Analysis: Will biotech IPOs rescue VC backers?

Fresh off two successful biotech IPOs last week, industry watchers have begun to speculate on what the developments could mean for the beleaguered venture capital industry. Biotech promoters would love for public investors to swoon over the chance to invest in drug developers, because more money pouring into the coffers of therapeutics outfits helps them advance their products toward the market.

Kythera Biopharmaceuticals ($KYTH) and Intercept Pharmaceuticals ($ICPT) went public last week and swiftly traded at least 20% above their IPO prices. Plus, biotech stocks on the Nasdaq are outperforming the broader index in 2012, with all but one of 12 biotech companies that went public this year trading above their IPO prices, as Xconomy's Luke Timmerman wrote.

While these are all positive indications of a healthy public market for biotech, Bruce Booth of Atlas Venture wrote of his skepticism about these developments prompting a return to juicy IPO pricing of the 1990s. Back then, IPOs were typically priced at double the amount of the previous round of venture capital raised for the biotech, Booth notes. What Booth didn't say is that those IPOs of the 1990s got a lot of major investors jazzed about venture firms that made a killing on the deals, and some of those players such as pension funds, endowments and others plowed billions into VC firms that went on to disappoint them in the 2000s as IPOs became a tougher prospect for many of the development-stage biotech companies supported by venture investments.

Timmerman wrote in his column (dubbed "Which VCs Are Poised to Cash in on the Biotech IPOs of 2012") that with some luck the VC firms that invested in the biotechs that went public in 2012 could get a "lifeline" to fuel their activities for years to come. Yet Booth argues that in aggregate, biotech IPOs of recent years haven't provided "great returns" to venture investors. "Unfortunately though, I think it would be an over-statement to conclude that these IPOs are "lifelines" to venture investors, as my friend Luke Timmerman has suggested," Booth wrote.

Altas wasn't noted as a major pre-IPO investor in any of the dozen biotech outfits that have gone public in 2012 in Timmerman's analysis, yet the Cambridge, MA-based venture firm has benefited from the sales of its portfolio companies such as Stromedix and Avila Therapeutics to Biogen Idec ($BIIB) and Celgene ($CELG), respectively, this year. That said, Timmerman notes that three VC firms that have raised major new funds in the post-2008 lean years of the venture industry--New Enterprise Associates (NEA), Sofinnova Ventures and OrbiMed--all show up multiple times as investors in this year's crop of biotech companies that went pubic.

So perhaps the biotech IPOs of recent months aren't necessarily going to prompt a return to glory for the VC industry, but it's doubtful that NEA, OrbiMed and Sofinnova Ventures are fretting about their portfolio companies going public this year.

- check out Booth's blog
- here's Timmerman's column

Special Report: The 10 biotech IPOs of 2011

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