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Executive Q&A Vanessa Jacoby, Dan Chevallard, VPs of Finance

These are uneasy days for biotech CFOs. Valuations are down, capital is harder to come by, and companies (fearful they will be undervalued) are shying away from acquisition talks.

The bumpy road ahead will be the focus of discussion at this year’s annual meet-up of the Association of Bioscience Financial Officers — a gathering of CFOs who congregate yearly to trade advice and ideas. The discussions this year, hosted here in San Diego, may be gloomier than usual.

The public and media criticism over high drug prices — and the uncertainty over whether drugmakers will face some kind of regulatory crackdown — have cast a cloud over the bioscience industry as a whole. By the final trading day of this year’s first quarter, the Nasdaq Biotech Index was down 24.7 percent. By comparison, the total Nasdaq Composite Index was only down 2.8 percent.

The down market has been particularly impactful here at home. San Diego’s public companies are almost exclusively life science firms, with 29 of the top 50 public firms falling into the bioscience/medtech sector. Further, San Diego’s public biotechs are often nano caps with valuations under $50 million. These smaller firms are more volatile by nature, and can struggle to survive during bust periods, experts say.

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The timely discussions at the ABFO conference were organized by two local biotech veterans who co-chair this year’s event: Dan Chevallard, who’s served as vice president of finance at Regulus Therapeutics Inc. since 2012, and Vanessa Jacoby, vice president of finance at PharmAkea Therapeutics Inc.

The two make a good team as Chevallard brings perspective from the world of public biotechs, and Jacoby offers the outlook of privately held firms. Together, they organized the 2016 ABFO conference to address the challenges and opportunities facing bioscience companies in the current climate.

The conference, which will host over 200 financial executives this year, will feature discussions on strategic collaborations, alternative financing options, challenges for public companies, and trends in mergers and acquisitions (M&As), among other topics.

Big wigs are lined up to speak at the conference, including Andrew Fastow, the former chief financial officer of Enron Corp. He will address how the ambiguity and complexity of laws and regulations breeds the opportunity for problematic decisions, and the questions finance professionals should ask in order to ensure that their companies are following the rules.

National Public Radio Social Science Correspondent Shankar Vedantam (author of “The Hidden Brain”) will also speak at the conference, addressing how unconscious factors in the mind shape the way people think about innovation, communication, and risk.

The ABFO conference takes place May 24-27 at the San Diego Hilton Bayfront hotel.

Chevallard and Jacoby recently sat down with the San Diego Business Journal to talk about the common challenges facing bioscience CFOs in today’s climate. Here are some excerpts:

VANESSA JACOBY

A certified public accountant by trade, Jacoby has been working with life science companies for close to 20 years. Career highlights include six years as revenue manager for Diversa Corp., a high-flying industrial biotech firm in the early 2000s whose technology was ultimately acquired by BP. Jacoby has been serving as vice president of finance at private biotech PharmAkea Therapeutics Inc. since 2012, and was instrumental in raising $45 million in a combination of a Series A round and a collaboration with Celgene Corp.

DAN CHEVALLARD

Since 2012, Dan Chevallard has served as vice president of finance at Regulus Therapeutics Inc., a public company with a market cap of $278 million. Before Regulus, he worked as the controller for San Diego-based Prometheus Laboratories Inc., which sold to Nestle Health Science back in 2011. Although the deal price was not disclosed at the time, analysts estimated that Nestle paid between $567 million and $1 billion for Prometheus. Chevallard, a certified public accountant by trade, began his career at Ernst & Young.

With the unsteady trend on the global stock market, weakness with China, and the election looming in the background, what’s the climate for biotechs trying to access new capital?

Dan: Valuation is a challenge. When your stock has gone down in the market, raising capital through the traditional methods of equity financing is less desirable. If you were trading at $10 per share six months ago and now you’re trading at $5, you don’t want to go raise money at $5 because you think you are worth $10.

Of course the tweet from Hillary Clinton didn’t help, and Martin Shkreli’s price hike — these are macro economic factors that influence the market.

Vanessa: The fundamentals of the industry haven’t changed. Yes, the market caps are a little depressed. However, we continue to see an appetite for VCs and other investors who get a return on their investments. If you have good science, you’ll always be able to attract investment.

Many people believe that venture capital isn’t the best choice for life science firms looking for cash. VCs want to get their returns fairly quickly, so companies are forced to plan for short-term payoffs rather than long-term growth. If you can’t raise money through the public markets, how is venture capital as an alternative mode of financing?

Vanessa: That’s a controversial question. I think a combination of venture capital along with collaboration with pharma is a creative way to finance a company. At PharmAkea, we have a collaboration with Celgene Corp. (in which Celgene has options to acquire PhamAkea), and we also have a venture capitalist. I think that works well for both parties because the VCs can see a return on investment on a shorter horizon. It de-risks their investment because there’s a built-in exit. Pharma, such as Celgene, continue to need drugs in their pipeline and they see biotech as a vehicle to generate more drugs. So Celgene comes in with non-dilutive funds, they get the drugs they need, and the VCs get a faster return.

Dan: There are also groups out there that do venture debt. They specialize in biotech, and they understand the risk appetite for the business. Usually, when you take out a loan you’re expected to pay it back with profits. But certain banks — like Oxford Finance, Hercules Capital Inc., Square One Bank and Silicon Valley Bank — understand and are willing to lend to biotechs knowing that they won’t necessarily have the cash flow from profits to pay back. They’re counting on biotechs raising money (or getting acquired) in the future to pay off the loan.

There’s a lot of money sitting on the sidelines in these venture debt groups, and venture debt will become more attractive in this down market.

Another vehicle is royalty financing, which is a way to monetize future royalties.

Do you think that generalist money, which played a large role in the outperformance of the Nasdaq Biotech Index over the last few years, is critical to stabilize and infuse the sector again during this correction period?

Dan: Generalist money is not smart money. People have flooded to the sector because they saw the market boom. You have people who are not informed in science, and are buying on momentum or selling when they don’t understand or misinterpret information. That’s very, very dangerous and it directly correlates to volatility — unfortunately — for us. You end up having a disconnect between the company’s value in the market and the true value of the business.

The science has never been better in biotech, but you have uninformed investors that are just not helping the value proposition. Generalist money exacerbates the up, and the down. There’s plenty of smart money out there.

Do you think that the correction period we are experiencing is healthy?

Dan: I think we’ve crossed the point of it being a reasonable correction. Across the board our sector is down. You’ve got good news happening: drugs are getting approved, and stock is trading down; good clinical data is published, and stocks are trading down. That doesn’t make sense.

People are risk averse. Why buy stock at $10 per share if I think it’s going to $7? It’s a scary time right now.

Vanessa: This industry is very cyclical, and there’s uncertainty associated with the election year. I think once that’s passed the industry will pick up again. That’s what happens historically in an election year.

If biotechs and other life science firms continue to face difficulties raising capital, will other cost-cutting measures (like outsourcing R&D overseas) become more prominent?


Vanessa:
As finance professionals, we’re always looking at costs and how to keep costs low. There’s always a combination of outsourcing and insourcing that works best.

Dan: A smart biotech will be virtual where possible, and they will outsource where it makes sense. For example, things that would be prohibitive or impossible to internalize should be outsourced. That can mean manufacturing and clinical trials. But you would not want to outsource your core researchers — that’s your whole company, that’s where the inventions come from.


What needs to happen to revitalize the sector? Does one big company need to go public and be successful in the endeavor?

Dan: That’s a good question, and there’s no crystal ball. We need to continue delivering on innovation. Just in San Diego, multiple drugs have been approved and we need that to continue.

M&A activity is also generally good for the sector, and now we’ve seen a big transaction fall through with Allergan and Pfizer. We’re ripe for M&A, and there needs to be more of it. We’ve seen some M&A activity, but it’s certainly not “hot.”

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