A recent nature biotechnology article by Bruce Booth looks at why the recent IPO window has been so underperforming with on average investors losing money on these investment. The author highlights this poor performance due to: difficult pricing of he IPO relative to other windows, poor post market performance and the scant liquidity of trading volume of stocks. Of particular interest to me was the discussion around the effect this market crash is having on the type of businesses that will emerge from it.
This was based around two aspects:
More bets on innovation: Organisations will seek fundamental shifts in technology as opposed to only incremental. This obviously involves higher risk and businesses must have processes in place that allow them to evaluate projects regularly, killing them early if required.
Leaner business models: Without IPOs, the only realistic exit for shareholders is through M&A. Luckily there are a few new acquirers entering the market ( as opposed to your traditional big pharma) not to mention the freeing-up and recycling of a lot of capital due to recent big purchases [ Genentech, Imclone, Wyeth etc].
Because of this, the author suggests that emerging biotechs need to establish early stage partnerships or links with these potential acquirers to get them in the game early. This is aided by such movements as pharmaceutical companies starting up their own venture funds (e.g. Merck Serono Ventures). These partners not only provide a influx of cash but the agreements can also set your business up for purchase through buy out clauses.
Also start-ups need to build themselves towards this as opposed to creating a company that is ideal for an IPO. For platform companies this means focusing on specific vertical applications (as opposed to horizontal) enabling them to become an easily acquired functional unit for a larger company. For product based companies this means concentrating capital around a single program with multiple ‘shots on target’ matched with clear milestones and decision points. Having small teams complemented with outsourcing to contracted partners and allowing senior management roles to be filled by investors. e.g. VC firms, also presents an inviting acquisition case.
With the recession declared as over a few moderately successful bio IPOs have taken place.
- Inspire Pharmaceuticals $115 million
- Cumberland Pharmaceuticals $85 million
- Talecris Biotherapeutics wants to do a $1 billion IPO
Graeme @ graemefielder.com