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Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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May 3, 2012

The Biotech Class of the Early 90s

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Posted by Derek

Here's an excellent piece by venture capital guy Bruce Booth, looking back at the heady days of 1991-1994. I can tell you that they weren't so heady in Big Pharma, but there were a lot of startups coming along. Included are some really big names of today, but also a lot of outfits that no one even remembers any more. And how have investors fared? That depends:

Only a subset of the 1991-1994 IPO window have accrued real value over time. There were certainly a few big winners in there – Gilead probably being the biggest, up over 100x since its IPO in 1992. MedImmune also fared quite well with its $16B acquisition (though AZ is not thrilled about it now), and Vertex is up 10x.

But let’s take the prior two examples, Isis and Amylin, which represent “successful” 20-year old mid-cap biotechs. Both have gone from preclinical stage companies around their IPOs to having products launched or filed with the FDA. But they haven’t really created any shareholder value over 20 years. Isis today trades at $8 per share, but it went public at $10 per share. Amylin went out at $14, but closed on the end of its first day of trading in 1992 at $21 per share. It now trades at $25. So for 20 years, these companies (and many, many others in the 1991-1994 cohort) have underperformed not only all major equity indices, but also treasury bills, and consumed billions in equity capital. And recall that many more companies from this window, probably at least half, ended up dying long whimpering deaths like long-forgotten Autoimmune Inc and Alpha-Beta Technology.

And that's a big reason why you don't see so many big biotech/small pharma IPOs any more. The markets are a different place, twenty years on:

The current reality, shaped by a couple decades of lackluster performance, is that the public markets aren’t open for business in biotech. While they are much less tolerant of the value-destroying tactics of the past (which is a good thing), they have also set the bar so high as to discourage even great, innovative companies from considering it as a viable option. In this new world, the old company building models just don’t work: it’s hard to back a startup today with an investment thesis around “we’re building the next Gilead” – the capital markets are just so different.

Small companies have to act differently, raise money differently, and sell themselves differently these days. Stay private, do as much virtually/outsourced, sell out to Big Pharma earlier than before. . .it's worth another post or two to talk about some of those models, but the "Let's Have an IPO!" one isn't going to be on the list. Not for some time to come, anyway.

Comments (10) + TrackBacks (0) | Category: Business and Markets | Drug Industry History


1. Student on May 3, 2012 1:07 PM writes...

How efficient is an IPO? Clearly your middlemen (Bankers) are making a ton of cash from the process. Either fees upfront or a percentage after its over, the underwriters is taking something away from the company. What about other factors such as scaling up your investor relations and PR departments?

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2. bbooooooya on May 3, 2012 1:10 PM writes...

"much less tolerant of the value-destroying tactics of the past"

I think that's simply incorrect.

Public biotechs are still able to destroy capital at a prodigious pace pursuing clinical targets whose viability is suspect in the best of cases, and down right absurd in the worst (looking at you SVNT, NGSX, XNPT, SOMX, XOMA, many others.....).

Biotech execs are able to destroy this capital (and pay themselves handsomely, both in salary and bonus) for their failure because they know that there are bottom feeder investment banks (Rodman, Roth, JMP, you know you you are) that can sell more (soon to be worthless) equity or debt to yet another group of unsuspecting investors or arb funds. These guys could are experts at putting lipstick on pigs (in the form of warrants/convertible debt) such that biotechs have more longevity than cockroaches.

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3. darwinsdog on May 3, 2012 3:53 PM writes...

I didn;t find the original source data in the link but the empirical observation sounds right. However, that small time window misses is not very representative also some of the biggest and best capital bulding stories got aquired along the way. Interestingly, the ones mentioned from that era are disproportionately anti-infectives / vaccines companies.

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4. Frank Adrian on May 3, 2012 3:53 PM writes...

"But they haven't really created any shareholder value over 20 years."

Actually, including the effects of inflation, most of them have actively eaten value. Biotech startups are probably the least profitable investment you can make outside a casino.

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5. anonymous on May 3, 2012 4:12 PM writes...

Yeah, well, and then you have today's "Westphal" model of doing business, with Sirtris as one of the most glaring of poster children in making money for the insiders countered with the greater loss of jobs & value for so many others.

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6. Dude on May 3, 2012 4:17 PM writes...

Does seem the success stories are rare. Even REGN, who just posted its first quarterly profit ever, was a long time in coming and burned through a ton of investor cash to get there.

But I don't know if it's possible to have a biotech model that won't burn through a ton of cash to get its first drug approved. Yes, you could go in with a number of viable targets based on the literature and not spend anything on pure discovery, but the pace at which the field moves, anything in the literature is going to have multiple patents on it and if you don't jump on something immediately, you're going to fall behind. Interesting article.

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7. hopeless on May 4, 2012 5:46 AM writes...

The correct way to calculate stock value change should be stock price change (current price - IPO price) x current number of shares (usually a significant increase since IPO)...

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8. chefen on May 4, 2012 9:44 AM writes...

To be fair to biotech, Big Pharma has destroyed hundreds of millions of dollars worth of 'value' too. Pfizer probably has a lower market cap than it did 20+ years ago despite gobbling up several other major companies and spitting out their employees in the mean time.

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10. Boo on May 4, 2012 10:23 AM writes...

It's probably fair to mention that one of the stocks that the article mentions as a winner, VRTX, long was derided by high profile publications for losing -- "burning" is the term I remember -- prodigious amounts of investor money over the years. It has had several brief boomlets followed by long periods of decline. Thanks to its HepC program, it looks solid now, but who knows? This isn't a criticism of VRTX by any means. It's just a statement about how putting money into even relatively well-run biopharmas more closely resembles speculation than investment. Indeed, VRTX, through skill and luck, has managed to keep the ship afloat long enough to bear real fruit, and they should be applauded for that.

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