More money is the key to making good returns on investments in the biotech sector says a survey by HBM Partners, the Swiss venture capital house.
It looked at all trade sales of venture-backed biotechnology and specialty pharma companies from 2005 to 2007 and found that investments that generated returns of 3x or more, known as “winners”, received on average substantially more VC investment than the “losers” – US$90m compared to US$51m.
The report said: “Biotech and drug development seems to be a business where substantial investment is needed until real value is generated. Trying to make good returns on a ‘shoe string’ does not seem to be a recipe for success. Successful companies were well capitalized.”
It was also revealed that trade sales, on average, have been the more attractive exit route for life sciences companies than IPOs, and considering the uncertain public markets, HBM believes trade sales will become an even more important exit route going forward.
Another finding was that companies with a productive technology platform and clinical-stage products showed the best returns and the lowest relative number of losses, and that having reached phase I or II with at least one product generally increased the chances for a good exit – once a company had reached clinical stage, the investment generally returned 2x or more. Phase II companies had the highest number of winners, whereas the number of losers was lowest when products were already on the market.
Other conclusions reached included companies which have products in development produced 60% of all winners, and that winners were more likely to have ongoing collaborations with another pharma or biotech company than losers.
Also, buyers that paid valuations that made a M&A transaction a winner for VCs were more often located in the US than in Europe or Asia, with a ratio of 12 to 4 to 1.