ATPblog

Going against the Grain: Is it time to take a stand against “Asset Favoritism”?

In his 2004 Chairman’s Letter at Berkshire Hathaway, Warren Buffet offered sound advice to those trying to find the best time to invest in equities: “be fearful when others are greedy and greedy when others are fearful”.   For equity investing, this strategy seems to work very well.  Selling at the end of a long bull run, just as others are piling in on the back of historical gains was the right strategy in 2008.  Buying up distressed assets at a time when most potential purchasers are too fearful to move, keeping prices depressed, was surely the right strategy in the years that followed the crash.  But is going against the grain also a winning strategy for private equity investors in high-risk biotech ventures?

Finding Safer Medicines

Medicines need to be safe and effective.   Once upon a time there was a trade-off between the two that was assessed at the population level – over the entire group of people receiving the medicine was there more benefit than harm.  Across a broad swathe of an indication, a positive answer to this risk:benefit equation was usually sufficient to support approval and widespread clinical adoption.

Biotech Survival Lessons from the Inuit

I've recently been following the BBC's excellent "Human Planet" series. Last week's program was a fascinating insight into how the Inuit of the Arctic have adapted human existence, over centuries, to live in one of the harshest environments known to man. Why mention this on a blog about biotech funding?

The Biotech Life Cycle - Seattle Revisited

BMS is currently in discussions to buy Zymogenetics, from Seattle. While some will mourn at the loss of another regional leader, we see things a different way.

A recent article from the Seattle Times highlights why recycling is so important to building biotech into a

Market Access: How Does it Affect Biotech Funding Prospects?

Does it work?  Once upon a time it was sufficient to determine if a drug, diagnostic or device delivered some benefit.  A significant effect in a randomized, placebo-controlled trial was necessary and sufficient to identify efficacy.  Combined with demonstration of safety, this was enough to garner regulatory approval and with it a sizeable profit. But not any more.

And an IPO window is an even more distant panacea...

...as evidenced by two IPOs that went out in 2010, with substantial haircuts:

Anthera Pharmaceuticals, reported in WSJ:

Acquisitions & Licensing: No Panacea

A recent Lex article from the FT highlights some of the recent deals done, both acquisitions and licensing, between big pharma and biotechs. Usefully, it serves to remind us, that while the popular headlines capture pharma's and bigger biotech's need to buy-in research programs from R&D stage companies, this is no sure thing for earlier stage companies.

A Penny for Your Thoughts - how much value does an idea have today?

I remember very well a meeting in the mid 1990s when a venture capital partner told me that “a good idea is worth a million’. He didn’t specify whether his bon mot was denominated in pounds, dollars or euros, but as an inventor of early stage technologies it was music to my ears.  Perhaps more importantly, he didn’t specify

Creative Financing - in a brave new world

This month we were invited to participate on a panel at UK Trade and Investment (UK TI) in Boston looking at issues affecting life sciences companies across both sides of the Atlantic. Several of the interesting presentations focused on experiences of companies in the US and UK, each

Hard times, Harder times

No-one is any doubt that these are hard times for life sciences companies. Some commentators have even suggested that these are the hardest times. The cause is obvious enough: the paucity of capital that has blighted the ‘real’ economy has been felt even harder in the cash-hungry world of

Is India still shining?

A recent report by the Centennial Group,  highlighted in a FT columnist article discusses "What India must do if it is to be an affluent country". Findings in the report, and my own observations from recent trips, have three quite significant implications for the life sciences and

Better ways to spend £150 million

 

A recent Lex article (see below) from the FT highlights why the UK government's new £150 million venture fund is unlikely to stimulate much new venture creation or entrepreneurial spirit. A useful suggestion in the article is to concentrate on attracting and retaining the best talent to help drive

Is Silicon Valley the Best Global Entrepreneurial Region: Fact or Myth?

 

The US is inspiring and pioneered Venture Capital. Often, non-Americans (and even some Americans) believe that Silicon Valley is the role model to follow for new venture creation and a location that provides the best entrepreneurial experience. However, nowadays everyone can

Kinetic Concepts revisited: value or growth?

For all investors, the key to success, is to buy an asset which is priced at less than its intrinsic worth. This applies whichever style of investing one considers - either value or growth. In "The Warren Buffett Way" by Robert G. Hagstrom, Buffett even goes as far as stating

Using Grants to Reduce Cash Burn and Equity Dilution

 

Entrepreneurs can be defined as “businessmen who utilise resources beyond their direct control”.  In the early phases of research or product development, some technology entrepreneurs tend to take advantage of grants from various sources to progress their scientific ambitions. I have learnt that

“Mum, what should I do when I grow up if I want to be rich?”

Suspending disbelief for a moment, and assuming that little Johnny has set his heart on being an investor in the life sciences, there are still plenty of options for where he might invest his money to make a fortune. Many seasoned investors restrict themselves to one (or a small number of areas), such as

Fundraising in the Credit Crunch

The last 2 weeks have seen tumultuous change in the markets and sentiment from investors. We conducted a series of short interviews to see how this had changed people's perceptions for "fundability" of biotech companies and projects, particularly as it relates to early stage or start-up.

Perils of M&A: Overpaying

A recent deal in the medical devices sector illustrates one potential peril of M&A: overpaying. The deal is between Kinetic Concepts, Inc (NYSE: KCI) and LifeCell Corp (NASDAQ: LIFC). Overview deal terms are described in the Wall Street Journal:

Kinetic Concepts, Inc agreed to buy LifeCell Corp. for $1.7 billion to expand the company's reach in tissue repair with the maker of AlloDerm.

LifeCell Chairman and Chief Executive Paul Thomas said joining with Kinetic Concepts will speed the availability of LifeCell's products internationally and that Kinetic Concepts' standing in the advanced-wound-care market will help get LifeCell's line into that segment.

AlloDerm, used to repair damaged tissue in hernias and breast reconstruction, generated $167 million in sales last year and is LifeCell's best-selling product. The combined company is expected to generate sales of approximately $2 billion this year and to employ more than 7,000 people.

Kinetic Concepts, based in San Antonio, said it will pay $51 a share for LifeCell, an 18% premium to Friday's price in 4 p.m. composite trading on the New York Stock Exchange.

At first glance the deal seems to fit well since both companies sell wound management products to hospitals without real overlap in product lines (though equally, there is not huge opportunity for cost cutting).

But take a look at what's happened to KCI's share price since the acquisition was announced at the start of April 08 (see right).The price has dropped from just below $50 to around $38 (as of 2nd May).

Why could this be so? At the time the deal was announced, KCI had a trailing PE ratio (ttm) of around 15x. This has now fallen to a PE ratio of 11x. Meanwhile, LifeCell currently has a PE ratio of 64x, expected to fall to 50x in 2008. Looking at it another way, KCI paid $1.7 billion for a company with $26  million of net income for 2007, while its own valuation before the deal was announced was $3.4 billion, with $237 million net income for 2007. KCI's valuation has now dropped to $2.8 billion; there goes $600 million.

KCI claim earnings will be accretive from 2010 and that there is a strong strategic fit. Earnings for LifeCell would have to increase 6x for this to happen, so KCI management must be pretty optimistic about their acquisition. But it looks like KCI investors are voting with their feet, and feel the ticket price is just a bit too high?  I guess we'll know by 2010.