How Long Can the PIPE Success Story Keep Running? - Transcript

Joe Coletti

Welcome the Pathfinders podcast series from RBC Capital Markets where we explore the fast moving world of biotech, and healthcare. I'm your host, Joe Coletti. On today's episode, we'll hear from several members of our biotech investment banking team, including Alex Lim, Tim Chung, and Richard Hsieh.

As we round out the first quarter of the year, we'll be looking at where biotech investors are active and where they're turning to find value in the sector. We'll also deep dive into the types of transactions and trends our experts are seeing come to the table more often. One in particular is PIPEs, private investment and public equities, and what these types of trends may indicate for the sector as a whole.

Tim, Alex, Richard. Welcome. Thanks for being here.

Tim Chung

Great to be here, Joe.

Alex Lim

Thanks, Joe.

Richard Hsieh

Thanks for having us, Joe.

Joe Coletti

So I want to start off, I want to give our listeners a quick chance to just have a little bit of background for each of you. Maybe we'll start with you, Richard. You know, could you basically just tell us, you know, just a little bit about your background and sort of how you’ve come to this?

Richard Hsieh

Thanks, Joe. I'm Richard Hsieh, one of the managing directors with RBC is healthcare investment banking team based in New York and exclusively focused within the biopharma sector, been a career health investment banker, my entire professional career for 20 years now, most of which has been on the RBC platform.

Alex Lim

Yeah, Alex Lim, similar 20 plus years in the business, been based in San Francisco, I run our West Coast biotech efforts. We work with partner companies, helping them raise money, helping them look at M&A. And I’ve been at RBC about two and a half years.

Tim Chung

I’m Tim Chung, the director in the biotechnology group based in New York City, joined RBC about three plus years. I've been doing this for about 11 plus years now.

Joe Coletti

Excellent. So I think you know, with that backdrop, and with the experience that you all have, which is significant. I want to dive right into the deal landscape a little bit. And, Tim, maybe you can help kick us off here. So we're sort of nearing the end of calendar Q1. A lot of talk about the sector recovery for biotech. You know, what are you guys seeing out there in the deal landscape? What kind of trends are you paying most attention to? What are your clients talking to you about most right now?

Tim Chung

Sure. So all the craze has been around PIPEs being done as the modality of choice for raising equity. So in 2024, we've seen 12 PIPEs priced at a premium with proceeds of at least 50 plus million dollars. And so that is actually more than all the deals combined in 2022 and 2023. So clearly, has been a very issue friendly tool that is used by corporations. And so a PIPE is a private investment in public entity. And so what investors get are unregistered shares, and generally get some sort of confidential information that gets released to the public at some future date. Usually it is within a three month period, sometimes it comes out concurrently on the day of pricing transaction, or it can be within 90 days. And so one key difference here is that historically, PIPEs have been used for companies who have had challenges raising capital and oftentimes included sweeteners that would include free warrants. Also, PIPEs were generally used for companies that had data that was challenging to understand and required some time to digest information.

Tim Chung

So the market has now changed, with investors pushing to use these PIPE modalities. One being for them, allowing them to get their full allocation of their shares. And so they are actually pricing these deals at a premium. And generally, most of the deals have performed fairly well. The aftermarket performance on these PIPEs over the past three months have been up 20 plus percent.

Alex Lim

Yeah, and I guess, you know, these are designed to perform well, in the aftermarket, as you can imagine, when you're announcing good data alongside, you know, a financing that well, you know, the funds the business, you know, for the for the long term, you can imagine why the market would be excited about something like that, especially when there's validation from some of these, you know, top tier investors. And so we're seeing that as a way for management teams to get the funding, they need to drive really good performance, from a value perspective, and bring on investors who are going to be committed to the business for the long term, which is, you know, I think a big part of how you navigate these kind of volatile funding environments that we have in biotech.

Richard Hseih

And it seems like everyone seems to be benefiting here, as Alex has already mentioned, are getting their allocations and are getting access to asymmetric information here to help drive returns, companies are getting the funding that they need. I guess the question is, like, who might be, you know, who might be left out here. And I think, you know, some of the drawbacks, though, of the current PIPE environment is that by nature for these PIPE financings is you're only reaching out to a select number of investors in order to finance the company. And as a result, some investors are being excluded as part of this outreach, which I think can be frustrating for some investors, including some of the existing investors that aren't being contacted.

Alex Lim

And also, some investors aren't built to participate in these type of transactions where they can only, purchase registered shares, where, you know, PIPEs, by definition, you're getting unregistered shares, so they won't be able to participate. And some of them include, you know, some of the largest and most important funds in our business

Tim Chung

Hey Alex, you bring up a good point. However, most of these management teams right now are using these PIPE modalities, because it's kind of like bird in hand where, you know, you have a clear slide of what's going to be priced at, and how much cash you're going to add into the balance sheet. So, clearly, there is a benefit for issuers here. And moreover, you know, they are not as exuberant or bullish that the market will actually truly appreciate their data, right? And so their stock is, they don't think their stock will go up as high as it should be, nd so, you know, they're willing to take, you know, up 25%, up 30%, with data in hand with these investors prior to getting the stock properly re-rated in the market.

Joe Coletti

So you started to touch on this a little bit, but I want to ask the sort of broader question and get more pointed on it is, so as all this PIPE activity, you see it as ultimately is a good thing? Is it a bad thing? Is it both? Alex, maybe we'll start with you.

Alex Lim

Yeah, that's a good question. I think, you know, our industry is kind of grappling with that issue. I think there's been a lot of different takes from obviously lots of biased parties here. I would say, I would say definitely it’s both. You know, I think you can't, you can't go have gone through what our industry has gone through over the last couple of years, on the inability to finance really good science and really interesting technologies, and not feel like ‘hey, if there's a vehicle where we can transfer significant amount of capital over to, you know, these biotech companies like let's, let's make sure we do that.’ So, I think that's, that's definitely, you know, positive. I would say, you know, that the concern here is, you know, the amount of information that the investors are getting under confidentiality prior to announcing these transactions and how, you know, as I think kind of Rich and Tim are talking about, you know, only a select number of investor getting that information before, you know, pricing that transaction, you know, I think that folks are concerned about, you know, kind of what that means. And how that how that looks from a, trying to get deals done, and trying to make sure that, you know, all investors are getting an opportunity to participate, especially ones that have been supporting companies, you know, kind of prior to that that piece of data and that PIPE. So that's probably the thing that we're kind of trying to figure out and see how best to support both these types of transactions, and make sure people aren't getting what they feel like are fair, opportunities to invest.

Richard Hsieh

I agree with all of Alex's comments. And I think that at least for the near term, and it's certainly a positive for the biotech sector in the sense of there are companies that are in need of financing, and that the PIPE modality is a form that is attracting investors. And absolutely, I think it's good to see good companies get financed right now, I think ultimately, as market sentiment continues to improve, we'll see a shift back to more regular way marketed deals, or confidentially marketed public offerings, at least in the near term, it's good to see capital flow into the biotech sector.

Tim Chung

And I think we're, you know, obviously discussing context of having data in hand. But I think the one thing that we did not go over are the opportunistic deals that are being done as PIPEs. And so companies who have been, you know, very challenged to raise capital, who waited for the share price to appreciate. So obviously, the market is improving, and share prices are appreciating, and we're seeing companies start to tap the markets and doing smaller PIPEs in order to shore up the balance sheet, diversify the shareholder base, and once data actually hits, and they can potentially release the data in the market and have the stock properly re-rate and do a regular way walk-off [inaudible] offering so huge benefits here across both tallis driven and opportunistic raises.

Alex Lim

And I'll just say one more thing, you know, this comes down to a cost of capital, you know, conversation, right? So, you know, when you do these PIPE transactions, you're capping what the price of the transaction can be, because you're not letting the broader market have to decide what price to transact that, you know, to finance that. And so you're asking investors to, these PIPE investors, to price a deal, when potentially, you know, if you kind of put out the data, and let all the investors see the data, you know, the price of the transaction could trade up, you know, much higher, right? You can imagine, that's how we've been doing deals for most of my career. So you kind of you're foregoing that potential upside. But as Tim said, you know, what we've noticed over the last couple of years is that you put that data out there, and many times just it kind of gets swallowed up and kind of disappears, and nobody cares. And there's not really that kind of strong valuation, uptick and rereading that you're looking for. And then now, where are you? Right, you know, you don't have the money, you don't have the higher stock price to have to finance and you're stuck. For every, for every client, we have, I think we tried to have a very bespoke solution, when it comes to, you know, this type these types of transactions, and where we feel like the support of a strong investor syndicate, in a PIPE transaction, would really help the company to maximize their opportunity to finance at a price that really makes sense. You know, we will go to this tool. At the same time, if we feel like there's an opportunity for data to really push a company's valuation to a different level. Before financing, I think we would, you know, try to advise a company to go down that road. So, you know, it's not it's not a tool that works for everybody. But I think it's something that we're, we're glad is in the market today.

Joe Coletti

I got a question about the investors that are backing the PIPE, is it? Is it primarily VCs? Is a hedge funds? Is it a mix? Like what are you guys sort of seeing out in the market?

Richard Hseih

Yeah, I think we've seen a mixture of various investors jumping in, it's actually interesting, I think, because of the nature of the PIPE. And the longer term hold period, we're seeing more venture firms now start to participate in in some of these offerings, because it's more akin to their investment horizon where you know, they're comfortable holding for longer periods of time, though, during a PIPE process, you'll have a longer period to be able to do diligence. And so some venture investors are able to take advantage of that. So we're seeing largely a mix of, of venture fund healthcare, dedicated hedge funds, and fundamental investors.

Tim Chung

And register your point, over the past two, three years, we've seen a lot of funds, dedicated to invest in these in these in these PIPE modalities. So we'll probably see that trend continue in the near term.

Joe Coletti

One other question I have is how much of this PIPE activity are you seeing tied to other things like mergers for example?

Richard Hsieh

I think that we're seeing PIPE activity largely right now on sort of standalone financings, I think that's still kind of like constitutes the majority of the PIPE financing right now within biotech. But there is certainly a PIPE component that's also happening amongst this these merger situations, particularly around the typical biotech reverse merger, where there's a public shell that's merging into a private entity, and the private entity then becomes the succeeding sort of pro forma company at the end. And as part of those mergers, there will be a concurrent PIPE financing to fund the proforma company going forward. Then also, there's the PIPE component that's also associated with special purpose acquisition companies, and what a typical SPAC. I think we've seen SPAC activity decreased a little bit within biotech in the last few months, but certainly within the reverse merger context, you're seeing PIPE financings happening - it's still become a very popular form of financings.

Joe Coletti

We've talked about, obviously, with PIPEs in the headlines and a lot of activity here. We expect at some point, this trend, will people probably shift away from this trend as the market changes? Is it really just a question of, you know, IPO markets opening up, and it becoming generally more active in terms of the ability to raise capital?

Alex Lim

Yeah, I think the hope is, and I'm not going to speak for every investor, but I'd imagine that even investors would want you know, a much more kind of free flowing environment where transactions are getting done without having to have, you know, a lot of this kind of the mechanism in place, you know, because it's obviously it takes a lot of work. It's something that, you know, you're restricted, you know, obviously from, from trading, you know, the stock and getting registered shares for, you know, a period of time. So, you know, I'm sure that that that's the case. And, and I would say from a company perspective, I think it would be important for the companies to feel like that they don't need to, you know, kind of come with a PIPE transaction to get a deal done, but they would have the flexibility of being able to share data, get the maximum amount of attention and rerating and, and increased valuation from what they present. And then and then decide if doing a transaction is what they want to do. And, and so yes, I think that a healthier market would move towards a doing kind of more regular way transactions,

Tim Chung

You never got a business for dilution, right. And so if you have investors lined up and line to slide and on your cash proceeds, you have to take a hard look, and you know, think about what's going on with the macro factors. And so, you know, you can't delay clinical trials, you're gonna constantly raise capital. And, you know, the market can easily turn on a dime in the next day, so it's prudent to take capital when it is there.