Rx Market Caps–the Flip Side: From Public-to-Private Investment
This article was originally published in Start Up
Executive Summary
This month, we compared valuations for those biotech companies which had both gone public in '95 or '96 and had, in 1998, completed a round of private financing. As the amounts of private money raised got larger, so too did market cap valuations. One major reason: the larger the valuation, the more investors are willing to invest.
In the dismal market for biotech shares, many companies are opting to raise money with a least-risk-for-best-return solution: private investment. The question remains however, what kind of effect do these investments have on company valuations?
This month, we compared valuations for those biotech companies which had both gone public in '95 or '96 and had, in 1998, completed a round of private financing. The companies whose private investments fell within the low end of the range, $1-10 million in total, lost on average 14% of their market cap value from the time of their IPO. However, as the amounts of private money raised got larger, $11-20 million, $21-30 million, and $31+ million, respectively, so too did market cap valuations. One major reason: the larger the company's valuation, the more investors are willing to invest.
Most notable are those biotech companies whose private round investments fell within the $21-30 million range, and that since their private financing round increased their market cap valuations on average 253%. For example, when British Biotech Target SA, a BB Biotech AG unit, invested $50mm in pain management company Algos Pharmaceutical Corp. , Algos increased its valuation 129% [See Deal].