Editor’s note: Last month we looked at how IR at life sciences companies is complicated by having two regulators overseeing the industry. This month, we continue our coverage of this growing sector with a look at early-stage biotech IR.
There are wags who say biotechnology is the industry of the future, and that’s where it will always be – in the future. Its products can take a decade to dribble down the pipeline, and a lack of funding can hold up the devilishly complex regulatory process. All of which makes investing in a radically new drug or novel medical device an act of faith or folly. As such, doing IR for these early stage companies is a careful balancing act where managing expectations can be very challenging.
The payoffs for funds and investors savvy enough to sniff out biotech winners are legendary, and it’s that Genentech-sized hope that keeps investors and inventors
in the game. ‘No-one is interested in curing cancer in mice anymore,’ says Bruce Babbitt, a drug development expert at Parexel Consulting, a firm that works with biotech and
pharmaceutical companies to accelerate product development and secure financing. ‘People expect miracles but experienced biotech investors know it’s going to be a long process.’
While it’s not easy to run investor relations for a manufacturing, mining or service-oriented company, it’s less speculative and more lightly regulated than the highly volatile world of the life sciences. In these industries, the competition is more clearly defined and the roadblocks to success are usually easier to define.
But the world of biotech is very difficult to predict. When your product is a machine that breaks up cellulite with sound waves, or a drug that shrinks a rare fatal kidney tumor, selling your story is more complicated. This is the scientific revolution, after all, and revolutions aren’t cheap. Nor, for the most part, can they be scheduled.
Getting on track
It’s not easy to bring a new life science product to the market. There is the bold and experimental science behind the effort, the deep regulatory overlay and the price tag: as much as a few hundred million for a new drug with basic science, and $1 bn for small-molecule, cutting-edge, ‘oh wow’ technology.
The highly speculative nature of the new life sciences can put a nascent company’s CFO, who often heads IR, in something of a quandary. How do you whip up excitement about a product that may be five years away from human trials? How do you present extremely complex science to the financial community? How do investors value a company that has not a single product on the market? And what happens when an expected ‘value event’ – an injection of cash, merger or acquisition, or sale of a product to another company – falls through?
Later, what happens when the successful medication is taken off the market because of questionable side effects? And how does a company keep the money spinning when the patent on the golden egg – or the little blue pill – expires? The answer is to have a winning sequel already in the pipeline or a strategic partnership that allows you to develop another winner.
At the start, however, those problems are the stuff of dreams, not nightmares. At the beginning, it’s all about funding and credibility. The important thing is to give the financial community a way to gauge your success, such as through financial officers who deal with venture capitalists, scientific foundations and investment funds.
‘You have to hit the marks to make investors comfortable,’ says George Elston, vice president of finance at Elusys Therapeutics of Pine Brook, New Jersey, which is developing a vaccine for anthrax, among other products.
That means developing a roadmap of scientific research on the drug or technology including details on research, clinical trials and what the likely sources are for funding to help a firm expand to the next level. By hitting the markers, experts say, a small company with an experimental product can build the confidence of potential investors.
‘You should fail early and fail often,’ exhorts Steven Burrill, who founded San Francisco-based merchant bank Burrill & Company, which invests in biotech companies. He notes with pride that life science is the one field where investors are not turned off by failure. Rather, they know that at least 90 percent of ideas will fail, so they like a company to work out the kinks early on.
Venture capitalists and fund managers are, understandably, more interested in creating value than in easing suffering or prolonging life. But what is value to this group? A company with no products on the market, and possibly a long Food & Drug Administration (FDA) approval process ahead of it, does not conform to standard business models. ‘We wrestled with this, because the traditional models didn’t work,’ says Elston, whose company is developing new therapies to treat a variety of bacterial and viral infections.
Step one
Some investors measure value by looking at the IPOs of comparable companies and adjusting their targets. This is tricky, however, with the IPO market being dry for so long.
The initial IR goal for early-stage biotechs is to score enough capital from foundations and ‘angel investors’ to develop the product. When it’s farther along in trials, venture capitalists and funds may buy a piece of the firm. Ultimately these companies either merge with or are acquired by another company with deep pockets, or issue a wildly successful IPO.
‘Investors don’t ask about valuations, but probabilities,’ says Babbitt. There are rules of thumb, of course: a device or drug that’s farther along in clinical trials is worth more than one that isn’t. Officers with a track record don’t hurt, either, and a larger market is better than a smaller one. An obscure condition that afflicts the wealthy few will probably get faster funding than a treatment for conditions that plague the poorest. And developing a drug for a condition that doesn’t yet exist isn’t crazy – it’s a marketing triumph.
Biotechs mature in any number of ways. At the very beginning, the CEO might be a scientist or doctor trying to develop a product and the CFO is the one in charge of bringing in the funding. Sometimes biotechs start off as virtual companies that subcontract the research, animal testing and production of products as well as the communications function. Then as the product winds through the FDA pipeline, the company may take on a more traditional shape, including physical offices and staff.
Angel investors might see their own early money diluted as the next wave of private investors or underwriters comes along. At this point, the company is almost never public and valuation is still very speculative, contingent on factors that add to and detract from the overall appeal. If the company has a good product and strong leadership, it might flirt with the idea of going public, partnering with a strategic ally, or allowing itself to be acquired by a larger publicly traded company.
Elusys, for example, had intended to go public but now its partners are thinking about an eventual merger. The company is well along in developing a vaccine for anthrax, a biological weapon that closed several US post offices and a Senate office building in 2001. The company’s first treatment is Anthim, which uses new technology to deliver an anthrax vaccine that will cure illness even after exposure.
The hype factor
All industries are subject to unreasonable expectations, but there is something special about biotechnology, which, in the public mind, produces both miracle cures and cloned celebrity babies. Today’s life science firms are magnets for gossip, their products often in the news before they’re on the market, as fodder for a 24-hour news cycle desperate for ‘serious’ good news. Victims’ groups, for instance, can compound expectations in their eagerness to win grants or attract members.
Jeffrey Krasner, the biotech reporter for the Boston Globe, advises companies to respond to unofficial news as best they can. ‘To me, rumors are news in nascent form,’ he says. ‘Good reporters will treat them the same way they treat a hundred press releases – pressure test them, run them past sources and try to find the five worth pursuing.’
The idea is to contain a false rumor by refusing to dignify it or downplay a true rumor as much as possible without saying anything that could be considered material. Either way, be sure to get back to reporters immediately in order to keep your finger on the pulse of a story that will be written with or without your comment.
‘Sometimes you have to remember that investors are not the most important audience,’ says Alison Marquiss, director of corporate communications at California-based Chiron. The company made headlines last fall when production of its flu vaccine was suspended at its Liverpool, UK plant after authorities cited contamination problems, which contributed to a shortage in the vaccine at the height of flu season.
‘If you’re withdrawing a drug, there are doctors and patients to consider,’ Marquiss adds. ‘Remember: investors look at these stocks not just for growth potential but also because they believe in what the company is doing.’
This is true – to a point. When disaster strikes, communications experts say it’s vital to have internal lines of communication open and a clear policy in place that forbids employees from talking publicly, especially informally.
This is where pre-IPO biotech IR is similar to heading the function at an established blue chip: the goal is to make sure all messages to key stakeholders are aligned. And, at the end of the day, if you can maintain your cool through the highs and lows of early-stage biotech, there’s a lot to be said for the experience of being able to sell a story that’s always about tomorrow.
