follow the lead. Getting that lead is the hardest thing to do.
X: Are there any cautionary tales when it’s not a good idea to recruit crossovers for that last mile?
CJ: To me crossovers are really public investors that dip down to private when it’s opportunistic. But when all hell breaks loose they’re back to investing in publics again. It’s great in neutral-to-hot market to get them to come in, there’s nothing wrong with them dipping into private to get a little extra return. If they’re already in and the market goes south, they’ll work to protect their investments. But if it goes south first and you’re looking to get crossovers in, I expect them to be very selective.
SK: I agree. I wouldn’t knock them, they’re taking on risk. Look at PTC: the company had $2 million on the balance sheet. No banker will tell you to go public and file an S-1 when you only have $2 million. They say you have to do a private [round], but your VCs are all tapped out, and even if they aren’t, they say they’ll pull together a $15 million round. But if you get good crossovers… we raised $65 million from crossovers. That’s a big chunk of dough. We then raised $144 million on the IPO. Six months prior, the management team wasn’t expecting anywhere near that. Part of it was market momentum getting better and better. But it was the process and order of operations we followed.
CJ: What [PTC] benefited from was a nice market. I’m not sure those same crossover guys would be there for your $65 million private round if they didn’t think they could get out. How long were they in, a year?
SK: No, four months. I hear you, but they came in in January [2013] before the IPO market was wide open. They got in at $12 and we went public at $15.
X: What about longer-term investor behavior, perhaps something that has influenced companies that went public before the Great Recession?
RH: We went public in 2000. When there’s part of a market that’s hot, suddenly everyone’s interested. We’d get crossover funds, generalists, even people sitting down saying ‘I don’t know anything about your company but I know biotech’s really hot, so what can you tell me?’ Those are difficult meetings, but some of those guys go out and buy and support the stock.
X: We’ve fallen off the patent cliff, we’re working through health care reform. What other hurdles will the industry have to push through in the next five years?
EA: Pricing.
RH: The Pfizer-AstraZeneca situation highlights the need for tax code reform. [Editor’s note: Pfizer abandoned its pursuit of an AZ takeover Monday.]
X: Are you talking about the rules for repatriation of foreign revenues?
RH: Repatriation as well as a tax code that’s favorable to organizations in the U.S. Let’s assume the transaction goes forward and Pfizer becomes a foreign-based company. You’ve had several transactions in the past: Elan, Jazz, Valeant, Actavis…
SK: All these companies are re-domiciling through inversion deals. That’s the flavor of the day.
CJ: This could be part of the patent cliff thing. [Pharma is saying] we’ve lost all this gross margin, but here’s a way to pick up our bottom line.
Table image courtesy of Ofer El-Hashashar via a Creative Commons license.
