Can (Should?) A Young Biotech Company Still Go Long?
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 “crossover” investing, where public-oriented funds invest in late-stage private companies, helping to build bridge to the public markets (eg, Agios, Intarcia).
I’ve just been through this kind of decision twice, first with Adnexus, which was acquired by Bristol-Myers Squibb in 2007 when we were on the cusp of our IPO, and then with Avila Therapeutics, acquired by Celgene early in 2012.
In each case, it was a combination of several factors that resulted in a decision to sell the company. I believe that each of those companies could have “gone long” – we had the science, the people, and enough capital to get to the next step. But the M&A path was a very exciting path forward in each case.
Valuation is a big driver in these situations, but it’s not the only one. For both Avila and Adnexus, we knew our drug candidates had an equal if not better opportunity to advance in the context of a larger company than in the highly capital constrained environment of a small company. The acquirers offered a good cultural fit, and there was respect & friendship across the organizations. Our investors did also get a good return – they took significant risks early on, and providing returns (especially in a tough financial environment) also built confidence to continue investing in the next young biotech company.
M&A wasn’t the “strategy” in either case – it was a compelling option that presented itself along the way and was one among several choices.
So – back to the original question: Can (should?) a young company “go long”?
In a word, yes.
In fact I think that’s the only real strategy. At Avila, I was often asked the inherently unanswerable question “are you guys going to try to get acquired or stay independent?” I always found this to be a perplexing question, because to say our goal is either “building an independent company” or “being a FIPCO” or “being acquired” focused on an outcome rather than on the goal of creating value.
The one thing a company has control over is building value…and that includes building value in a way that also allows investors to realize a return. That’s not the sole objective, but for young biotechs, attracting capital (equity, deals, etc.) is an enabler of our vision. To attract it, we also need to meet the needs of those funders.
Acquisition is not a strategy or a vision or a plan…but sometimes it’s an outcome. It’s something that can happen to you while you’re busy building value. Companies of all sizes can face this issue. Think of Genzyme, Wyeth, Pharmion, ImClone Systems, MedImmune, and Biogen Idec in recent years.
For a young biotech company, I view “going long” as planning for and figuring out what it will take to get one or more new medicines approved and successfully introduced onto the market (which includes successfully reimbursed). That plan necessarily needs to take into account a realistic view of what capital sources can be accessed to execute that plan.
When Avila signed the merger agreement with Celgene this past January, the word that each of my Board members used was “bittersweet.” Not because there were any concerns about Celgene – on the contrary, we felt very strongly that there was excellent fit and we trusted and respected the Celgene team. We were very excited about that future and we chose it among several other strong options that we had developed. But we also knew that it meant letting go of the other paths – and you can never do the “control experiment” and find out what might have happened if we had continued to build Avila as an independent company.
But we always planned to go long. And the new medicines still will.