Tortoise & Hare Revisited: “Time To IPO” For VC-Backed Startups

Posted in Exits IPOs M&As, VC-backed Biotech Returns | Leave a comment

Getting a drug from discovery to market requires more than a dozen years, so you just can’t do biotech in a 10-year venture fund – it just takes too long, right?  Fortunately, wrong.  The data just don’t support this premise, although this common misperception of biotech continue to be promulgated by industry pundits, and I hear them within the institutional investing community in particular.

I’ve written in past blogs on holding periods in VC-backed biotech, often charting data for different vintages for the sector’s time from founding to exit, for instance.  In the summer of 2011 (here), IPOs in the decade of the 2000s were explored showing no difference from other sectors. In spring 2013, largely before the current IPO window, looking at both IPOs and M&As (here), the 2009-1Q2013 dataset revealed that VC-backed biopharmaceutical companies experienced M&A and IPO events at a younger age than technology companies in that vintage.  The bias was especially true for M&A events valued at greater than $100M.

Since the public markets have changed dramatically over the past two years, I thought it worthwhile to re-examine the latest data on the venture-backed IPO Class of 2014.

According to Thomson Reuters data shared by the National Venture Capital Association (NVCA), there were 114 venture-backed IPOs in 2014. Pie chart of IPOsThis doesn’t include IPOs that didn’t have US-based venture capital investors involved or were on foreign exchanges. The majority of these venture-backed IPOs were in the Biotech sector (56%), as per the pie chart here.

These ThomsonOne data also track the initial investment date for these companies, enabling one to examine the “time from first investment to IPO” for the dataset. The two charts below depict both a summary distribution (with terminal deciles, quartiles, and median data) as well as a cumulative distribution (with each company datapoint for Software and Biotech).

Time From VC-Investment to IPO_Feb2015

As the charts above reveal, Biotech’s median time to IPO was essentially identical to Software and other VC subsectors. However, the faster end of the data’s distribution is strongly skewed towards Biotech: 33% of Biotech’s 2014 IPOs occurred within five years or less of their initial investment date versus only 20% of the offerings in software and other VC subsectors. Some of these have been incredibly fast, like Juno Therapeutics, Loxo Oncology, and Atara all going public less than two years from their initial venture investment.  This skew in the distribution explains why Biotech as a sector has a ~10% faster arithmetic mean (average) time to IPO than Software: 7.4 years versus 8.0 years, respectively.

There are many reasons for this faster path to IPO in biotech, and the topic was explored in detail in an earlier post (here).  Simply put, in biotech we are largely taking exciting R&D-stage companies with enormous promise and financing them in the public markets to develop their drug candidates further, whereas in software, the buyside typically requires $100M+ revenue run rates with double-digit growth multiples and often profitability in order to get public.  These are very different types of businesses, and the latter often takes many years to build.

So in the more recent vintage of IPOs the conclusion still hold: Biotech is certainly not the tortoise of venture capital.  The time period from first funding to IPO is at least as fast, if not faster, in Biotech as it is for other venture sectors.

It might seem redundant with past blog posts, but more data, and more recent data, confirming the same findings are always helpful in framing investment perspectives about the sector.


Data Snapshot: Dwarfed By Big Pharma, Biotech By The Numbers

Posted in Biotech financing, Pharma industry, Translational research | 1 Comment

Biotech fills the news these days – whether it’s the announcement of exciting new clinical data, another high-flying IPO, or a big M&A deal. Amidst the significant “share of voice” in the coverage of young and emerging biotech in the media, it’s easy to forget the relative scale of the sector relative to larger BioPharma companies.

Here’s a three-part graphic aimed at framing these David-and-Goliath size differences. Market cap’s reflect the VC-backed biotech IPOs of the 2013-2014 window compared to the top 30 largest global BioPharma companies. Below that the R&D spending of those same thirty companies is compared to the private VC funding into biotech (a good proxy for annual “R&D” spend by biotech’s involved in product development, funding about ~500 biotech companies annually).  And lastly is a bar chart reflecting the scale of the cash positions on those thirty balance sheets versus the amount raised during the “largest IPO window in biotech history” for all US-based biotech firms, as well as a narrower definition of NVCA’s VC-backed biotechs.


What’s the point of all of this, beyond the joy of looking at data itself?

First, stating the spectacularly obvious, it’s clear that biotech is a tiny fraction of the scale of the bigger BioPharma part of the sector in every major financial dimension.  Small percentile changes to a Big BioPharma company’s market cap swamp the scale of the biotech sector.  For instance, Biogen’s initial Alzheimer’s antibody data earlier in January moved the value of the company upward by ~$10B.

Second, because of this scale difference, even small changes in the resource allocation practices within large Pharma companies offer the potential to dramatically alter the biotech ecosystem. Assume these Big BioPharma companies channeled just ~5% of their balance sheet cash (roughly the “draw” on a typical “endowment”) into private biotech companies – this capital flow would fully fund the entire VC-backed biotech sector for a year (~500 companies). Minor changes in the internal vs external R&D allocation would have similar effects. And with market cap differentials this large, the cost-of-capital is staggeringly different across the ends of the BioPharma spectrum.

Third, this differential in size makes Pharma’s increasing “externalization” of their R&D functions (via partnerships and M&A) a significant financial “buffer” against the cyclic ups and downs of the public capital markets. For sure this IPO window for the past eight quarters has been a boon for companies and for returns, and we all hope for it to continue, but it is not immune to the natural capital cycles – there will be both bears and bulls in the future. Big BioPharma’s massive financial scale, captured in the charts above, and their unrelenting appetite for biomedical innovation, provides a healthy long-term foundation for the biotech sector.