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lots of behind-the-scenes action in biotech ventureland, which suggests things are moving in a positive direction.
Over the past few weeks, Jim Blair, a partner with Domain Associates, said he’s started to notice a curious phenomenon. Sometimes, he says, fellow VCs at other firms will ask him to serve as a reference for when they are trying to raise a new fund from limited partners (LPs), such as pensions and endowments.
Many times Blair will agree, but no LPs will call. That usually meant the other VC firm had gotten partway toward its fundraising goal before running into a wall of indifference among LPs.
Many LPs have been harshly critical of VC firms that have a history of overpromising and underdelivering (see the Kauffman Foundation’s blistering 2012 report for more). But the LPs also watch the stock market, and see that biotech has outperformed the broader indexes, and that biotech IPOs have done exceptionally well of late.
“The phone is ringing now,” Blair says, with LPs checking references on venture capitalists. He predicts that some of the VC firms on the fundraising trail will successfully nail down their next funds, partly because of the improved outlook for biotech returns.
“There’s a backlog of firms that have been out there knocking on doors, working to get funds closed. That backlog will get worked off,” Blair says.
It all sounds good for investment in early-stage innovation. But the skepticism among certain LPs took a long time to form, and many aren’t likely to change their minds overnight just because of a few months of positive IPOs, says Noubar Afeyan, the managing partner with Flagship Ventures in Cambridge, MA. While it’s good news that the IPO market provides VCs with another way to get returns, acquisitions are still where most of the money is likely to be made, he says.
Besides LPs, there’s another important group of folks who are monitoring this IPO business closely. That’s Big Pharma.
Many Big Pharma companies are notoriously slow-moving when it comes to negotiations with little biotech companies, partly because they know they have the money, and therefore, most of the leverage. But when the money moves toward small biotech, Big Pharma can’t ignore it.
Wende Hutton, a general partner with Canaan Partners, says Big Pharma business development people they knew that whichever biotech company they were negotiating with couldn’t realistically count on going public. The only way a little biotech could generate real negotiating leverage was to start a bidding war (or at least the impression of one) among multiple Big Pharma companies.
Now, little biotech companies don’t necessarily need multiple pharma bidders, Hutton says. One of Canaan’s portfolio companies, Research Triangle Park, NC-based Chimerix (NASDAQ: CMRX), was able to raise about $118 million through its IPO, which gave it enough money to run a Phase III clinical trial program on its own. Instead of being the cash-poor biotech company going on bended knee to Big Pharma—and giving away the store in the process—Chimerix now has enough money to run the key experiments that will say whether it has a real drug.
If Chimerix does pass such a test, you can be sure that a number of pharma companies will want to buy it. The price will surely be way higher than it is today.
“Pharma BD groups are moving faster than they used to,” Hutton says.
One of the things I’ll be watching over the next year is whether these dynamics entice more VC firms to get back into the game. Right now there are so few firms doing this kind of work that it’s tough for entrepreneurs to find a willing VC to invest in them. It’s maybe even harder for surviving VC firms to find any peer firms they can syndicate with, and share the risks and rewards.
As I noted a few weeks ago, these IPO windows tend not to last very long, and it’s a virtual certainty that many of this year’s IPO class will fail. But if this thing lasts a few months longer before it bursts, it could, in an odd way, help restore a long-term healthy balance in the biotech market. Here’s hoping that the surviving VCs will harvest some returns from IPOs this year, and seize the moment to raise new funds. Then they can all go out and plant a whole lot of new seeds.