Balance of power shifting to biotech from pharma
This article was originally published in Scrip
With biopharmaceutical companies and their investors enjoying the best initial public offering (IPO) market for more than a decade it is hardly surprising that venture capital firms, with a track record for achieving exits, are able to go back to the markets and raise new capital. However, while it makes sense to make hay while the sun is shining, a quick glance at the industry's history will remind us that public market enthusiasm for biotech is not an enduring phenomenon.
The latest firm to announce a successful fundraising is Edmond de Rothschild Investment Partners which closed its life sciences focused BioDiscovery4 fund at $250m. In the past 12 months, venture capitalists have raised funds worth more than $3.2bn earmarked for life science investments. Institutional investors are being attracted back into the space by the uptick in IPO activity with 48 firms raising more than $3.2bn. In 2011 and 2012, life science companies were able to raise just over $1bn a year in IPOs.
While historically EdRIP has achieved 10 exits and partial exits through IPOs, it has been the track record of trade sales at the venture capitalist, and others, that has been the magnet for additional new funds. And yet, this year's robust IPO market appears to be having a drag effect on major merger and acquisition activity in the biotech world.
There is little incentive for investors and biotech management teams to sell their businesses when they can get better returns by going public. Interestingly, there is no evidence to suggest that this is causing deal sizes to increase – indeed the number of deals worth more than $50m is in the mid-teens this year compared with the mid-20s in 2012. About a third of 2013's IPO class has a market cap of more than $500m.
More importantly, with VCs being able to reload, it is likely that many biotechs are going to be able to raise additional funds to build their businesses rather than sell off their assets earlier than they might like. This is good news for all biotech stakeholders but could be a major problem for pharma companies in desperate need of replenishing dwindling pipelines.