A Walk Down Wall Street: Two Analysts Tell you What to Expect from the Markets in the Coming Months

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Pfizer. Allergan. Valeant. Bausch & Lomb. The ophthalmology sector is rich in big deals that happened, didn’t happen, and could happen. How does the sector – and the market overall – look to analysts?


Tom Salemi: Hey, everybody, welcome back. This is Tom Salemi. You are listening to the OIS Podcast. Very happy to have you with us. We’re going to zoom out from the innovation landscape a bit and look at the public markets. Specifically, we’re going to be talking with two of our go-to analysts, David Nierengarten of Wedbush, and Liav Abraham of Citi. And we’re going to talk about a few things. The IPO market, such as it is, is – it’s open. We saw Clearside go out. It wasn’t a strong IPO, but it did go out, and we’ll talk about the benefits of that in this Podcast. And we’ll talk to Clearside, actually, in a couple of weeks, so stay tuned for that. But we’ll talk about what the opportunities are for IPOs, what impact this election season is having on the IPO season. I don’t even know how to characterize it. But what impact is this particular election, as unusual as it is, what impact it’s having on the markets and on IPOs. Also we’ll take a look a bit at the strategics. A lot of speculation up at that level, particularly about Bausch and Lomb and Valeant, and we’ll talk with David and Liav about that, and they’ll offer whatever answers they can provide on those issues. And finally, just talking a bit about the economy in general and the market cycles in general. So hope you enjoy these conversations. We’ll split them up into 2 different conversations with David Nierengarten and Liav Abraham.

TS: All right, David Nierengarten, welcome back to the OIS Podcast.

David Nierengarten: Thanks for having me.

TS: Happy to have you back. We spoke six months or so ago. It was actually just before OIS@AAO to talk about market cycles and where ophthalmology was in the public markets, were in IPOs and financings. And a lot has actually happened since then, obviously, economically. Obviously seen a lot going on on the bus dev front as well between Allergan and Pfizer happening and then not happening. So but first, let’s just kind of center in on IPOs. And we can get into those larger, sort of macro events later on. We had Clearside. We wrote about them earlier this year in the Eye on Innovation. They managed to go public, and the quiet period just experienced this week. I know you don’t cover the company, so you can’t really speak to the specifics of the company and its news, but what did their IPO and its performance say about the IPO market in general for biotechs and for ophthalmology?

DN: Yeah. I think Clearside’s experience, along with several other IPOs that have come out recently have confirmed some of the comments I’ve made before and will make again, is that almost independent of market cycles, companies with clinical data can go data. There will be differences in valuation, of course, with softer markets like we’re experiencing right now seeing clinical stage companies probably come out at a lower valuation than they’re used to previously. But there are still investors who are willing to invest and be a part of that IPO process. We are definitely seeing fewer IPOs recently, not surprisingly, with the markets. And again, I think a majority of the potential IPOs that have fallen off or are not – are maybe postponing their plans are earlier stage and preclinical companies that just are probably retooling and pushing forward to get actual clinical data to support an IPO when they can.

TS: Is an IPO when you go out at half of what you were initially hoping to go out, does that still count as a win? I know in the past, we’ve seen companies go out, particularly on med device side, where they’ve gone out and then just sort of suffered from a lack of coverage or attention, and the IPO, while a positive thing, wasn’t necessarily the cure-all they were hoping in terms of financing. Is going out at a range that Clearside went out, is that still a positive for the company? Or for a company?

DN: I think – yeah, I think usually it is. Or actually I would say almost always it is still a positive for the company. And the main reason is liquidity and the availability of additional options for financing. Investors put a significant premium on having an investment that they can buy or sell or trade, even intra-day. And that attracts a lot more investors into invest in the company and to the IPO. You have other financing options available, from follow-ons to convertible debt to PIPEs and other financing vehicles that are open now to a company that is public, versus a private company that has a really, you know, relatively small universe of venture capital and private investors that both are able and willing to invest. And that’s not only a smaller number of investors, but a smaller pool of capital is available to the company. So net-net, I would say going public from a financial standpoint for the company in terms of being able to continue to raise capital and such in the future is a positive event. Of course, investors may – their returns may vary, as the saying goes, but from the corporate point of view, I think it is important, and it is a net positive for them from a corporation and surviving as a corporation standpoint.

TS: How do you see the pace the IPO filings going forward? We’ve seen several companies, not just in ophthalmology, but in biotech, file. A few went out with, I think, strong results. A lot have sort of sputtered; some didn’t go out at all. Are we on a downward slide? Are we plateauing? Do you see any reason to believe that we’re going to be seeing an uptick in IPO filings and successful IPOs happen, if not over the summer, perhaps in September when things generally reboot again?

DN: Yeah, I think that the IPOs – I think it’s next to impossible to see the record setting years that we saw recently this year, just from a fiscal possibility standpoint. So the real question is what degree do we come back, what degree our future IPOs set up and staged. I would say normally we would see a rebooting in the fall. I think that’s going to be less of a reboot because of the election this year and the uncertainty around that always affects investors’ willingness to invest in their IPO. And I think so therefore, the second half of the year might be a little bit more muted than we’ve seen in past years. I do think that we’ll kind of push things into perhaps a little bit bigger bumper crop in early 17 in terms of IPOs. Again, as the election recedes, you get past the holidays, and we usually see quite a few IPOs file in that January time frame. And I think we’ll see a little bit more because there’ll be some who chose or were unable to go out around the election season.

TS: That’s an interesting point. The elections always introduce some level of uncertainty. But this year, and maybe we say this every election season; I don’t think so. This year would seem to be one where the uncertainty is just off the chart, and then sort of add the whole Brexit news of last week. Are all these local political and geopolitical events, are they really having a larger impact on markets than they have in the past, by your point of view?

DN: Well, I think the – you know, there are real reasons for the biotech slide in the second half of 15 and early 16. And those were both economic and political. You had the noise around drug pricing and you had fears of an imminent recession. The fears of recession kind of receded, and you saw a recovery in the market, the political risk that remained. Now I think you have an additional economic risk, and the political risk is still there and becoming ever closer. I think the political risk to this year’s election is heightened mainly because there are two relatively candidates who haven’t run before, right? I mean this is not a re-election campaign for either party. So that just adds to the uncertainty that we didn’t really see as much of, I would say, in 2012, for example.

TS: No, it definitely are interesting times. Economically, though, how are we looking? Last time we talked, we talked about the yield curve and its ability to be an indicator of what might come. How’s it looking? Have you been checking up on that lately?

DN: Yeah. It’s flattened dramatically over the past 6 to 8 months, which is a warning sign. The long term yields have dropped quite a bit, short term picked up a bit with the Fed raising short term rates. Contributing to that narrowing of a spread hasn’t inverted yet, which has presaged every recession in living memory. But again, with the artificially low short term rates, I think a narrowing could be almost as good as an inversion this time around. I don’t think we’re quite in that danger zone because you do have the experience of Japan over the past 20 years having zero to negative interest rates, and they would slide into recession over the past 20 years when the spread dropped to, say, above .4. And I believe in the US we’re hovering around .8. So the spread is still positive and in our favor for the time being, but it’s definitely worrisome, and it’s something that bears continued watching, certainly, and again, just stepping back for a second, I think no matter how you look at it, we’re definitely in the late endings of an economic expansion. It’s long by any measure, any historical measure, and but I don’t believe any politician or economist who says we’ve refueled the business cycle and we’ll have a recession at some point, probably – I don’t want to say sooner like in the next 12 months, but it’s definitely a possibility in the next year or two or three, versus the beginning of an expansion where you have at least 5 years of time horizon for the next recession most likely.

TS: And that outcome is independent of any political outcomes? I mean I’m not asking for an endorsement of one candidate or the other, but does the winner in November, do they change the length of – change your projections at all?

DN: You know, no. I think the president and government policy certainly have an effect, but it’s usually a matter of degree and not entirely of direction. So it could accelerate or decelerate it by a little bit. But we’ll have a recession; it’s just a matter of when, not if. And maybe it would sooner with one and a little bit later with the other, but it’ll happen.

TS: I don’t know why that made me laugh. But I guess it’s certainly something that we’ll be following up on. Just zooming in back to ophthalmology, it’s been an interesting 6 months. At the top of this talk, I talked about the Pfizer Allergan happening, then not happening. We’ve seen Valeant going through its issues and discussions as to whether or not Bausch and Lomb will be spun out of that or acquired by somebody else. What’s your take on these 2 larger companies and the state of ophthalmology in general in terms of the strategic players in here? Is it taking Pfizer first or Allergan first, is the outcome of that non-deal, has it been generally, do you think, a positive for ophthalmology to have a company like Allergan remain independent and to have its focus be so heavy on ophthalmology?

DN: Yeah, it’s definitely a positive. You have an obvious candidate to buy smaller biotech companies. And I think underappreciated is when you have a smaller or midsized players like Allergan, they can make smaller acquisitions, necessarily of earlier stage or smaller cap biotech companies, and have that work for them, whereas a Pfizer, they can buy a 100 million biotech company, obviously, tomorrow, but it’s not going to move the needle for them. So there’s a bit less of a motivation for them to acquire the small to midcap biotech companies that are really the vast majority of the universe. So I think having more midcap or mid-sized pharma companies like that are good for the potential for smaller biotech companies getting acquired. There’s just more of them; there’s more opportunities to be acquired.

TS: And Valeant and Bausch and Lomb. Is removing Bausch and Lomb from Valeant, would that be a positive for ophthalmology? Or is it too soon to say?

DN: Yeah, I think that’d be a huge positive. I’ve joked with investors before that if Valeant were to be go bankrupt tomorrow, or broken up tomorrow, that would be a net positive for the industry. Quite honestly, I think the negative publicity and everything also with Valeant has definitely weighed on biotech in general, and it’s unfortunate. And perhaps the sooner that issue goes away, the better, again, for smaller cap companies and biotech in general.

TS: All right. Well, interesting thoughts. And appreciate the opportunity to catch up with you and to hear your outlook, as concerning as it may be. It’s something that obviously impacts all of us. So thanks for taking a few minutes today.

DN: Sure, no problem. Have a good one.

TS: OK, well, that’s our interview with David Nierengarten. Hope you enjoyed that one. In this break, I just want to remind you coming up on OIS@ASRS. Just go to OIS.net. we’re beginning to put the agenda up there. We’ll be announcing speakers and other details up on the OIS.net website. We’ll have some content coming out in the coming weeks about the conference, so keep an eye out for that. And we hope to see you on August eighth in San Francisco. Now we’ll talk to Liav Abraham. We’ve talked to Liav before, specifically about – well, about a lot of things, but we’ve her about Allergan in the past. This time we’ll talk a bit about the IPO market, what she sees, why she’s hopeful that things might improve, and also we’ll discuss what Allergan has done since its deal with Pfizer did not happen. So I hope you enjoy this conversation with Liav Abraham of Citi.

TS: Hi, Liav Abraham, welcome back to the Podcast.

Liav Abraham: Thanks, Tom. Great to be with you.

TS: Always a pleasure to talk to you. Just wanted to touch base on a few things as we’re looking at the ophthalmology market. I know you don’t cover Clearside, but it was able to go public, albeit at a reduced price than it was initially seeing. But more broadly, zooming out, what is your assessment of the opportunities for IPOs in ophthalmology, but I suppose you have to cover biotech in general because it’s hard to just focus on the single sector?

Liav Abraham: Sure. Well, at the moment, the IPO environment is tough, and that’s not just ophthalmology related. It’s not only biotech related. It’s generally speaking, the market for primary financing is tough. But I would say, taking a bit of a longer term view, innovation is always a good thing, and there’s always an appetite over time for innovations. So what we are seeing in ophthalmology, broadly speaking, as innovation continues to be robust is there’s a lot going on, both in terms of public companies and in terms of private companies. And the market is cyclical, and as long as there are good ideas out there, there’s the financing. But public and private will be there in the time.

TS: Do you have a sense – I think election years always introduce some – infuse some uncertainty into the markets. This is a particularly interesting election season.

Liav Abraham: Yeah.

TS: Will it have any greater impact on the markets? Will it make it less likely that the window might open again up in September? Or is it just white noise in the background as far as investors go?

Liav Abraham: It’s a great question. I think to a certain extent; it will be determined by the outcome of the election. The election, generally speaking, I think will be some kind of clearing event, but based on the outcome of the election, we’ll know what the policies of the new president and the new administration will be. I don’t see it having that much of an effect on, let’s say, on IPOs, generally on innovation in ophthalmology. It will have some impact on the hot topic that has been in the public domain of late, and that is on drug pricing. But I think that’s a separate topic.

TS: And just finally, looking at the larger strategics, we’ve talked a few times about Allergan when it was going to be part of Pfizer, then when it wasn’t. What has happened with Allergan since, and do you see any significant changes happening at the strategic level? I know you don’t cover Bausch and Lomb, but there’s news as to whether or not it’s going to remain part of Valeant. What do you see Allergan doing going forward, and more broadly, do you see any other changes in the strategic landscape in ophthalmology?

Liav Abraham: Well, the good news is that it’s really back to business for Allergan, and went back to business very quickly. The sales growth of the company remain strong, including in its key ophthalmology franchises, particularly Restasis. And it’s made strides in its pipeline and in its ophthalmology pipeline as well since the Pfizer deal broke. So we’ve seen Oculeve being submitted for approval, the glaucoma stent XEN45 submitted for approval. We’re expecting approval of the Restasis multi-dose formulation in the second half of the year, and enrollment for DARPin continues to progress well, and the continues to pursue the business development opportunities which will focus, among others, on ophthalmology, which is one of its core therapeutic areas. So the company is making – is continuing on its path of strong growth and focusing on its core therapeutic areas, including ophthalmology. Generally speaking, in the market there is fragmentation. There is room for consolidation, and Allergan, given its strong balance sheet, given that it will be receiving a bundle of cash from Teva over the very near term will be well positioned to be a consolidator in the market. And I think that’s a good thing for the company.

TS: Is there any indication that B&L could be part of those plans?

Liav Abraham: I think I’ll stay away from answering that question given I just can’t. I don’t cover Valeant.

TS: I have to try. Well, great.

Liav Abraham: No, you have to try. And I’d love to answer it, but stick within the rules.

TS: Well, we’ll have to wait and see and hopefully have you back when that deal does or doesn’t happen. Thanks for the time, Liav.

Liav Abraham: OK, thanks very much, Tom.

TS: Thanks again, David Nierengarten and Liav Abraham. It’s always a pleasure to have you both on the Podcast and have you share your thoughts of the public markets. And thanks, of course, to our listeners, you all, for joining us on the OIS Podcast. Tune in next week. We’ll get back to some tales of innovation. Got a great interview lined up with one of our new co-chairs for OIS@ASRS. So I’ll save the details for next week, but I hope you join us for that one. And you of course should join us at OIS@ASRS. It’s on August eighth. Just go to OIS.net, register for the upcoming OIS@ASRS, and we will see you in San Francisco.