Data Insight: The Return Distribution Of BioPharma VC Financings

Posted in Exits IPOs M&As, General Venture Capital, VC-backed Biotech Returns | 1 Comment

Return distributions in venture capital across different sectors have been a frequent source of commentary, and new data from Correlation Ventures provides further substrate for that theme.

I’ve highlighted data from Correlation Ventures (CV) in the past, looking at top decile returns (here), returns by multiple or aggregate size (here), and their comparison to the S&P500 (here).  The team at CV has built an extensive data set, as a key part of their investment model, compiled via datasets like Dow Jones VentureSource.

CV just released a new dataset looking at 21,640 financings of U.S. VC-backed companies that closed between 2004-2013 into companies that have been acquired, IPO’d, or went out of business.  Approximately 10% of these financings were into BioPharma companies; this proportion is less than the share of dollars flowing into biotech over the decade (>15%) and likely reflects the multi-year tranched “financings” in biotech vs other sectors.  The bulk of the other financings were in technology-related sectors like software, information technology, eCommerce, etc… It’s important to emphasize these are financings, not companies, and so the returns for one series of financing could be positive while for other financings negative.  Kudos to Correlation for pulling this analysis together.

The distribution of returns in these financings is intriguing, and continues to support the thesis that BioPharma venture investing, in contrast to common perception, has actually outperformed most other non-biotech venture sectors at most of the percentiles of performance.  Here’s the summary data:

Returns by Financings- Correlation Ventures

Key observations:

  1. The rate of “significant winners” above 5x is greater for BioPharma financings than other sectors.   Based on more than 20K aggregate financings, the rate was 11.5% for BioPharma vs 9.8% for other sectors; given the huge size of the dataset, this is likely to be real difference – a 17% spread – though I have not run statistical significance analyses on these numbers (I only have the summary data). Further, this favorable margin for BioPharma financings themselves is consistent with prior analyses at the company (rather than financing) level (here), showing a higher rate of 5x+ outcomes in BioPharma.
  2. Frequency of returns above 20x are surprisingly similar across BioPharma and other sectors.  With frequency rates of 1.6% in BioPharma and 1.5% in other sectors, these data suggest that 1-out-of-60 financings lead to greater than 20x returns.  This makes intuitive sense if one considers the pricing of early “seed” rounds of financing and the eventual returns of winners off of those values.  In the past I have speculated that the distribution curves likely favored non-biotech sectors at return rates this high, but CV’s dataset suggests otherwise.  Only above 50x does BioPharma begin to numerically lag other venture sectors, where only 1-out-of-300 financings reach those return levels.  But the numbers begin to get very small and noisy: only 7 financings led to >50x returns in this BioPharma dataset over the decade.
  3. Loss rates for BioPharma financings are lower than the rest of venture capital.  These data show that 57% of BioPharma financings returned less than their invested capital (<1x) versus 66% of financings in other venture sectors.  This is inline with prior analysis showing more favorable loss ratios in biotech (here, here), both on a company/deal basis (% of deals that lose money) and on capital-weighted basis (% of dollars invested into loss-making deals).  The latter figures – dollar-weighted – are even more favorable towards biotech (e.g., Adams Street Partners data had a 36% loss ratio for biotech, vs Internet at 59%.).

These data are further confirmation of the relative attractiveness of biotech venture capital in the asset class.  Further, a recent report from Jon Norris at Silicon Valley Bank highlights the resurgence in returns in healthcare with over $12.5B in potential LP distributions in 2013 alone (3x higher than most years in the past decade; see Exhibit 12 in this link to the report).  This is solidly 2.5x more than the amount invested into new BioPharma deals on an annual basis.  Estimated distributions have outpaced investments in BioPharma for the past few years.

Given the nature of these return distributions, it’s worth pausing to consider why it is that biotech has historically been perceived as the “ugly stepchild” of the asset class (written about here and here).  We’ve speculated about the lack of halo deals (Facebook’s), the unrealized valuation problem of emerging biotechs (here), and the issue of biotech’s esoteric R&D models (vs simple-to-digest social media stories).  But on top of these, one big driver may just be the challenge of absolute vs relative numbers.  The reality is Tech represents 80%+ of the financings over the last  decade – some 18,000 financing events. At a 20x “hit rate” of 1.5%, that’s nearly 290 financings outside of BioPharma vs only 36 from the sector.  That’s 8x more noise, the sort of stuff that fills up TechCrunch, Primack’s columns, Xconomy, and even broader media (NYTimes etc).  Beyond the

With 2013-2014 continuing with strong M&A and IPO momentum, coupled with continued demand for innovation from Big Pharma/Big Biotech, returns and LP perception of the sector have strengthened and are likely to continue to improve; its not surprising that a number of Life Science focused venture firms are raising new funds in this environment.

Thanks again to Correlation Ventures for sharing the above analysis – shining more light on the opaque realm of venture capital data.


VC-Backed Biotech IPOs: Valuations And Virtuous Cycles

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

As everyone in biotech knows, the last eighteen months have been an unprecedented time in the public capital markets.   2014 is on track to become the best year ever for life science IPOs, topping both 2013 and 2000.  Last week was the busiest single week – with eight IPOs – since February 2000.  Over 120 life science companies have gone public since the beginning of last year.

This staggering volume of deals has brought nearly $10B of public equity financing to emerging life science players, at attractive prices, which serves as much-needed growth capital to advance their pipelines.

Instead of focusing, though, on the topline numbers of offerings and capital raised as a comparison to historic IPO windows, I thought it might be useful to reflect on some of the distributions in the data and a few observations of what has made this market so distinctive.

I’ve narrowed the subset of IPOs to those more relevant to our vantage point at Atlas: the 66 VC-backed biotech therapeutics companies that have gone public since January 2013, using a list from the NVCA for “VC-backed” companies and Cowen data.  Today, these 66 companies have a combined market value of $27B.  Here are a few observations:

  1. This cohort of newly-minted public companies is significantly over-weighted for historically “top decile” biotech valuations.  As I have written before (here), over the past decade a $400M valuation has been the cutoff for the top decile of M&A and IPO outcomes in VC-backed biotech.  Of this recent cohort of IPOs, almost 40% of them currently have valuations above this number as of the end of July.  That’s a 4x-higher frequency of “top decile” valuations than the rate in the past decade.  This is clearly reflective of the bullish nature of the biotech markets today, but I think it also highlights the value of high impact clinical data.  Many of these emerging companies have the “glimmer of greatness” and, with luck and capital, could become the next Alexion or Vertex in a few years.  This observation is in some ways an expected and obvious one – the market wouldn’t be perceived as hot and exciting without this – but it’s still impressive how far above the historic norms this window has been.  IPO market cap July 2014
  2. Biotech is creating “unicorns”.  As I count it, ~10% of these venture-backed offerings (7 companies) have gotten above $1B (the “unicorn” valuation) and held their value through the last few months.  All of these stocks traded up considerably from their IPO prices, ranging from 67-200% upward movement in their prices.  Seeing unicorns with 1 out 10 new IPOs is a very good hit rate; in most sectors, it’s far less common than that.
  3. Virtuous and vicious cycles exist in the market: the big get bigger, the small get smaller.  As mentioned above, the “premium” valuations today are a function of both good pricing and stock appreciation.  Of the 40 companies with post-offering initial valuations above $200M, ~80% of them have subsequently traded upwards from their IPO price, with average gains of 46%.  Conversely, of the 26 companies valued below $200M at their IPOs, 73% of them have subsequently traded downwards, with an average loss of 10%.  Interestingly, this measure – with nearly three out of four of these companies trading down from their IPOs – is in line with historic trends (check out Figure 2 of this Nature Biotech article, “Beyond the IPO”) where even at the October 2007 peak, 59% of the past four years of IPOs were below their offering prices; by June 2009, 79% were below.  Interesting that in today’s “hot” biotech market, the “micro-cap” IPOs with post-offering valuations south of $200M have all traded lower.  The silver lining, of course, for those smaller players is that regardless of how they trade in the near-term, they are now public, can raise capital in different ways, and can benefit from future positive clinical data news flow.    Big bigger, small smaller_July 2014
  1. Higher average private investor returns going into the IPO pricing appear to correlate with stronger after market performance as well.  Using the “existing” private shareholder weighted average price per share as a proxy for the typical private investor (as I have in the past, here), companies that got public with higher private “paper” returns into the IPO pricing (>3x) have out-performed since their offerings, up 52% and 59% on average and at the median, respectively.  For example, Epizyme and Ultragenyx IPO’s were both priced well above 4x their weighted average private share price, and both have gone on to appreciate by ~100%.  At the other end, companies that posted less attractive returns into their IPO pricing (<1.5x, though most of which were <1.0x) have struggled relative to their peers, at 3% and -5% on average and at the median. It shouldn’t come as a surprise that companies hitting on all cylinders privately are continuing to do so in the public markets; another version of the virtuous/vicious cycle at work in this market.  Also, it suggests that these private shareholders aren’t trying to “take every dollar off the table” during the IPO pricing, given the post-market performance (many of whom shot up on their first day of trading).   Pre- and Post-IPO Returns_July 2014
  1. Companies of all shapes and sizes are doing well. Comparing the number of employees at the time of an IPO (in the S-1) to the post-market performance, there appears to be no correlation at all.  Bigger teams and more infrastructure don’t by default drive better returns, and vice versa, as the scatter plot below suggests.  Some of the biggest out-performers had less than 25 FTEs.  That said, micro-companies don’t appear to be trading well in the after-market: all six biotech offerings with less than 10 FTEs have traded down. IPO and FTEs _ July 2014

As these observations suggest, there are some interesting distributions and virtuous/vicious cycles at work in the markets today.

It’s anyone’s guess what happens to the IPO market for the second half of 2014.  Like many others in January, I thought the window would cool as the crop of 2013 and 1Q 2014 IPOs were digested by public equity investors (here).  Instead we’ve seen the busiest six months in the history of biotech.  There are lots of fundamental reasons to think the window will remain open – clinical data catalysts, large and mid-cap biotech successes, continued M&A pressures, historically low Fed rates continue to support allocations into higher risk equities, etc…  But hiccups are just as likely – the storm around Solvadi’s pricing amazingly cast a pall over the whole sector for a couple months.

Irrespective of how the second half plays out from a stock price perspective, the great news in all this is that a whole new generation of small cap public biotech stocks have been energized by billions of dollars of growth capital.  Will be interesting to see what they are able to do with it.