Venture capital backed biotechology companies have been around for over 30 years. The concept originated in California and has survived many ups and downs. Owing to the nature and the cost of developing products, the model is dependent on a series of funding rounds. At each stage of the funding round there should, ideally, be an increased amount of funding at a higher price per share. This happens if everything goes according to plan, but that, unfortunately, is not always the case - quite regularly, early investors are forced to dilute considerably as new investors demand a lower price for stock.
At times it appears that financial planning and the skill of raising funds can be more important than the skill of developing products. Having observed the industry for over 20 years, one key lesson I have learned is that successful biotech companies always have lots of cash when clinical failure happens, while unsuccessful biotech companies have little or no cash. The abundance of cash that these successful companies have enables them to take a new steer on strategy without having to go back to their investors.
Traditionally, a biotech's series of funding rounds ultimately led to a public listing or initial public offering (IPO). Of course, this meant that companies had to get their timing right as the IPO market can vary greatly, even over short periods of time. Recently, in the US, the majority of companies who listed have ended up within a few months with a share price less than that at the time of listing.
" Traditionally, a biotech's series of funding rounds ultimately led to a public listing or initial public offering (IPO). ... Recently, however, things have changed. The number of biotech companies being acquired by larger pharmaceutical companies, or who have merged with an already listed company, has increased dramatically."
This has been very bad news and has placed great pressure on any new company wishing to take the IPO route to lower its valuation expectations. This situation often leads to discontentment on the part of current investors who are seeking an exit at a price above their original price.
Recently, however, things have changed. The number of biotech companies being acquired by larger pharmaceutical companies, or who have merged with an already listed company, has increased dramatically. These M&A activities mean that shareholders are seeing greater premiums for their stock as larger companies make strategic moves around technologies and therapeutic areas. Such activities should bring a boost to the biotech sector as the capital markets realise that there are gains to be made in investing in biotech.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd