Intersouth Partners’ Garheng Kong talks about biotech investment trends in a two-part wide-ranging interview.
By Allan Maurer
DURHAM, NC—Going public is not the primary exit goal for young drug development companies the way it once was, says Garheng Kong of Intersouth Partners. Kong, who specializes in biotech at the Durham-based venture capital firm, tells TechJournal South that’s one of the trends he sees now.
Kong says mergers and acquisitions are frequently the best exit for fledgling biotech companies these days.
In the past, young drug development companies often followed a somewhat predictable path. If they had a promising treatment or technology with a potentially profitable market, they would license it to a large pharmaceutical company and eventually launch an initial public offering of stock.
The mindset of large pharmaceutical companies has changed, says Kong. “They have acquisition very much on their minds,” he says. Now, he notes, the first question large pharmaceutical companies ask about a young firm with assets they like is not “should we partner,” but “should we buy it?”
That can be a good result for investors, says Kong. An acquiring company may place a premium of from $10s of millions to $100s of millions more on a target company than its public market value. “That makes being acquired an attractive proposition.”
The additional value a large pharmaceutical company may place on the acquired firm is not surprising, Kong explains. “They see what they can do with its assets, whereas the financial sector sees less. There’s less synergy.”
Outside investors increasing
Kong says investing in biotech has been “pretty steady,” pointing out that “various funds have raised significant amounts of capital in the last year and a half, ourselves included.”
Intersouth raised its 7th fund in June. “As those both inside and outside the region raise successive funds, there is more capital available.” Kong notes that a number of outside funds from New York, Boston and elsewhere are starting to look at investments in the region as part of their strategy.
That means more deals are “not just a Southeast consortium,” Kong says.
“They’re pushing because they have more capital,” he says. “It’s not a quantum sort of thing. It’s been very gradual over time. But if you want to be Darwinian about it, there are more good opportunities here relative to those they see with all the other investors in their backyard. It may be easier to find good deals in this region because there are not 200 other investors looking at them.”
While that may mean Intersouth and other Southeast-based funds may have outside competition for good deals from time to time, overall, Kong says, “We see that as good for the region. The more capital that flows into the region the better off we’re all going to be.”
Medical devices still attractive
So what areas are attractive to biotech and drug development investors now?
“Medical devices are doing well in raising capital over the last five or six years. They’re capital efficient. Most are usually acquired in a shortened timeframe that’s attractive to investors, so they continue to garner quite a bit of attention.”
One unusual area also gaining attention, says Kong, is in non-reimbursed therapies for obesity or appearance where the company does not depend upon having health insurance pay for the procedure. “They’re attractive because you don’t have to go through that cycle of dealing with payers. Once you’re on the market, you get paid,” he says.
Kong sees other areas gaining ground as well, such as targeted therapies and “high end” diagnostics. Read about them in part two of TechJournal South’s interview with Kong tomorrow.
www.intersouth.com
TechJournal South editor Allan Maurer can be reached at allan@techjournalsouth.com
Southeast Venture Conference, February 29 – March 1, 2012 at the Ritz Carlton in Tysons Corner, VA – Where Smart Money Meets Smart People.
www.seventure.org
© 2007, TechJournal South. All rights reserved.
