Everyone in biotech talks about capital efficiency these days. Doing more with less financing, more disciplined tranching of rounds, leaner organizations, lower expenses, etc. But paradoxically, as a sector, there’s universal praise and admiration for those individuals and companies who raise the most money.
Take our “Top Deals” lists. I just read John Carroll’s Fierce Biotech “Top Biotech VC Deals” of 2010. Its an interesting set of companies and John has put together good commentary about them. The list was compiled by looking through the NVCA stats for those “promising biotech companies which were the most successful at raising money in 2010”. Here were the top 15 (now 16, as a I guess John was ‘informed’ by an Agile investor to add it to the list):
1. Pacific Biosciences – $109M
2. Reata Pharmaceuticals – $78M
3. Relypsa – $70M
4. Pearl Therapeutics – $69M
5. NanoInk – $65M
6. TetraLogic Pharmaceuticals – $59.83
7. Achaogen – $56.31M
8. Otonomy – $49.07M
9. Tetraphase Pharmaceuticals – $45M
10. Agile Therapeutics – $45M*
11. Incline Therapeutics – $43M
12. Cellular Dynamics International – $40.6M
13. Calistoga Pharmaceuticals – $40.22M
14. Sagent Pharmaceuticals – $40M
15. Complete Genomics – $39M
16. Intrexon – $37.51M
So these 16 are being highlighted as successful because they raised a ton in 2010. Not that raising big rounds means a company is necessarily inefficient with its finances, but its fair to say the two have certainly been correlated in the past.
I don’t want to argue with the quality of some of the companies on the Fierce list – there some very strong companies on there. Calistoga being an obvious one – that $40M round was turned into $130M or so in less than 12 months with their sale to Gilead in February and there’s more to come.
But the big question I have is why do we, as a sector, consider raising the most money a good thing? Isn’t it more important to know what the cost of capital was? Ultimately, capital efficiency is a big driver of reducing the cost of capital over time. Create more value than the cash you’ve had to spend. If value doesn’t increase faster than capital intensity, bigger raises just impair returns in aggregate (or shift whatever returns may occur from the founders/early investors to the later stage investors).
Many of these Top 15 companies have now raised far more than $100M in equity. If gravity is real, many of these aren’t going to generate much of a return (if any) on such large amounts of invested capital. My guess is that most of these rounds weren’t done a significant step-ups to their last rounds; in fact, most were probably flat or down once the sizeable option reloads to the existing management team were factored in. So the cost of capital for these players – despite their ‘late stage’ and ‘top deal’ status – was probably still quite high (and often painful).
Lets take a few examples where I have only a few facts (someone correct me if I’ve got the details wrong here, happy to be better informed):
- Pac Bio with its top performing >$100M pre-IPO round is a fundraising machine around a very cool technology in a hot space. They raised $370M privately before their IPO. Impressive. With the $200M IPO raise, they are at whopping $570M in invested capital. I know the last $300M of that came in at a small step-up on the first $270M, but assuming a meager option pool, they are sitting at $650 or so at a ‘flat price’ for the avg investor. Market cap for PACB as of March 4th was $775M. So they’re at ~1.2x (on avg). With a rarefied valuation of nearly $800M, its disappointing to see aggregate returns only in the “1.something“x range. Sounds challenging, but hopefully it will grow into its promise.
- Complete Genomics, like PACB, raised a big pre-IPO round and also made it public in 2010. They raised over $200M in equity capital privately and in their IPO. Now GNOM trades with a mkt cap of $180M. Tough.
- Relypsa has now raised over $120M in equity capital for a single program. I’m all for focused asset-centric plays, but that’s a lot of capital. It may be a great phosphate binder for kidney disease, but I’d find it hard to see how the recent $70M went in at anything but flat or modestly down round. And rumor has it that the first generation binder from Ilypsa has already been terminated at Amgen; not a great sign for the space.
- Achaogen has raised well over $100M and is in a Phase 2 for an antibiotic program. Frazier led the $77M round (including the $56M tranche). Hard to imagine our friends at Frazier didn’t push hard on valuation since the company had already raised $30M or so from 2003-2009. But perhaps the lucrative biodefense grant shielded them on pricing and improved their cost of capital.
- Agile has been raising money since 1997. It raised roughly $35M or so prior to 2006 in Series A through E, and its post-money according to Venture Source was about the same. Adding this new $45M with three new investors to fund the Phase 3 contraceptive patch program was almost certainly part of a recap. Perhaps that’s why they are back to “Series B” now.
- Worth noting as well that a couple of these were done outside the ‘traditional’ VC world. Intrexon is financed almost entirely via New River Mgt (raising over $130M to date), and Cellular Dynamics by “Tactics II Stem Cell Ventures” to expand its heart cell market. Good to see other players entering the space, perhaps they’ll have more success with big biotech financings than the VC world has.
And sadly for the entrepreneurs, founders, and early investors, I’m sure most of these big later stage rounds came with large senior liquidation preferences. What does that actually mean? Last money in, first money out, right off the top. And if they are participating preferred, as is common today, the investors dip twice. ”Pay me first, and then I’ll share the rest pro rata with you”. At smaller levels of invested capital, its not hugely impactful; but the only way these capital intensive deals are likely to exit is with management carveouts to preserve some incentive for them. Or the management teams are incented to push to go public into unattractive markets to wash those preferences away. Either way, its not healthy. But that’s the subject of a future blog.
In short, it’s worth revisiting whether raising the biggest pile of capital should be extolled as such a trophy virtue.
So how about celebrating some capital efficiency for a change? I’d like to see a Top 15 list for this. John’s FierceBiotech annual “Fierce 15“ list does capture some of the most efficient companies, but its not an explicit criteria. One of last year’s winners is worth noting: antibody play Adimab LLC (disclosure: not an Atlas company). If VentureSource has it right, they’ve raised only $22M in equity and the last $4M came in a late 2010 financing at a post-money of $500M. Wow. If that’s true, Adimab been incredibly efficient at driving down its cost of capital.
I just wish there was a good, easy-to-measure metric for this that we could use. Perhaps a ranking by step-up in valuation or capital-to-Pharma-deal or an after-the-fact exit multiple. But all those require tough to get information, making it difficult to create an accurate list.