalamic injury associated obesity (here), Auspex ($ASPX), PTC Therapeutics ($PTCT) in DMD (here), and others. Compelling clinical data has driven the majority of the big stock moves in the IPO cohort.

Of the laggards that have underperformed and are below their IPO prices, most of them have struggled to catalyze investor support because of challenging post-IPO data and newsflow. Again, here are a few examples:

  • Kalobios ($KBIO): One of the first IPOs on 2013, it has suffered multiple setbacks and is down over 90%: its lead respiratory product failed to demonstrate efficacy in Phase 2 back in Jan 2014 (here), and then a second respiratory product failed in a pseudomonas study (here).
  • Regado ($RGDO): after a brutal IPO and financing process, the company’s Phase 3 program, REGULATE-PCI, was terminated by its DSMB, sending the stock into a tailspin (here) and eventually a reverse merger with Tobira
  • Onconova ($ONTX): it’s lead drug, rigosertib, failed in a late stage pancreatic cancer study in fall of 2013, and then again in a MDS trial in early 2014; the stock lost 75% of its value over the first year (here)
  • Akebia ($AKBA): Originally a high flier, after it published its Phase IIb efficacy data last fall investors questioned the safety issues raised by the study (here); stock is now off 30% or so since its IPO

Certainly there are exceptions to the theme of the “great data, great stock” correlation implied above. Some companies popped because of exuberant sentiments on the day of their offerings and just haven’t retreated, despite a lack of any material new data. But by and large, companies need to have their pipelines perform to be rewarded with appreciating share price above their initial offering in today’s public market.

Another observation worth noting, in line with my prior August 2014 analysis, is the virtuous-vicious cycle at work here: the big are getting bigger, and the small are getting smaller. Companies with “premium” post-money IPO valuations above $200M have posted a median stock performance of 84% since their offerings. Said another way, nearly half of the premium offerings have already doubled in value. In contrast, the median performance of those IPOs with post-money valuations below $200M is a small loss of -1.0%. That’s striking. Interestingly, it’s a variation of a theme that is reminiscent of the Feuerstein-Ratain Rule for oncology startups – that small cap companies have historically not been able to deliver positive data later in the clinic. Are the sub-$200M companies just not posting good data? Its not quite that simple, for sure, though the discrepancy in performance is significant.

To conclude, if there were widespread disregard for negative news, and only euphoric (rather than measured) responses to good news, we’d all be very worried about being at “Peak BioBubble”. Instead, though, the fact that we’re seeing a broad range of performance post-IPO, and a cooling off of the pace of new offerings in 1Q 2015, is suggestive that we’re in a marketplace with some reasonable hallmarks of buyside discipline.

But only time will tell whether the current environment reflects measured data-driven optimism around evolving biotech fundamentals, or just overwhelmingly irrational exuberance. We’d all like to believe the former is possible as the sector matures.

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Biotech CEOs: Observations In Thermodynamics And Kinetics

Posted in Bioentrepreneurship, Corporate Culture, Talent | 4 Comments

A great CEO makes all the difference, and a poor one destroys a ton of value.

But recruiting great CEOs is often hard, especially when picking, as is most often the case, from a list of potential first-time CEOs. How do you know who is going to be the right fit and profile for a biotech startup?

It’s fair to say that identifying the hallmarks of a new CEO destined for great things (versus those with less stellar outcomes) is therefore one of the best skillsets an investor can possess. In early stage biotech investing, it’s obviously important for an investor to understand the science and to appreciate the art of drug discovery and translational medicine – but it’s the ability to pick, recruit, and cultivate a great CEO that is worth its weight in gold.

There’s often not a lot of science in the recruiting process, nor in how to describe the ideal candidate for a new role.

To have some fun, increase the scientific element of the dialogue, and take metaphorical descriptors way too far, I’ll put forward that CEO profiles can be described through the lens of thermodynamics and reaction kinetics. Let me explain.

Thermodynamics: Endothermic vs exothermic interpersonal styles.

As many readers know, in science, thermodynamics considers the relationship between different types of energy (like heat) in systems, and how it is transferred through output like work performed across and within systems. Generally speaking, there are two types of thermodynamic processes, endothermic and exothermic ones:

Endothermic: of or relating to processes that absorb or consume energy to complete work in a system, e.g., baking bread, photosynthesis, evaporation

Exothermic: of or relating to processes that release energy like light or heat, e.g., the burning of a candle, formation of snow in the clouds, nuclear fission

These concepts can easily be applied to how a CEO engages with teams and people around them.

Endothermic managers primarily consume energy provided by others around them. They are often low-key thinkers, deep on content and R&D experience – frequently scientist-turned-CEOs. When successful, they typically surround themselves with teams that are able to provide the energetic fuel to achieve the vision. There’s a bias amongst endotherms to go off by themselves, often alone with the door shut, to tackle a big intellectual problem before reverting to the group. Solving conflicts in the boardroom with endothermic managers isn’t often comfortable, so a great burden of conflict resolution may fall to the boards themselves. These leaders also don’t tend to be “high maintenance” managers with their teams and Boards; since they don’t give off heat into the system, they typically don’t cause of stress-inducing chaos with “six impossible ideas before breakfast”.

Exothermic managers typically add energy to a room and a leadership team. They are seemingly full of boundless energy, throwing off the joules required to inspire, motivate, and sustain the people around them as they lead their teams on efforts of broad ambition and scope. They are great up on the stage, charismatic in their in support and articulation of the company’s vision. They are adamantly “open door” types, preferring to engage others than to necessarily construct a novel solution all by themselves. They often prefer tackling tough concepts in the boardroom through animated and at times heated discussions. Their bias to add energy can often inefficiently fuel organizational entropy; lots of heat around challenging topics can create waves of thermic disruption in an organization.

You can often feel the difference here in the first meeting with these two types of CEOs; did the initial discussion consume or throw off energy?

As an investor trying to identify talented leaders, while the exothermic executive quickly lights up the room, it often requires several meetings to begin to appreciate the deep competence and attraction of endothermic executives. Either profile can work in leadership, but they are very different – and putting them in an organizational context that supports and “fits” with them is critical. For instance, pairing a endothermic scientist-CEO with a more exothermic CBO is a frequently used configuration.

In some ways, these two characterizations are geeky variations and build upon the overused MBTI personality type dichotomy between E’s and I’s (extraversion and introversion).

Kinetics: Stoichiometric or catalytic organizational impacts.

The second key axis for how a CEO or leader drives value in an organization picks a descriptive metaphor from reaction kinetics, and the difference between stoichiometric and catalytic processes:

Stoichiometric process: one where the inputs are all consumed at a fixed, proportional basis, and the rate of the reaction is largely constant; additive or linear processes

Catalytic processes: ones where inputs can be consumed in greater proportions as the velocity of the reaction is increased (in catalysis); synergistic or non-linear processes

As before, these two can be aptly applied to the type of organizational impact a leader can have.

Stoichiometric CEOs can be great stewards of the business, superb at executing the plan, meticulous on the details and getting the job done. As Phil Needleman often says, the prize often belongs to finishers. This type of leader takes the inputs and fully converts them into the outputs in an expected, positive way. They are, when successful, excellent executors of the strategy, and getting a drug program or discovery platform from A to B. Most of the time, though, these CEOs are additive and not synergistic to the trajectory of an organization.

Catalytic CEOs, like an enzyme in a reaction, can have outsized impact on the velocity and performance of an organization. They often achieve non-linear changes in an organization, looking around new corners, creating new strategies, deriving new paradigms for how to envision the company and the field at large. They are by definition more strategically inclined than stoichiometric CEOs. Often not great at execution (perhaps distracted by too much enzymatic substrate around them!), they can lose focus at the finish, so are best surrounded by detailed-oriented ‘completers’. Catalytic CEOs can change the vector of a business profoundly.

As with endothermic and exothermic types, stoichiometric and catalytic CEOs can both be successful – but they typically are best fit into different types of companies, are excited by different types of challenges, and require different types of teams around them.

The Sato Matrix

Most CEOs fit into a matrix of these two dimensions. It may be a bit cerebral, but I think it’s a very appropriate pair of axes to define the characteristics of a CEO. Vicki Sato is a friend, mentor, and advisor of mine (and former President and Head of R&D at Vertex), and is always full of pithy ways of framing up issues. She deserves much credit for this matrix, as it came out during a well-caffeinated morning discussion at Henrietta’s a few weeks ago. So I’ve decided to call it the Sato Matrix of Biotech Leadership:

Sato Matrix 2

The descriptors in each of the quadrants captures the essence of the CEO profile.

It’s fair to say that the bottom left – stoichiometric endotherms – is probably not a frequently successful CEO profile in biotech, though they can and often are good individual contributors inside of an organization. The other composite profiles have many examples of successful CEOs, though I’ll refrain from applying names to labels to protect the innocent – but most readers can probably think of folks in the biotech world across these profiles.

Picking the right CEO profile for the right business context is critical. Big science drug discovery platforms, opening up new frontiers of biology, are clearly best suited with more catalytic leadership. Asset-centric single product plays frequently do well with a stoichiometric exotherm in charge – someone who can operate a lean virtual biotech and its external R&D partners to deliver on the product strategy. Getting the leadership of a biotech “right” is as much about the CEO profile as it is about getting the appropriate team around them, and the underlying business model.

So next time you are thinking about the CEO role in a company, remember it’s all about thermodynamics and reaction kinetics.

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