Abstract
Introduction
As the coronavirus pandemic continues to spread across the world and the likelihood of a second wave increases, the spotlight has been shining ever-more-brightly on biotech companies. As a result, the biotech sector has continued to see significant investment. In this article we will consider why the share price of Life Sciences companies has been so resilient, how and why those companies are taking advantage of this trend, and what we can expect going forward.
Why has the Share Price been so Resilient?
When the World Health Organization declared COVID-19 a public health emergency on January 30, 2020, the public spotlight became focused on companies in the biotech and pharmaceutical (biopharma) sector. The hope was (and continues to be) that at least one biopharma company will be able to find a way to alleviate the pandemic and its impact, be it through a vaccine to prevent or treat patients with COVID-19, diagnostic testing to identify who has already had and recovered from COVID-19, or setting up some form of technology to trace and isolate those who have been diagnosed with COVID-19 so as to prevent its spread. Consequently, companies in the biopharma sector have generally been front page news and that is likely to continue to be the case until the pandemic is under control, at least in developed countries.
When news is released by a biotech company with regards to data, or successful progress with clinical trials, it is invariably received positively and is accompanied more often than not by an exponential jump in the share price of those companies 1 notwithstanding that, save for specialist investors, few might have been aware of those companies or what they did six months previous. Ordinarily, a movement through the early stages of clinical trials would be unlikely to lead to jumps on the scales seen for a lot of Alternative Investment Market (AIM)–listed biotechs since the turn of the year.
After Synairgen, the respiratory drug discovery and development company spun out of the University of Southampton, announced positive results from a Phase II trial (a trial which tests the efficacy of a drug) of hospitalized COVID-19 patients, 2 its share price increased almost 400 percent. 3 Similarly Avacta, a company which had previously been focused on developing novel cancer immunotherapies, has seen its share price increase from 24 pence on April 7, 2020, to 202 pence only six weeks later (an increase of almost 800 percent.), driven by announcements of a partnership with Cytiva (previously GE Healthcare Life Sciences) to develop and manufacture a rapid test for the COVID-19 infection for population screening, 4 a collaboration with U.S. company Adeptrix to develop an antigen test using Adeptrix's proprietary platform, 5 and a distribution agreement with Medusa 19. 6 It is worth bearing in mind that as yet there has been no definitive breakthrough against COVID-19; when that happens, the share price increase of the company in question is likely to be spectacular, based on the evidence so far.
While the share price of companies in the retail, hospitality, aviation, and related industries has faltered due to the impact of COVID-19, those of biopharma companies, and in particular biotechs (who tend to be more specialized in particular therapy areas or technologies than Big Pharma), have been buoyant. The FTSE AIM All-Share Index dropped over 35o basis points between February 21 and March 19 before slowly recovering (although it still remains 100 basis points below where it was on February 21) 7 ; overall, the FTSE AIM All-Share Index has dropped almost eight percent year to date in 2020. 8 Meanwhile, the AIM Healthcare Index has risen over six percent in the corresponding period and 30 percent during Q2 2020. Given the sustained increase in the value of the AIM Healthcare Index, it would not be unreasonable to conclude that biotechs are increasingly being viewed as defensive stocks by investors.
In addition to the hope of successfully combatting COVID-19, one of the driving forces behind the rally of share prices in the sector is supply and demand. The sector has long been considered as high risk/high reward because outcomes are so often binary—a lead product or technology either succeeds or fails. As a result, biotech companies have tended to be the domain of specialized investors who can “understand the science.”
Now, however, given the relative resilience of the sector, the comparative safety of biotech shares has become much more appealing to investors who are looking to stem losses incurred in the wider market. As such, the higher level of risk associated with biotech stocks has become more palatable, not least because investors can see the huge potential upside.
As a result, there has been an increasing number of investors (such as private equity houses and sovereign wealth funds) who may have previously been wary of investing in the sector but are now being lured by the potential for higher returns on investment than might be available in other sectors. When coupled with sector-focused investors continuing to try and identify the next big thing in the biotech sector, the demand for biotech shares has increased significantly. New investors mean new sources of capital for biotechs, which has led to an upward trend in valuations.
Taking Advantage of Buoyant Share Prices
AIM-listed biotech companies have been capitalizing on this interest by raising money in the equity markets. Biotechs tend to have a high cash burn rate, principally as a result of the cost of research and development and the expenses associated with conducting trials. Many are using the rally in the AIM Healthcare Index, much of which is driven by the good news stories of a handful of biotechs, to ride on the coattails of the COVID-related successes of those companies. While one could argue that biotechs are simply being opportunistic in raising money at inflated valuations, it is likely that many of the fundraisings that have been conducted have at least in part been driven by more long-term thinking than is perhaps ordinarily the case in the sector, particularly in light of the potential headwinds discussed further below.
Of a sample of 18 fundraisings 9 undertaken by AIM-listed biotechs in the five months between March and July (inclusive), only three 10 had a pre-emptive element (that is to say, an offer of new shares to existing shareholders in proportion to the shares already held). The rest were conducted by way of a placing and/or direct subscription. A placing is the issue of new shares by a company on a non-pre-emptive basis; a subscription involves investors entering into agreements directly with a company to acquire new shares. In each case, shares are “placed” with specific persons or institutions chosen or approved by the company.
There are several reasons why a company may choose to conduct a fundraising by way of a placing and/or subscription. Primarily, it presents an opportunity for a company to broaden its shareholder base by targeting new investors. Speed is also often a key consideration. An AIM-listed company can use its existing share authorities approved by shareholders at its most recent annual general meeting to allot shares equal to up to 20 percent of its issued share capital to new and existing investors on a non-pre-emptive basis, without the need to convene an additional general meeting of shareholders to approve the fundraising. This allows for the fundraising to be conducted quickly (usually by way of an accelerated bookbuild, which can be announced and closed within a day following a few days of investor marketing) and for cash to be in a company's account within a week or so of the announcement of the fundraising. For biotechs that burn through cash, it is an attractive option.
However, almost 75 percent of the fundraisings conducted by those companies that were part of the sample group involved larger fundraisings that went beyond existing authorities and so required a general meeting to be convened. This would indicate that these companies were not necessarily desperate for the cash, but rather were using the buoyancy in the market to ask investors for bigger injections than they otherwise might. This is evidenced by the proposed uses of proceeds disclosed by the companies involved: over 90 percent of the sampled companies stated that the proceeds would be used to fund longer-term growth, accelerate ongoing trials, and scale up their businesses.
What might the Future Hold?
A number of the companies sampled also noted that the funds raised by their equity issuance would be used to explore a potential listing on Nasdaq. It is notable that a number of those companies added new US investors to their shareholder base, in anticipation of a potential move to the US. Bringing cross-over investors onto a shareholder register is a well-worn path used by biotechs to facilitate a future listing on Nasdaq. The offering by MaxCyte, Inc., the global clinical-stage, cell-based therapies and life sciences company, for example, was led by Casdin Capital, the New York City–based life science–focused investment firm. 11 Similarly, the fundraising by Scancell included a subscription by funds managed by Redmile Group LLC, a U.S.-based specialist healthcare and life sciences investment firm that recently acquired AIM-listed Redx Pharma.
Many biotechs continue to think that, notwithstanding that the AIM Healthcare Index has been riding the crest of a wave during Q2 2020, their long-term prospects would be better served on the U.S. markets. The attraction of better analyst coverage, higher multiples, and more sophisticated, specialized biotech investors, not to mention the potential size of the U.S. market and the greater visibility and exposure afforded by being on Nasdaq, continue to be a big pull. If one adds into the mix that there has been an unexpected boom in biopharma initial public offerings (IPOs) in the U.S. so far in 2020 (27 IPOs in H1 2020, raising over $6 billion, compared to 45 in the whole 2019, raising just under $4.5 billion), 12 then one can understand why AIM-listed biotechs might consider that the U.S. market is ahead of the curve when it comes to welcoming new companies to market.
Moreover, whereas in 2019 the U.S. biopharma companies listing on Nasdaq tended to be companies conducting Phase I or Phase II trials, the trend in Q2 2020 has been for preclinical-stage companies to look to the public markets. That could result in privately held UK biotechs looking to list directly on Nasdaq rather than AIM because they can see a market where specialized health care funds are willing to back them at an earlier stage than is likely to be the case on AIM. For European biotechs more generally, the trend has been clear for while: in 2019, all but one of the top eight (by value) European biotech IPOs was on Nasdaq (with the exception being Ascella Pharma, which listed on Stockholm's Nasdaq). It is a worrying trend for AIM and the other European markets.
AIM can be an unforgiving market. A number of AIM-listed biotechs have been scarred by the fallout from the winding up of the Woodford equity income fund and subsequent sale by the fund's administrator, Link Fund Solutions, of 19 of the fund's health care assets to Acacia Research, a Nasdaq-listed patent licensing specialist backed by the activist investor Starboard Value. 13 Shortly after its acquisition, Acacia Research aggressively disposed of holdings in some of the assets, which in the case of 4D pharma (a company leading the development of live biotherapeutics) sent its share price tumbling almost 50 percent over the space of a couple of weeks, despite it having announced the opening of Phase II clinical trials for patients hospitalized with COVID-19. So, while releasing COVID-related news has tended to be a positive for most AIM biotechs, it is not something that has universally held true. Despite some biotechs riding high, the volatility and unpredictability of the AIM market has not disappeared.
While many biotech companies, given their size and the fact that they are often conducting relatively early-stage research, have proven to be sufficiently agile to be able either to refocus their existing activities onto COVID-related research or to run COVID-programs in parallel, there remain concerns on the impact of the current pandemic for those companies and their pre-existing programs in the longer term. Such companies will be nervous about the implications of having repurposed their activities towards COVID-19 and the impact that might have on work previously carried out.
In addition, the long-term planning undertaken by biotechs should not be underestimated. A lot of time is expended by management teams on setting out their R&D roadmaps in meticulous detail around when data can be generated and how interim data may be used to extend a company's cash runway, be it though interim financings, collaborations, or options to license. The COVID-19 pandemic has upended that planning. Collaboration agreements that may have been entered into before the pandemic are likely to have contained milestone payments upon which biotechs have usually been reliant. Such payments may not now be forthcoming if a biotech's focus has switched away from the subject of the collaboration. Noting the potential that this might have on long-term cash flow, biotechs may have used the goodwill in the market to cushion any such blow by raising money while they can.
Aware of the potential headwinds, and the fact that the markets will not remain upbeat forever, it is becoming evident that management teams are now considering how they will meet future cash flow requirements beyond tapping the equity markets or moving to Nasdaq (something that may not always be possible). A mutually beneficial collaboration with Big Pharma has always been an attractive option but it is becoming increasingly sought after in the current climate. Big Pharma companies are always on the lookout for ways to replenish their pipeline, and can be willing to pay generously for investments in innovative biotech companies. In particular, if Big Pharma can hedge their bets and gamble on more companies at an earlier stage, they will be able to avoid higher prices and increased competition for assets further down the line. Equally, the technical and monetary input from Big Pharma into a biotech's discovery and development capabilities can help to speed up progress and, if successful, lead to potentially generous milestone payments. The tension, as has always been the case in such deals, will be the size of the up-front payment.
An alternative to a collaboration could be an equity investment by Big Pharma into a biotech. This would not only allow the biotech to retain control over its day-to-day operations, but it would also provide a cash injection. Such a structure might also suit Big Pharma as, again, it would again allow them to hedge their bets by making multiple investments. GSK has recently acquired a 10 percent stake in CureVac for £130 million and provided a cash payment of £104 million to fund R&D, as well as taking a majority stake in ViiV Healthcare.
Conclusion
The general strength and stability of the AIM biotech sector at the moment is without doubt a positive in an economy and a market currently beset by uncertainty. While AIM biotechs can revel in the upward trajectory of their share prices for the time being, the management teams will know only too well that there are multiple headwinds ahead: the upcoming U.S. election and its potential knock-on effect on drug pricing could feed through the biopharma ecosystem and result in fewer investments in biotechs by Big Pharma (at least in the short term); supply chain issues caused by COVID-19 are likely to start rearing their head; and hopefully, at some point in the not too distant future, a cure for COVID-19 will be found, at which point it will be back to reality for many biotechs. Hopefully they are sufficiently well prepared and capitalized so that they don't hit the ground with a thud.