When a company like Plexxikon can’t pull off a big-time IPO, you know something’s out of whack in the biotech world.
Berkeley, CA-based Plexxikon hit the motherlode last week when it agreed to be acquired for $805 million upfront, plus $130 million in milestones, by Japan-based Daiichi Sankyo.
VCs everywhere drooled. That’s because in this most expensive and risky of businesses—where 90 percent of drugs fail in clinical trials, and it typically takes hundreds of millions to develop a new therapy—Plexxikon proved it had a winner after raising just $67 million. That’s the kind of return VCs live to see.
No doubt, this lucrative payday was the result of a bidding war among potential acquirers. But when I spoke to Plexxikon CEO Peter Hirth and president Kathy Glaub by phone after the deal was done, I was struck by how limited their options actually were.
When asked if the company seriously considered an initial public offering—as an alternative to raise money, stay independent, and reward shareholders and employees—he said the company considered it, and walked away.
“There is no IPO market. Not at this valuation, anyway,” he says.
Imagine for a second what that means to thousands of people working at biotech startups, pursuing their IPO dreams. Many still seem to be deluding themselves about how they are building the next Genentech, and walking down the yellow brick road to IPO riches. Heading into this year, industry impresario Steve Burrill predicted that at least 25 biotech IPOs will get done in 2011.
I’ve watched as a number of biotech companies have tried to go public over the past year, only to become calves heading to the slaughterhouse. If Plexxikon can’t get what it considers a fair valuation from IPO investors, it makes you wonder what some of these other companies are thinking. Investors—duh—have been burned by so many biotechs over the years that overpromise and underdeliver that there just isn’t much appetite left on Wall Street even for really good drugs. As Tom Marsico, who runs the $51 billion fund known as Marsico Capital Management, put it in a recent interview with Fortune, he’s bullish on Apple, banks, and a lot of sectors—everything except healthcare.
“Drug development has become very difficult,” Marsico told Fortune. “The low-hanging fruit has been done—the beta blockers, high-blood-pressure medicines, cholesterol-lowering drugs, pain medication, antibiotics, etc. At the same time, the tough stuff—like treatments for cancer, for Alzheimer’s, and for autoimmune diseases—is going to be much more difficult to figure out.”
If you think that’s too dour of an assessment, consider what Plexxikon had going for it:
A drug for about half of patients with metastatic melanoma, a deadly skin cancer. The drug has shown an ability to at least partially shrink tumors in 81 percent of patients—in a field where 10-to-15 percent response rates are the norm. A pivotal study of more than 600 patients has shown the drug can keep tumors from spreading and extend lives when compared
