The tenor of public discourse in the United States has become rancorous and that’s likely to ratchet up in 2020.  Uncertainty about the outcome of the election may cause market volatility and a risk-off mindset among investors, which would be a negative for the life sciences sector.”

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Annette Grimaldi

MANAGING DIRECTOR, LIFE SCIENCES INVESTMENT BANKING, BMO CAPITAL MARKETS

February 25, 2019

BMO Capital Markets operates out of 16 offices in North America and 29 worldwide, offering services across several sectors. Where does the life sciences sector sit within BMO’s offering?

BMO Capital Markets is the investment banking arm of BMO Financial Group. BMO Capital Markets has a number of industry specializations, but the healthcare group has been one of our rapidly growing industry sectors since a group of us joined BMO about 10 years ago. We grew from a team of five people at the end of 2008 to about 30 professionals across various areas of healthcare in 2019. We have been gratified to see our franchise grow in prominence in the sector – in 2018 we were the number six bookrunner of life sciences IPOs – based on deep and long-standing relationships with our clients.

We have driven our growth by bringing the resources of a bulge bracket bank to service offerings for growing and development-stage companies. We offer full services for public and private companies and their investors: IPOs, follow-on offerings, convertible and other types of debt financings and strategic advisory. We also lend to life sciences companies.

To what extent is BMO Capital Markets’ services offering directed towards small to mid-sized biotechs, as opposed to large biotechs and large pharma?

Our client base spans the spectrum from small and mid-cap to larger biotech and pharma companies.  By sheer numbers and distribution, there are more small and mid-sized companies in the life science space, but we work with larger companies as well. We have the product capabilities and geographic reach to grow with our clients.

Despite great expectations for M&A in 2018, activity was relatively slow. What were the causal factors behind this lower-than-expected activity?

Many assume that strength in the capital markets and new issue market is inversely correlated with M&A activity. But in fact, they tend to move in tandem. When capital markets are receptive to life sciences companies, like they were until the final quarter of 2018, companies that might otherwise be acquisition targets of big pharma had access to the capital needed to pursue standalone business models. Despite the downdraft that we saw at the end of 2018, this capital continues to be available.

Equally, life sciences companies tend to be bought rather than sold by pharma companies, meaning that pharma companies pursue acquisitions not merely because a company is for sale, but to plug a gap in their pipeline or arsenal of capabilities. That’s when acquiring companies are proactive in reaching out to prospects. In 2018, we didn’t see much of this, but 2019 started out with a flurry of activity. The Bristol-Myers Squibb and Celgene transaction caught everybody’s attention, and there was also a nice takeout of Loxo Oncology by Eli Lilly. Celgene is a widely-held stock and that acquisition will return a lot of capital to the market that can be redeployed in life sciences, which could be highly impactful for the market.

With larger companies being less aggressive in their inorganic growth strategies, is partnership always the more favorable alternative?

Given the choice between an outright acquisition and a partnering transaction, pharma companies will almost always prefer a partnering transaction. For a development-stage company, by definition, not all of the data cards have been turned over, so there is risk associated with clinical trial results and, ultimately, drug approvability. Experienced people can disagree on the magnitude of the opportunity and the likelihood of success. Collaborations are a way to de-risk the investment without the full commitment that would come with an acquisition. It may not be the best option for the smaller company, but it is definitely preferable for the larger company.

Although there has been a strong track record of IPOs over the last few years, how great is the impact of the government shutdown likely to be?

It has been an extraordinary couple of years for life sciences IPOs, with an unprecedented rate of company creation. Since 2013, the number of publicly-traded biotech companies has more than doubled. I’ve been impressed that the capital markets have been able to absorb and fund this level of company creation.

The partial government shutdown has slowed the pace of life sciences IPOs in early 2019.  Companies that were on file with the SEC, and would have otherwise launched their IPOs in January, were frozen for a period of time, left conferring with lawyers and bankers on various strategies.  We’ve since had a reprieve, with the federal government reopening for three weeks while border security and other negotiations continue and, in that window, a number of life sciences IPOs have been able to launch.  But the number of deals is definitely less than it would have otherwise been.

The shutdown has also impacted public M&A transactions, which need to be reviewed by the SEC and the FTC. Similarly, the backlog is growing and the agencies cannot respond at the pace to which companies have become accustomed.

The increasing scrutiny of CFIUS on foreign investments has placed a question mark over future deal flow, particularly when it comes to China. What is your expectation for investment from China into the U.S. life sciences industry in 2019?

Venture capital investment from China has greatly increased, both in terms of the number of deals and capital deployed. We continue to see strong interest from Chinese investors, particularly in private life sciences companies. Since many of these private companies ultimately go public, these investors then hold ownership stakes in U.S. public companies. So far we haven’t seen interventions from CFIUS prohibiting these investments, but we’re monitoring the situation.

Going forward into 2019, how would you advise life sciences companies as they consider their investment decisions?

We are cautiously optimistic about 2019. Investor interest is more muted than it was in the first nine months of 2018, but is still generally favorable. For a company thinking about going public or selling itself, 2019 may be a better option than 2020. The reason I say this is because 2020 will be a presidential election year. The tenor of public discourse in the United States has become rancorous and that’s likely to ratchet up in 2020.  Uncertainty about the outcome of the election may cause market volatility and a risk-off mindset among investors, which would be a negative for the life sciences sector.

What are the primary objectives for BMO Capital Markets over the next 12 months?

Our aim is to continue along our current trajectory – to position ourselves as a leading and trusted investment bank to life sciences companies. Our way of doing business is relationship-oriented. We look for opportunities to partner with companies and work with them on multiple transactions as they advance their business plans and do great things for human health.

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