It used to be that every young biotech company’s goal was to “go long,” to become a FIPCO (fully integrated pharmaceutical company…remember when that phrase was in vogue?), selling its own product and running a sustainable business.
These days, that’s rarely in anyone’s business plan. And yet at the same time, I’ve heard public market investors wonder where the next exciting $1B-$10B biotech company will come from. Are we less aspirational than we used to be? Or are we perhaps just more realistic?
There are a few emerging companies actively building fully integrated enterprises that seek to develop and market their own products. Ironwood Pharmaceuticals, Aveo Pharmaceuticals, Regeneron Pharmaceuticals, and Onyx Pharmaceuticals are a few newer-generation companies going down that path, and recent large financings by Intarcia, Infinity, Synta, and Sarepta appear to set them up to go long (or at least longer).
But many other exciting young companies are acquired long before nearing that point, such as Plexxikon, Adnexus Therapeutics, Avila Therapeutics, Intellikine, Calistoga Pharmaceuticals, BioVex and more. I was part of both Adnexus and Avila, so this is very familiar territory.
Let’s take a moment to talk about what it takes to finance a “go long” strategy, and the related dynamics of M&A versus IPOs and the public markets.
To “go long” in biotech, you need to access a tremendous amount of capital (>$1 billion) to discover, develop, and launch a product before you have product revenue to keep going on retained earnings (an excellent source of capital). This nearly always means needing to step into the public markets at some point – that’s where you can access capital on that scale.
The decision to go long, therefore, is necessarily in the context of how much capital is available and at what price. If the prices in the public markets don’t recognize value at the same level as an acquirer, then economics push towards M&A. Everyone understands this: VCs, public investors, pharma companies, and biotechs. And each of these parties plays a role in establishing these relative values.
In recent years, young biotech companies have struggled to command strong valuations in the IPO market, even while Big Pharma has continued to bid aggressively on promising assets from startups.
A senior & well-respected person on the buyside, who normally only buys shares in public companies, told me not long ago that although he didn’t typically invest in private companies, he was considering starting to do so. He was finding that the most exciting private companies were the very ones that were most likely to be acquired prior to going public.
As an investor, that meant that he was missing the opportunity to invest in companies where clearly his perception of value was being validated. And recently we have indeed seen some examples of
