Big pharma, big backers
While valuations for new biotech companies may seem astronomical based on lack of revenue, the market benefits from the unusually strong presence of institutional investors—both private equity funds and pharmaceutical companies. “(The biotechs) probably have a stronger probability of success than they did before,” Andersen said.
For instance, biotech investment firm MedImmune Ventures, based in Gaithersburg, Md., is owned by London-based giant AstraZeneca. MedImmune backed Monrovia, Calif-based Xencor, which completed an IPO in December. MedImmune has 16 companies in its portfolio, according to its website.
“The big pharma and life-sciences companies are getting more directly engaged in venture capital, and by extension pre-IPO companies as a way to lubricate their development pipeline,” said Darren Rush, CEO of GrantIQ, a Los Angeles-based data-services company focused on start-up funding.
A preproduct IPO can serve as a final round of financing for biotech companies to win approval for their drugs. “It becomes a good liquidity strategy,” said Rush.
Private equity funds that own shares of the companies often buy some additional shares at the IPO to maintain their ratio of ownership. Those purchases help assure that the stock price will stay strong.
Dicerna offered shares at $15 each and had a 206 percent first-day pop. Its shares are now trading at more than $36.
Downriver, the pharmaceutical companies play yet another role in the market for biotechs. If a biotech doesn’t succeed or can’t sustain itself on its own as a public company, big pharmaceutical players offer another possible exit: a buyout. If a biotech’s drug isn’t approved, a big pharma might find value in the research, Rush said.
What looks like a bubble at first glance can be viewed as a long-term strategy for funding drug development, one that involves private funds, pharmaceutical companies and the public markets, along with a good deal of risk—and, sometimes, high reward.
—By Elizabeth MacBride, Special to CNBC.com