A prescription for Australian healthcare companies looking to crack the US market
For ambitious Australian healthcare companies, the US represents the deepest and most lucrative capital pool, dwarfing the domestic market: the combined market cap of Australia’s top 100 listed healthcare firms equals just 35 percent of the capitalization of the US’ largest listed pharmaceutical company Johnson & Johnson.
While many Australian healthcare companies are recognized for their innovative science, many stumble on approach to North America. Common pitfalls include not conducting enough due diligence to assess the US scene with informal meetings, failing to adapt a pitch to more sophisticated investors, and a value proposition that is insufficiently differentiated. That’s the message from healthcare bankers and investors on the ground in New York, where healthcare companies from around the globe make their rounds through the year to pitch for capital.
Chicken-and-egg dilemma
From the North American perspective, Australia faces a chicken-and-egg dilemma. In the absence of big-name healthcare or venture fund investors domestically, Australian healthcare companies often use the local equity market as a proxy venture fund to raise capital for product or drug development. This can result in a capital structure perceived as weak on the more sophisticated US scene.
Savvy healthcare companies lay the groundwork for entry to the US market early in their development, enabling the flexibility to shift strategic focus or move quickly when capital-raising conditions are favorable. Ross Barrow, chief executive of Paranta Biosciences, says a recent visit to the US highlighted differences between markets.
‘In the US, we met a cross-section of sophisticated institutional investors and large pharmaceutical companies with deep knowledge of therapeutic markets and scientific expertise,’ he says. ‘The therapeutics program that attracted the most interest [there] differed from the program that generated interest with our Australian shareholders.’ This prompted Paranta to review its strategy and messaging to improve resonance with potential US investors.
Brian Hagerty, head of healthcare capital markets and senior director at the NYSE, echoes the importance of informal meetings. ‘If you are international, being able to dedicate time [to assessing the US scene] is very important, and most companies don’t,’ he says. ‘There is no silver bullet: engage sector-focused IR firms in the US, attend conferences. Ultimately, bringing on shareholders that have a deep understanding of the sector and what you do as a company helps a lot with biotechs.’
Act like a US company
The parochialism of US investors can be somewhat countered by acting like a US company: voluntarily follow US regulations where applicable, consider having a team on the ground here, and partner with strategic investors. Having a clear regulatory strategy to engage with the US Food and Drug Administration is crucial for commercial success, and partnering with US institutions for clinical studies can help with credibility.
Alex Ibrahim, head of international capital markets at the NYSE, says companies may be put off by the mistaken perception of onerous regulation. Yet firms with less than $1 bn in revenue filing with the SEC as emerging growth companies can have five years to present SOX section 4O4 (internal control over financial reporting).
One globally focused US-based healthcare banker compares Australia’s strong R&D and scientific community to Israel, but notes both countries tend to fall short on sales and marketing. ‘There are many examples of bad products in the US that have been able to grow, because they had a sophisticated sales force,’ he says.
Still, Barrow notes that good science and data are recognized in North America, and often a prerequisite for opening the door to engagement.
Take a multi-track approach
As ever, the fundamentals of capital raising apply. Keep your options open through a multi-track approach including pre-IPO rounds, reverse mergers, joint ventures, strategic partnerships, licensing deals and even the trickier route of private placements. Capital market players suggest a pre-IPO or crossover round in the US before listing is prudent for foreign companies, with the expectation that an anchor investor will invest significantly to basically underwrite the float. Critically, an IPO should never be approached as a sorely needed liquidity event – a dynamic that will turn off potential shareholders – but rather as creating an investable opportunity for new stakeholders.
Flexibility is key: capital-raising conditions have changed markedly from two to three years ago, with US investors and venture capitalists shifting away from early-stage companies to place greater importance on those with significant patient data. As investor risk appetite wanes, the timeframe for IPOs has also lengthened.
‘There is no shortcut to raising capital in the US and what resonates with Australian investors will not necessarily resonate with US institutional investors,’ Barrow says. ‘A key learning for Paranta was to prepare to move quickly when capital-raising conditions become more favorable. A company may consider itself unique and special in Australia, but the reality is that there are thousands of biotech companies in the US competing for capital.’
Jane Searle is a director at MBS Value Partners in New York
