Which VCs Are Poised to Profit From the Biotech IPO Boom?

9/9/13Follow @xconomy

Biotech venture capitalists, as a group, haven’t had much to cheer about the past few years. But this is shaping up to be the year the storyline changes, thanks to the ripple effect from the biotech IPO class of 2013.

The story of biotech venture capital over the past few years, as many readers know well, has been mostly about struggle. Many firms haven’t been able to scrape out returns, and they’ve reacted by grasping for new investment models, pushing partners out, veering into other sectors, or shutting their doors. The historic shift, which came about a decade after the genomics bubble, left only a few firms with the desire and capability to make the edgiest, riskiest, and potentially most innovative investments in life sciences.

It’s still too early to say that biotech VCs have climbed all the way back into the saddle just because of a string of quick IPOs. But it is clear that the firms who stuck it out during the tough times, and continued investing in innovative fields, are in a position to be rewarded and to keep doing what they do for a long time.

For those of you who took long summer vacations and missed some of the action, this has been the busiest year since 2000 for biotech IPOs. Altogether, 32 biotech companies have debuted on the public stock markets so far this year, and another 12 are waiting in line, depending on how strictly you define “biotech.” It’s a big development for an industry that is more used to seeing 10-12 companies go public per year. Every time one of these companies goes public, it creates an opportunity somewhere down the line for early investors to cash out, and collect rewards for all the risk they shouldered for years.

So which firms are standing in line to reap the benefits of the IPO boom? Here’s a quick rundown I put together from a review last week of SEC filings.

Venture firm # of biotech IPOs in 2013 Portfolio Companies That Went Public
Fidelity Investments & related entities 5 KaloBios Pharmaceuticals, Stemline Therapeutics, Bluebird Bio, Tetraphase Pharmaceuticals, Agios Pharmaceuticals
MPM Capital 5 Epizyme, KaloBios Pharmaceuticals, Portola Pharmaceuticals, Aratana Therapeutics, Conatus Pharmaceuticals [Updated 9:33 am ET to include Conatus]
NEA 3 Epizyme, Omthera Pharmaceuticals, Prosensa
Arch Venture Partners 3 Receptos, Agios Pharmaceuticals, Bluebird Bio
Flagship Ventures 3 Receptos, Tetraphase Pharmaceuticals, Agios Pharmaceuticals
Celgene 3 Epizyme, PTC Therapeutics, Agios Pharmaceuticals
TVM 2 Enanta Pharmaceuticals, Bluebird Bio
Delphi Ventures 2 PTC Therapeutics, OncoMed Pharmaceuticals
Brookside Capital 2 Portola Pharmaceuticals, PTC Therapeutics
Pappas Ventures 2 Chimerix, Liposcience
Alta Partners 2 Chimerix, Esperion Therapeutics
Domain Associates 2 Esperion Therapeutics, Regado Biosciences
Third Rock Ventures 2 Bluebird Bio, Agios Pharmaceuticals

 

Before getting all carried away, it should be made clear that while all of these firms have reason to feel good about future paydays to come from these IPOs, they can’t count the money yet, and start bragging about 5x or 10x returns. Part of that is because most venture backers are bound by a “lockup” period which legally bars them from selling their shares in a newly public company until it’s been trading for awhile, usually 180 days.

A lot can happen in the markets in 180 days (Syria, anyone?) which is one way of saying the market could crash and all these theoretical gains that look good on paper today may not be there tomorrow.

“Right now, it’s all paper value,” says Beth Seidenberg, a partner with Kleiner Perkins Caufield & Byers.

What matters more, Seidenberg says, is whether this IPO boom is sustained for at least a year. If so, that will enable the VCs to turn some of that paper value of today into hard cash returns of tomorrow.

Beth Seidenberg of Kleiner Perkins Caufield &  Byers

Beth Seidenberg of Kleiner Perkins Caufield & Byers

In Kleiner’s case, real returns have come in from one of its investments that went public last year—Waltham, MA-based Tesaro (NASDAQ: TSRO). It still has to wait and see how big its returns might be from Epizyme (NASDAQ: EPZM), its one current member of the 2013 IPO class. Kleiner will have to wait a little longer than that to see how things pan out for a couple current IPO hopefuls—South San Francisco-based Five Prime Therapeutics and Cambridge, MA-based Foundation Medicine. And the firm will have to wait even longer to find out about the prospects of three or more portfolio companies that are evaluating their IPO possibilities, Seidenberg says. “We’re feeling good about where we are,” she says.

It’s certainly true that the final numbers aren’t in yet, and it’s never good to count chickens before they hatch. But the IPO surge has already created … Next Page »

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