The goal of exemplary investor relations at any publicly listed company should be the achievement of a fair market valuation. However, for those working in an IR function for a biotech firm, it’s important to understand that how the market values your company will be quite different from how it values any other.
While companies in every other industry are valued based on their expected profitability compared with cash flows and other potential investments, biotechs are typically expected to lose money in the short- and medium-term, attaining profitability only a long time into the future. And that future is subject to a substantial amount of risk.
Consequently, biotech investor relations is a unique beast and successfully playing and winning the biotech IR game means adhering to some distinct guidelines.
Technology
Technology is a biotech company’s principal asset and unfortunately for biotech investors and entrepreneurs alike, that technology is initially only partially proven. Nevertheless, it can be worth a fortune. The biggest mistake that biotech companies make when it comes to investor relations is being too close to the science and too enamored with the as-yet-unproven technology.
Substantiating your claims and explaining the technology in a manner that doesn’t require a Ph.D. is a substantial challenge that must be met. If you can’t explain what makes you special, where the technology was developed, and why it can’t be reproduced by others, then you have a problem. The good news is that biotech investors are a specialized bunch; many have scientific or medical backgrounds. Nevertheless, your technology and investment stories still need to be coherent, concise and compelling.
Risk
Biotech stocks are some of the riskiest investments in the public markets. Initially, companies must overcome development risk, including creating and developing a drug that will actually work, and have an acceptable safety profile. On top of that there is the regulatory risk: Can you convince global regulators to approve your drug for sale? Finally, you have commercial risk: Can you convince patients to pay for it, insurance companies to cover it, or public health authorities to provide it?
Few other industries are as heavily regulated as biotechnology. Every step of the regulatory process can throw up unforeseen hurdles. Biotech companies have to lay out a convincing and understandable roadmap through development and approval while at the same time providing a watertight business plan for the final product.
Opportunity
Pharmaceuticals are big business, and small companies with a big product opportunity can become a huge overnight sensation. This means that if you happen to invest in a biotech success story, the payoff can be many multiples of your initial investment.
Biotech companies therefore need to lay out a reasonable description of the market opportunity of their potential drug products. The key here is credibility. You will likely face competition and your market data and assumptions will be challenged. Don’t shy away from using big numbers if they genuinely represent the opportunity you are seeking, but be prepared to defend your assumptions and to share your calculations.
The value of your company will be based on a multiple of forward projections of how much the peak or average sales of your products might be. You will need to provide these estimates, in some form, either explicitly or implicitly for analysts and investors to model what your future might hold.
Finance
Most biotech companies consume cash — or more bluntly, lose money. In fact, most need to return to the capital markets again and again to raise money to fund the next stage of their development pipeline. Therefore, planning a corporate lifecycle that involves a number of value-creating milestones is essential in developing an event landscape conducive to sequential capital raises.
Nowadays, investors usually expect biotech companies to raise money after the announcement of positive Phase 2 or Phase 3 clinical data. It is also expected that biotechs will file at-the-market (ATM) financing facilities on the first anniversary of their public listing. There are fairly mainstream expectations within the investment community and a successful biotech management team will put the necessary documents in place in order to adhere to best biotech practice.
The professionals on Westwicke’s Life Science team are experts in advising private and public biotechs through all stages of their corporate lifecycle. If you would like to discuss how we can help your company, please get in touch.
