WBJ Interviews Early Stage Biotech VC on Economy

Excellent interview by Vandana Sinha with HIG Bioventures' Bruce Robertson.

Friday, June 26, 2009
Bruce Robertson: Why he's still bullish on biotech VC
Washington Business Journal - by Vandana Sinha Staff Reporter

Bruce Robertson, managing director of HIG BioVentures, has been working the venture capital circuit long enough to see the ups and downs in biotech investment — and observant enough to learn from them. He talks about the lessons of the worst period he has seen.

What do biotechs need to be considered for venture capital money? A pipeline of good drugs and experienced management teams are getting funded. Good data around the compounds. Certainly, it’s not like a company can decide to do this overnight.

What’s the craziest pitch you’ve received? It was basically a baseball hat with an ultrasonic music oscillation device in it to slow the progression of Alzheimer’s disease. Part of the baseball cap played music, and the other part was vibrating. We didn’t do that deal.

What’s something that will always get noticed by you? Really good preclinical or clinical data in a big unmet medical need where we believe we can build a company in a very capital-efficient manner.

What will always turn you off? Capital inefficiency. Big burn rate.

What’s going on with venture capital now? In 2000, people had been doing so well. VCs had gotten sloppy at how they reserved cash [for future financing rounds for their existing portfolio companies]. That behavior continued even when the bubble started to burst. High-priced deals continued to happen and reserves continued to be short. By 2001, VCs couldn’t invest because they didn’t have the money, and good companies went under. So, when Lehman Brothers went down last September where the venture market was slow to react in 2000, the venture market was fast to react in 2008. Lehman closed on a Monday, and the venture markets closed on Wednesday to make sure they had reserves to support their existing companies.

So there’s money in the system? There’s less than there was in September, but there is capital. It just became incredibly conservative overnight.

What else are VCs dealing with? It’s a really tough time for VCs to raise money. So you’re going to be really conservative on how you deploy those last three, four deals. For the first three to six months nothing happened because we were all internally focused on our portfolio companies. Now VCs are starting to look at new deals again, but the bar is a lot higher. I think you’ll see some deals opening up in the next six months assuming no major disruption in the market.

What are you seeing in the life sciences market? When VCs perceive the risk to be high, they tend to migrate to later-stage companies. I don’t agree with that, but it does tend to be where things go. Early-stage companies suffer pretty disproportionately. Meanwhile, valuations have come down, so you end up seeing later-stage companies at much more favorable prices.

What do you mean prices are more favorable? In late 2007 to the middle of 2008, there was a little mini bubble. We did zero new deals between the middle of 2007 and the end of 2008, because virtually everything we saw was overpriced.

And you said you don’t agree with automatically migrating away from early-stage companies? Three to four years from now, we’ll be in a pretty decent economy. So the early-stage company you’re investing in now is likely to be thinking about exits — an IPO, an acquisition — in a better environment.

What do you see in the local life sciences market? Our region tends to be an earlier-stage region, which means it’s on the slower end of things to react. I don’t know how to gauge it, though, as it was slow during the uptick. It’s related to the thin pool of experienced entrepreneurial management. We haven’t recycled a lot of experienced people back into the market.

What happens to biotechs that don’t get money? The ones in the worst shape are public biotechs. A certain percent of biotechs have less than one year’s cash. Those guys are in real trouble. They have to report their financing options. It’s harder to be creative because they are public and have public shareholders. For the really early-stage companies, if you can hunker down and survive on grants for a year or two, that’s not a bad place to be. For the mid-stage companies that can’t survive on grant money and need more capital, that’s a tougher place to be. Sadly some will go out of business.

When will things turn around? I think this should probably all shake out in the next 12 months.

How much might we see here in terms of mergers and acquisitions? I’m long term really bullish on the M&A market, but this is also a tough time because Big Pharma is extraordinarily busy. I heard from someone in Big Pharma that they’re getting three new deals per day. Many of them want to do deals, but it’s a tough triage process. And I think they have been emboldened to feel they have a lot of leverage in every deal, even with well-financed companies. So if you’re a biotech that needs to get bought, it’s tough.

What will the local sector look like long term? There’s a lot of good stuff coming. The local governments are very supportive. I’m very encouraged by what’s going on in the local universities, particularly Johns Hopkins. There is money around. I know entrepreneurs fret that there isn’t. But in the three- to five-years time frame, I’m pretty bullish.