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.
Although 2007 saw the so-called IPO window open up a bit for biotechs eager to test their mettle on the public markets, over the past three years, public financings have been relatively weak exit opportunities for venture capitalists. (See "Is It Getting Breezy in Here? Biotech IPO Climate Improving," START-UP, September 2007 (Also see "Is it Getting Breezy In Here? Biotech IPO Climate Improving" - Scrip, 1 Sep, 2007.).) Acquisitions continue to outperform IPOs in terms of step-ups and total value, and in 2007 it became evident that basically any company wading into a road show with potential public backers was probably playing the M&A side of the fence as well. (See "Reviewing 2007 to Forecast 2008," IN VIVO, January 2008 .) In 2007 we saw Adnexus Therapeutics Inc. (a division of Bristol-Myers Squibb Co.), NovaCardia Inc. (a division of Merck & Co. Inc.), and Reliant Pharmaceuticals Inc. (a division of GlaxoSmith Kline PLC) each file to go public and each, seemingly at the last moment, pull their IPOs in favor of an acquisition offer. [See Deal][See Deal][See Deal]
It isn’t hard to see why. Not only did M&A out-value IPO on an average basis (see Exhibit 1), but the average VC money raised by those companies that were acquired was actually less than the average money raised by companies that decided to go public. Our figures and chart do not even include Pfizer Inc.’s December acquisition of CovX Research LLC. [See Deal] Details of that transaction remain undisclosed, but Windhover estimates that Pfizer spent roughly $600 million—which would add to M&A valuations’ superiority.
Of course there were exceptions: Addex Therapeutics and Ablynx NV, for example, raised spectacular IPOs last year. [See Deal][See Deal] Taking an independent view of the IPO market, things don’t look so bad. Average receipts from public financings are up from last year, continuing a rising trend since 2005. The average pre-money valuations of newly public companies also continued a recent rise, though this figure remains below the average of the past nine years. And most important, step-ups, the multiple of private money raised pre-IPO to the company’s pre-money IPO valuation, reversed a downward trend that had lasted since the turn of the century.
But given pharmaceutical appetites and the acquisition-versus-IPO valuation gap, why should VCs pursue an IPO at all? With pharmaceutical acquirers enjoying a lower cost of capital and willing to pay a strategic premium to acquire biotechs, and the fact that building companies for IPO exits is generally more expensive and time consuming, why bother? Twin-tracking has prevailed simply because investors need to gather as much information as possible concerning company valuations—finding out what the public markets will bear is one aspect of this data collection. Perhaps just as important, obviously M&A plans don’t always turn out the way management and investors expect.
Of course IPO is sometimes the logical route, even if the refrain "IPO isn’t an exit, it’s a financing event," remains true. Larger VC funds are one result of this climate—not to back more investments but to supply more investment per company as necessary. The same M&A versus IPO conditions are also helping to foster innovative VC investment strategies, such as the one-two punch phenomenon: acquisition, spinout, acquisition. (See "The A-List: 2007’s Trend Shaping Series A Financings," this issue (Also see "The A-List: 2007's Trend Shaping Series A Financings" - Scrip, 1 Jan, 2008.).)
