Seeing Beyond the IPO Window Dressing
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indulge in flights of scientific fancy. What else has it got to do with its money, given the alternatives? The excess of available cash only makes it appear as if biotech is finally working.
No one—not pharma, biotech, or Wall Street—knows how to reliably price bio-pharma products in the pipeline. Markets rely on financial, not clinical or technical information to establish the link between price and value. With a “normal” money supply, the market will tend to under-value assets that it does not understand. As a result, companies going public now that aren’t able to make a timely transition to revenues could find themselves in a financing trap when they return to the market.
To address Bruce’s factors: We have seen generalists before; they are just chasing the liquidity in the market. The strong performance of biotech is a reflection of crushingly low starting valuations (e.g. the Regado IPO), combined with excess liquidity. Stock prices will inevitably overshoot (e.g. Clovis’ inability to attract pharma interest at its current valuation), growth of the money supply will slow, prices will fall, and the window will close.
The industry must hold on tight to whatever recycle money comes its way from M&A, because once the window closes, that capital will head off in search of greener pastures. The JOBS Act is a new wrinkle in the landscape, but it is oil in the machine, not a sustainable source of fuel. In fact, the inevitable missteps that will be part of the crowd-funding learning curve could hurt biotech “finance-ability” in the future.
So, the occasional window should be regarded as a windfall, not a way of life. Thank Ben for the money; grab as much as you can; and lay in stores for the coming winter.
Though it took 22 years, beginning with the Genentech IPO in 1980, our industry found that it could not sustain itself in the feast-or-famine cycle of financing “windows.” The market closed to biotech in 2001-2 “with a vengeance.” This time the outcome is likely to be the same and the learning curve much shorter—unless, of course, the Fed can figure out how to manage the economy by perpetually inflating the money supply.
We built good companies in the past. It just took too long and cost too much money. Public market investors have already learned that lesson, though they may have to be reminded from time to time. Biotech needs new business and investment models. Even these may not work, but perhaps the market will be more patient if we are testing new approaches that make financial sense, at least on paper.