Tuesday, May 22, 2012

This just in: biotechs with pharma VC $$ are more likely to IPO or be acquired

OK, this news from Burrill & Co isn't exactly revolutionary, but it is interesting to see numbers applied to common sense.

Burrill analysts looked at ~2,900 companies that received venture funding. ~10% of those companies received financing from the VC arm of a Big Pharma company (such as Lilly Ventures, SR One, etc.)

Burrill sees the Big Pharma VC $$$ as a differentiator in outcomes. Consider these outcomes from Burrill's study:

Venture WITH big pharma VC                                  Venture WITHOUT big pharma VC
           ~25%                 % companies ultimately acquired                  ~15%
           ~50%              % companies w/pharma partnership                ~30%
           ~12%                     % companies that IPO'd                             ~8%

Combining acquisition and IPO outcomes to say "who got liquidity," you'd see that ~37% of biotechs with Big Pharma VC got liquid, while only 23% of biotechs without Big Pharma achieved liquidity.

(I'm surprised the figures are that high, and ultimately likely higher, as additional companies from the studies IPO or are acquired. Given another year or two, I wouldn't be surprised if the respective liquidity figures reach 50% and 33% respectively. Who thought that 50% of all pharma $$ backed drug discovery biotechs achieve liquidity? I'd naively guess that these figures are higher than what is experienced in internet/IT/software investing.)

So, based on Burrills analysis, attracting big pharma VC boosts by 50% or more your odds of partnering, IPOing, or being acquired. 

The big question is: does Big Pharma investment make a company better, or is big pharma better at picking winners?

I'd argue strongly the latter - that Big Pharma picks winners - for the simple reason that for every biotech, the ultimate customer is Big Pharma, not patients or attending clinicians. In that respect, biotechs attracting Big Pharma VC are by definition doing a better job of understanding the customer (Big Pharma) and are 'pre-selling' Big Pharma during investment discussions.

What I found surprising was that the Big Pharma VC investment IS NOT predictive of acquisition by the Big Pharma that made the investment.

What this all means:

for investors: the participation of a Big Pharma VC is obviously a stamp of quality, and likely more important than the identity of the non-pharma participating investment funds.

for biotechs: not all VC $$$ is equal. Getting SR One, or Pfizer Ventures, or the Novartis Option Fund to invest is likely much more valuable than taking VC $$$ even from traditional industry VC. Hmmm. Between this news, and other recent analysis about VC outcomes, you wonder if maybe traditional VCs ought ought to return to their roots in incubating companies, not scaling companies.

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