Another good post from Life Sci VC blog that speaks to the downside of raising too much equity for a biotech -- assuming the investors would actually like to recover on their investment. In looking at the top 10 financing rounds for biotechs in 2007, the following results were observed:
- 4 of 10 resulted in significant losses for investors
- 1 of 10 is sitting at or near cost
- 3 of 10 resulted in returns at or above 2x
- 2 of 10 can't be given a final score
The conclusion is that this sample of 10 is very close to what one would expect to see across investments in all of biotech -- as compared to actual return portfolio over the last 30 years (50% at a loss or return only cost, 35% made more than 2x their invested capital, 15% in process).
This seems counterintuitve if you believe biotechs with well-heeled funding are more likley to be successful. The data says no -- it apparently doesn' t alter the spread of risk. If that is the case, then having adequate investment to operate but not too much to add more risk in terms of earning a return, i.e. being more equity efficient would seem to be the better strategy. So us investors should be seeking managment teams who efficiently use their capital rather than putting it into a huge warchest. That is --- if we want to earn a better return.
I wonder if that idea will translate to R&D investments in pharma -- where sheer size is being reduced and presumably more thought being put into risk/return decisions with development programs. And, in big pharma's current penchant for striking deals with much smaller upfronts and basing them on milestone payments. That would seem to me to be somewhat more analogous to biotech raising less equity capital and using it more efficiently. Will forcing companies to work with lower upfronts be more efficient and result in more success? Hmm.
See more comments from In the Pipeline on this topic.
Posted by Bruce Lehr Aug 29th 2012.