Rodney Ferguson is no stranger to the swings of the life sciences market. Ferguson, a partner at JPMorgan Partners (JPMP) and co-head of the firm’s life sciences and health care practice, was previously a GP at InterWest. Prior to that, he was a senior director at Genentech. So he has seen his fair share of ups and downs in the market.
Recently, the life sciences outlook has been mostly up at JPMP. The firm was an investor in Myogen (Nasdaq: MYOG), which launched a $90 million IPO in October and Eyetech Pharmaceuticals, which has filed for a $130 million IPO.
Ferguson divides his time between the firm’s two offices in San Francisco and Woodside while he oversees investments in biotech startups and buyouts in the health care field. He talked recently with Senior Editor Jerry Borrell. Comments have been edited for clarity.
Q: Why are there so many venture-backed biotech IPOs right now?
A: Biotechnology has worked in four-year cycles since about 1984. We’re just entering the upward portion of the swing for one of those cycles. The last cycle in 2000 saw tools and development (genomics) companies go public.
So what’s driving this cycle?
This time it’s biopharmaceutical companies developing drugs. There are two groups: late stage companies that are in Phase III trials, several of which have already gone public, such as Myogen, and early stage companies that are in Phase II trials. Part of what is happening is a reflection of Genetech’s release of cancer treatment drug Avastin last May. That reminded the world that successes are possible. Within two weeks of that release, biotechnology indices like the American Stock Exchange turned upwards.
How long will it last?
By the end of the year, we’ll see around nine. It started with Acusphere in early October, which was unfortunate because it has not performed well. Since then, Advancis, Myogen, Genitope, Cancervax, Nitromed and Pharmion have gone public. Remember, there were three life sciences IPOs in 2001 and again in 2002. Those years were coming off of the peak in 2000 when there were about 20 biotech IPOs.
So, this trend will continue?
Well, most of the current round of IPOs are all trading down and that is never a good sign. However, it may be that biotech mutual funds are up as a group, about 20% for the year. So it could be that fund managers are not going to jump into new stocks yet because they want to preserve the gains that their funds made this year.
How has the VC community reacted to the biotech surge?
The last three years have been brutal for raising VC money for biotech. Most investments have gone into late-stage companies. Valuations of VC-backed companies have dropped over the last few years because there have been no IPOs, no M&A exits. The stock prices of biotech stocks have been low too. We’ve seen VCs making PIPE deals in biotech companies because there has been real money to be made doing that. Why back a startup when the price of an already public company is so low?
But are VCs returning?
Firms like Sprout and NEA have been in life sciences for a long time. In the case of both, I think what you are seeing is a lessening of interest in IT rather than any real change in direction to life sciences.
What’s your prediction for 2004?
If you compare the returns on biotech versus IT in venture capital, you’ll see that biotech has been steadier. The lows are not so bad, the highs not as good either. Next year, I’d expect to see 10 or more biotech IPOs as the market continues to gain momentum.