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.
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.
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 createdlots of behind-the-scenes action in biotech ventureland, which suggests things are moving in a positive direction.
Over the past few weeks, Jim Blair, a partner with Domain Associates, said he’s started to notice a curious phenomenon. Sometimes, he says, fellow VCs at other firms will ask him to serve as a reference for when they are trying to raise a new fund from limited partners (LPs), such as pensions and endowments.
Many times Blair will agree, but no LPs will call. That usually meant the other VC firm had gotten partway toward its fundraising goal before running into a wall of indifference among LPs.
Many LPs have been harshly critical of VC firms that have a history of overpromising and underdelivering (see the Kauffman Foundation’s blistering 2012 report for more). But the LPs also watch the stock market, and see that biotech has outperformed the broader indexes, and that biotech IPOs have done exceptionally well of late.
“The phone is ringing now,” Blair says, with LPs checking references on venture capitalists. He predicts that some of the VC firms on the fundraising trail will successfully nail down their next funds, partly because of the improved outlook for biotech returns.
“There’s a backlog of firms that have been out there knocking on doors, working to get funds closed. That backlog will get worked off,” Blair says.
It all sounds good for investment in early-stage innovation. But the skepticism among certain LPs took a long time to form, and many aren’t likely to change their minds overnight just because of a few months of positive IPOs, says Noubar Afeyan, the managing partner with Flagship Ventures in Cambridge, MA. While it’s good news that the IPO market provides VCs with another way to get returns, acquisitions are still where most of the money is likely to be made, he says.
Besides LPs, there’s another important group of folks who are monitoring this IPO business closely. That’s Big Pharma.
Many Big Pharma companies are notoriously slow-moving when it comes to negotiations with little biotech companies, partly because they know they have the money, and therefore, most of the leverage. But when the money moves toward small biotech, Big Pharma can’t ignore it.
Wende Hutton, a general partner with Canaan Partners, says Big Pharma business development people they knew that whichever biotech company they were negotiating with couldn’t realistically count on going public. The only way a little biotech could generate real negotiating leverage was to start a bidding war (or at least the impression of one) among multiple Big Pharma companies.
Now, little biotech companies don’t necessarily need multiple pharma bidders, Hutton says. One of Canaan’s portfolio companies, Research Triangle Park, NC-based Chimerix (NASDAQ: CMRX), was able to raise about $118 million through its IPO, which gave it enough money to run a Phase III clinical trial program on its own. Instead of being the cash-poor biotech company going on bended knee to Big Pharma—and giving away the store in the process—Chimerix now has enough money to run the key experiments that will say whether it has a real drug.
If Chimerix does pass such a test, you can be sure that a number of pharma companies will want to buy it. The price will surely be way higher than it is today.
“Pharma BD groups are moving faster than they used to,” Hutton says.
One of the things I’ll be watching over the next year is whether these dynamics entice more VC firms to get back into the game. Right now there are so few firms doing this kind of work that it’s tough for entrepreneurs to find a willing VC to invest in them. It’s maybe even harder for surviving VC firms to find any peer firms they can syndicate with, and share the risks and rewards.
As I noted a few weeks ago, these IPO windows tend not to last very long, and it’s a virtual certainty that many of this year’s IPO class will fail. But if this thing lasts a few months longer before it bursts, it could, in an odd way, help restore a long-term healthy balance in the biotech market. Here’s hoping that the surviving VCs will harvest some returns from IPOs this year, and seize the moment to raise new funds. Then they can all go out and plant a whole lot of new seeds.