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The Price is Wrong: Finding Alternatives to Traditional IPOs

This article was originally published in Start Up

Executive Summary

Biotech IPO pricing is fraught with more uncertainty than ever before, say some private investors and executives. It's worth seriously considering the alternatives. Start-Up takes a look at what is wrong with IPO pricing and how alternatives such as reverse mergers, M&A, or Dutch auction IPOs can improve biotech valuations.

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Biotech Backers Are Learning to Live with Exit-by-Earn-out

Despite a few bright spots, the fundraising environment remains difficult for many venture investors. Biotechs that went public during the 2005-2007 window have largely underperformed, despite hitting the stock exchanges with what plenty of CEOs and VCs felt were artificially low prices negotiated by an oligarchy of biotech IPO buyers. Moreover, pharmaceutical companies have been buying fewer, not more, biotechs - even as more companies are seemingly created with acquisition, not IPO, in mind. Meanwhile, the M&A deals that do occur are increasingly risk-sharing affairs that resemble alliances, replete with earn-out payments triggered by development, regulatory, or commercial milestones. In short: good venture exits have been extremely hard to come by. And data from Elsevier's Strategic Transactions analyzed by START-UP suggest that although these risk-sharing deal structures may be a by-product of a miserable economy, they are likely to stick around regardless of any economic turnaround.

Biotech Backers Are Learning to Live with Exit-by-Earn-out

Despite a few bright spots, the fundraising environment remains difficult for many venture investors. Biotechs that went public during the 2005-2007 window have largely underperformed, despite hitting the stock exchanges with what plenty of CEOs and VCs felt were artificially low prices negotiated by an oligarchy of biotech IPO buyers. Moreover, pharmaceutical companies have been buying fewer, not more, biotechs - even as more companies are seemingly created with acquisition, not IPO, in mind. Meanwhile, the M&A deals that do occur are increasingly risk-sharing affairs that resemble alliances, replete with earn-out payments triggered by development, regulatory, or commercial milestones. In short: good venture exits have been extremely hard to come by. And data from Elsevier's Strategic Transactions analyzed by START-UP suggest that although these risk-sharing deal structures may be a by-product of a miserable economy, they are likely to stick around regardless of any economic turnaround.

Best of the Blog, START-UP, September 2009

Some of our favorite blog posts about topics not covered elsewhere in this issue of Start-Up. (See the original postings for free at http://invivoblog.blogspot.com/).

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