Tuesday, February 19, 2008

If You're Betting on Acquisitions, Bet Private

It’s an odd biotech fact: given the choice within a group of more or less similarly sized and staged biotechs, drug firms generally prefer to acquire the private ones.

For biopharma companies that had gone public since 2001, only seven were acquired for more than $50 million. Over the same period, 33 private biotechs have been taken out beyond that price. (Not that this activity is anywhere near enough to either fill pharma's pipeline needs or solve biotech's financing dilemmas -- see this IN VIVO analysis of the situation.)

We don’t really know why this should be true, but we’re willing to guess.

First, there’s the natural split between investors and managers: the former want to maximize value as quickly as possible; the latter want to run companies.

In a private company, the investors nearly always win this argument because they have all the leverage: voting majority in just a few hands. In most public companies, ownership is scattered; the VCs abandon the board, leaving the managers to appoint the directors they want – all of which is why Carl Icahn lost his argument with Biogen Idec’s Jim Mullen over the company’s independence.

Moreover, VCs also talk directly with pharma’s R&D and business development world. Every senior biz dev exec worth his or her salt personally knows the key VCs and their portfolios. They by and large have no idea who the major public investors are. Far as we know, T. Rowe Price and Deerfield don’t host fancy shindigs in exclusive resorts to commingle portfolio companies and invited Big Pharma guests – but all the major VCs do (click here and here for some sybaritic reports). Indeed, we help out on one such meeting, called rEvolution (don’t blame us for the name, please), where the CSOs of the Big Pharmas and Big Biotechs eat, drink, jabber and – hopes Versant Ventures, the main host of the event – deal-make with their faster-paced but still luxury-loving cousins from biotech.

Finally, public companies are a lot more expensive than private ones – on average about 3½ times pricier, perhaps because the ones interesting enough for acquirers are also the ones which have done pretty well (like Pharmion or Myogen). And there aren’t many of those.

All of which is to say: given the tar-baby quality of IPOs (VCs can’t shake them for quite a while – often having to add their own money into the offering and then stay on boards for longer than they want to), any company that goes public had better figure on staying public for a very long time. And that’s not a message most public investors, acquistion-minded as they are, want to hear.

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