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Biopharma VC Exits 2005-2007: Cheap IPOs, Expensive Acquisitions

This article was originally published in Start Up

Executive Summary

Over the past three years, acquisitions have outperformed IPOs in terms of step-ups and total value. Here we take a look at the average valuations each year for the two exit categories. The figures suggest that although IPO is the logical exit, in most cases investors will advocate exploring M&A almost all of the time as well.

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In the Midst Of A Shakeout, Biotech VCs Must Embrace New Partners, New Math

With funds and firms closing, a new reality awaits those who survive until the next economic upswing. Some of the elements are already in place, such as VCs' willingness to take capped returns and exits via risk-sharing contingency-based acquisitions. The emphasis on capital efficiency may change the types of companies VCs can afford to back, and corporate funds are now a vital part of biotech venture, especially in the early stages.

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.

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