The Public Biotechnology Markets in North America Presented by TD Securities Sidney Himmel June 19, 2002
Dec 25, 2015
The Public Biotechnology Markets in North America
Presented by TD Securities
Sidney Himmel
June 19, 2002
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Biotechnology: Public Equity Markets
• North American markets are not strongly receptive to biotechnology stocks at the present
time.
• Issues which are getting done are occurring in:
– Well-sponsored companies with various products in the pipeline and with a solid
management track record.
– Companies with revenues and earnings.
– Diagnostics companies with revenues.
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60%
70%
80%
90%
100%
110%
120%
28-Sep-2001 16-Nov-2001 8-Jan-2002 26-Feb-2002 17-Apr-2002 6-Jun-2002
IndexedPrice
NASDAQ Biotech / S&P 500 NASDAQ Biotech / NASDAQ NASDAQ Biotech / DJIA TSE Pharm & Biotech / S&P TSX
Biotechnology Market OverviewBiotechnology Public Market Overview
The Good…..
The Bad…..
And the Ugly.
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The NASDAQ Since 1996
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Jan-96 Jun-96 Dec-96 Jun-97 Nov-97 May-98 Nov-98 Apr-99 Oct-99 Apr-00 Oct-00 Mar-01 Sep-01 Mar-02
Price
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Public Investor Concerns
• Capital losses
• Factors:
– Overvaluation? Are stocks too expensive? (Fed Model?)
– Confidence in management: a question of trust (“Never do business with anyone
you can’t trust” - J.P. Morgan).
– Accounting Issues: Relates to valuation and management issues (Enron: Arthur
Andersen).
– Research Analysts: Can they be trusted? (Merrill Lynch settlement with the New
York attorney general’s office).
• Why?
– From 1996 to 2000, investors and issuers underwent a paradigm shift which was
predictably not sustainable.
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Hysteresis Curve of the Markets
1999 – Mid 2000
NASDAQ: 2000 5000
Annual Biotech Issues: 100
Interest Rates: 5.5%
Nortel $15.00 $80.00
Industrial Production: 126
2000 – Year-end
NASDAQ: 2470
Annualized Biotech Issues: 110 ~
Interest Rates: 4.0%
Nortel $32.00
Industrial Production: 120
1995 - 1998
NASDAQ: 1000 2000
Annual Biotech Issues: 80
Interest Rates: 5.0%
Nortel $7.00!!!
Industrial Production: 117
“Irrational Exuberance”
1994
NASDAQ: 800
Annual Biotech Issues: 49
Interest Rates: 4.0%
Nortel $5.00
Industrial Production: 100
Beginning 1994
2001 – 3rd Week of Sept 2001
NASDAQ: Bottoms at 1420
Annualized Biotech Issues: 53
Interest Rates: 2.0%
Industrial Production: 120 ~
Y2K LIQUIDITYBOOM
FIBER OPTICSCRAZE
DOT COMCRAZE
INTERNETCRAZEBEGINS
DOT COMCRASH BEGINS
FIBER OPTICSSLOWDOWN
RECESSION
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Confidence in Management
• Sunday New York Times (June 9, 2002):
“There may be only one type of job in which somebody can commit a felony and,
after being fired as a result, still receives a severance package with many years of
salary. The job is chief executive officer of a large corporation.”
• Enron: CEO leaves.
• Tyco: CEO leaves.
• Imclone: CEO leaves.
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Accounting Issues
• Investors/analysts ignored write-downs and valuation adjustments
– AOL-Time Warner: $54 billion charge.
– Quest: expecting $30 billion charge.
– Vivendi: $14 billion charge.
– JDS Uniphase: $50 billion charge.
• Misleading revenues/expenses and off-balance sheet debt:
– Enron
– Elan
– Microsoft
– Xerox
– Tyco
– Computer Associates International
– Adelphia Communications
• Rules are being applied more rigorously now.
• May affect private companies financed by venture capital as well.
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Research Analysts
• Enron analysts interviewed by Congress.
• Henry Blodget: Internet Analyst.
– No. 1 ranked Internet analyst.
– Amazon.com target = $400.
– Merrill Lynch settles with New York state attorney general for $100 million.
• Investigations focusing on analysts and analyst compensation around the world.
• Compensation being decoupled from corporate finance around the world.
• Other investor lawsuits against brokerage houses are pending.
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Valuations
• Must consider:– Dividends– Earnings– Earnings Growth– Discounting of Dividends:
• Warren Buffett
versus• “You just don’t get it.”
• Means
• Standard deviations
• Risk aversion
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Valuation: The Fed Model
10-year note 5.07% (A)
Projected Earnings $52.00 (B)
S&P estimate (B/A) 1025
Actual 1027
Fairly Valued?
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A Historical Perspective on Valuations
Date P/E Dividend P/Book P/Sales 10-yr Rate EPS Growth6/13/49 5.4 7.6% 0.89 0.43 - 12.00%
10/22/57 12 4.4% 1.43 0.75 3.90% -0.08%10/25/60 16.3 3.6% 1.64 0.93 3.89% -0.05%6/26/62 14.9 3.9% 1.54 0.85 3.91% 12.00%1/3/67 14.9 3.5% 1.85 0.93 4.58% 9.00%5/26/70 12.9 4.4% 1.45 0.66 7.91% -0.09%12/6/74 7.5 5.1% 1.07 0.38 7.43% 17.50%2/28/78 8.3 5.3% 1.14 0.40 8.03% 7.00%4/21/80 6.8 5.7% 1.08 0.34 11.47% -0.08%8/12/82 7.9 6.3% 0.97 0.33 13.06% -0.14%7/24/84 9.4 4.4% 1.36 0.44 13.36% 3.00%
10/19/87 12.7 3.4% 1.92 0.58 9.52% 2.00%10/11/90 13.9 3.6% 2.24 0.60 8.72% -0.1%Average 11.0 4.7% 1.43 0.59 7.4% 4.8%
12/31/01 29-55 1.2% 5.80 1.64 5.09% 10.0%
Bear BottomsS&P Industrials
Average long-term S&P Earnings Growth 4.0 %
Sources: ISI Group; Federal Reserve Bank; Princeton University Press.
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Earnings Model with Growth and Dividend Discount Model Valuations
CONCLUSIONS:
1. Variability.
2. Valuations may well be sustainable, with anticipated share price growth, if growth assumptions are acceptable.
* We used a 6% discount rate and assumed a 16x multiple in 5 years.
2003 EPS
Estimated 5-yr EPS Growth
Rate
2003 Dividends
Estimated Value - Discounted Fed Model or DDM
Current Stock Price
Forest Labs 2.75$ 25% Nil $37.20 71.00$ Merck 3.45$ 10% 1.51$ $40-66.00 52.00$ GlaxoSmithKline 1.20$ 15% 1.27$ $28-40.00 39.50$ Wyeth 3.00$ 15% 0.96$ $30-62.00 53.00$ Pfizer 1.85$ 18% 0.60$ $21-50.00 35.00$ Bristol-Myers Squibb 1.90$ 5% 1.14$ $23-29.00 49.00$
Average $38.25 49.91$
1.30x
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Fund Flows: Affect on Valuation
1. Euro versus U.S. dollar.
2. War on Terror.
3. European, Asian, and Middle East Funds Flows.
4. Free Trade: Steel
Food
Lumber
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Biotechnology
• Stock valuations depend on:
1. Market
2. Sector
3. Company
• Declining valuations decrease institutional investor interest due to market capitalization
cut-offs.
• Worsening momentum decreases proclivity to invest in sector.
• But: YM Biosciences raised funds.
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Positive Independent View on the Market
• Harry Dent: Demographer and Market Technician.
• Pat McKeough: Successful investor - next big move should be up but be well-
diversified.
• Value Line: Expects moderate economic growth over the next 12 to 18 months. Should
underpin a rebound in corporate earnings.
– Middle East, accounting, earnings warnings, so still proceed with caution.
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Most Recent Biotechnology Financings in CanadaBiotechnology Public Market Overview
Closing Date Issuer Final Size (C$mm)
% of Invested Capital
News
Jan-18-2002 PanGeo Pharma Inc. $ 27.60 17% Management track record and profitable business model. Accretive acquisitions.
Jan-31-2002 Medicure Inc. $ 10.00 67% FDA approval to proceed with Phase II for lead product, MC-1. Since issue, has begun enrollment - results expected by end 2002.
Mar-08-2002 Cardiome Pharma Corp. $ 30.91 86% Issue concurrent with acquisition of Paralex, which owns several IP rights relating to cardiovascular applications of xanthine oxidase inhibitors.
Mar-21-2002 Axcan Pharma Inc. $ 90.85 13% Market expected strong growth even without acquisitions. Part of proceeds to pay balance of Enteris acquisition. One week post-issue, announced acquisition of Lacteol.
Mar-28-2002 Hemosol $ 22.05 12% FDA approval to proceed with Phase II for Hemolink (a week after Health Canada's rejection).
April-05-2002 Cytovax Biotechnologies Inc.
$ 5.35 17% Initiated Phase I trial of lead product CytovaxineTM (received Health Canada approval to proceed in January)
April-09-2002 Aeterna Laboratories Inc. $ 57.00 25% Private placement to SGF Sante, Solidarity Fund and Acqua Wellington: $35 million for acquisitions, $20 million for Neovastat development and $2 million general.
May-24-2002 Vasogen Inc. $ 17.00 8% Positive results from CHF feasibility clinical trial - first time immunotherapeutic approach had beneficial impact on morbidity and mortality. Also completed a feasibility clinical trial in moderate to severe psoriasis.
Jun-12-2002 YM Biosciences $ 15.00 29% Flotation of Preferred shares automatically convertible into commons one year post-issue if commons are listed. Amount raised was in the lower end of the range (C$15-40mm). Required distribution on both London Stock Exchange AIM and TSE.
TOTAL $275.76
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Most Recent Biotechnology Financings in the U.S.Biotechnology Public Market Overview
Closing Date Issuer Final Size (US$mm)
% of Invested Capital
News
Feb-4-2002 SangStat Medical Corp. $77.63 22% Achieved profitability for the first time in Q4 2001. Earnings were exceeded analyst expectations. Continues to gain U.S. market share for its two main products.
Feb-11-2002 Amylin Pharmaceuticals Inc.
$96.60 18% Initiation of third Phase III pivotal trial of AC2993 (synthetic exendin-4) in type 2 diabetes.
Feb-13-2002 Array BioPharma Inc. $34.50 15% Drug discovery collaborations agreement with Japan Tobacco.
Feb-14-2002 Cygnus Inc. $14.00 12% Glucose monitoring devices business insulated company from biotech sector devaluation.
Feb-27-2002 Orchid BioSciences Inc. $22.50 23% Restructuring.
Jan-11-2002 Antigenics Inc. $60.00 14% Six technologies, five products in clinic.
Jan-31-2002 Zymogenetics Inc. $120.00 28% 20 years operating history, 9 protein drug candidates in the pipeline, and US$52mm collaboration with Serono.
Mar-07-2002 InterMune Inc. $111.00 11% Three marketed products and advanced-stage clinical programs
Mar-08-2002 Salix Pharmaceuticals $61.50 28% 60-person sales force focused on high-prescribing U.S. gastroenterologists.
Apr-12-2002 Ribapharm Inc. $260.00 22% IPO priced significantly below initial price talk.
Apr-24-2002 DOV Pharmaceutical $65.00 50% IPO - Alleged misleading financial statements
May-7-2002 Quinton Cardiology $32.20 63% IPO - 48 year operating history providing stress-test systems; introduced 3 new PC-based products last year (2 non-invasive); well-positioned to address aging population.
May-22-2002 EON Labs $147.00 30% IPO - Major supplier of generic pharmacetucials offering over 190 products; history of success in obtaining FDA approvals (e.g. 24 approvals in 2000-2001).
TOTAL $1,101.93