Questioning Assumptions About Biotech Investing

by: The Burrill Report

By Daniel S. Levine

There's a widespread belief that investors in biotech have to wait longer than investors in medical devices to reach an exit and that there are bigger rewards for doing so, but a new study from Silicon Valley Bank suggest the current environment is turning such presumptions on their head.

The bank looked at private merger or acquisition transactions of venture-backed companies in the United States since 2005. In all, the study examined 60 biotech and 58 medical device companies. It included M&A activity in excess of $50 million for device companies and $100 million for biotech companies.

The study found biotech companies overall have quicker exits and lower multiples versus medical device companies, which tend to have longer exits and higher multiples. The research also revealed that biotech companies that received Series A venture capital investments at the pre-clinical stage made up the majority of the biotech exits over the past six years.

"We feel like we are mythbusters," says Jonathan Norris, managing director with SVB Capital's Venture Capital Relationship Management team. "Our research shows that many of the basic assumptions upon which life science investors base their decisions do not hold true in the current market."

The study also found that over the last six years, when large biotech exits were compared with large device exits, the multiples on the device deals exceeded the biotech deals each year. Overall device exits came at an average multiple of 5.3X versus an average 4.1X multiple for biotech exits. In fact, the device group had three times the number of 7X to 10X multiples and more than double the number of 10X multiple deals.

The report said that big exits typically come quickly in biotech with relatively few venture rounds. During the 2005-2010 period of the study, the average time from the close of a series A financing to exit was just under five year. The pace was accelerating in 2010 as that period dropped more than 18 months to less than four years.

While a return of the IPO market and the pipeline needs of Big Pharma are helping to improve liquidity for venture investors in biotech, the reality remains that the number of exits of at least $100 million represent a small portion of biotech investments. For each of these exits, the report notes, ten new companies received series A investments leaving a growing line of investments waiting for liquidity. Based on the ability to exit, the report says it will take some time to run through the backlog.