Thursday, April 21, 2011

BayBio Day 1: One Way Out

Even if the IPO market for biotechs isn’t quite dormant, venture investors are behaving as if it is. That was the overall sentiment expressed in three different venture-focused panels held on day 1 of the annual BayBio confab. As Alan Mendelson of Latham & Watkins deadpanned while moderating an afternoon panel specifically geared toward exit strategies, IPOs are “painful.” Thus, given diminished expectations and poor aftermarket performance in the public markets, building toward an M&A exit is just about the only game in town.

That's not a surprising conclusion. Though confidence in IPOs has increased in certain circles over the past year, this enthusiasm is rooted in the belief that any liquidity -- even if it requires a tomahawk chop -- is a positive given the deep freeze of 2008 and 2009. But if the favored exit for most VCs has generally been M&A, this preference raises another issue: the availability of buyers interested in a technology or product. As therapeutic areas go in and out of fashion within Big Pharmas' halls faster than jeggings or the gladiator look during a NY fashion week, what are the merits of building a company for M&A versus building for independence? (Call the latter the Field of Dreams strategy: Build it and the buyers will come -- if the data are positive and the risk is, thus, lower.)

Over the course of the first day, a balance emerged between the two streams of thought. The morning’s first panel argued for building toward M&A as the preferred approach, even as it outlined a broader shift in biopharma VC investing that favors de-risked later-stage assets that can be sold within three to five years. Three panelists – Scale’s Lou Bock, Norwest’s Casper de Clercq, and Pappas’ Rosina Maar Pavia, have moved toward later-stage investing in recent years, while CMEA’s Karl Handelsman was blunt in his assessment that “other people’s money” should be used to fund early stage R&D.

But as the day wore on, others reminded the audience that designing companies to be sold isn’t so simple. In an afternoon discussion, Essex Woodlands’ Ron Eastman managed to say the words “I don’t think you can plan for an exit strategy,” while noting the unpredictability of the FDA and “Mother Nature.” Better, he said, to “be prepared for luck to play a role.” Comments from MPM’s Vaughn M. Kailian show why flexibility is a must. Noting that "sometimes you’re betting on management,” he reminded the audience that it's not uncommon for most successful companies to shift their strategy after a few years. Eastman later echoed the sentiment, even throwing in the dreaded word “pivot".

Even without the chance to go public, designing for independence adds leverage as an acquisition is negotiated, as long as deep-pocketed VCs can keep a company alive. Eastman noted the that preponderance of acquisitions grow from licensing discussions, often in structured deals, while Neuraltus Pharmaceuticals’ Andrew Gengos, a former member of Amgen’s M&A team, added that unencumbered companies with few existing partnerships are the easiest ones to sell.

If no one’s exactly waiting around for the IPO to become a likely exit option again, some believe it could still return as a credible alternative if corporate M&A picks up. Kailian suggested that a Big Pharma M&A binge of late-stage assets will spur interest in mid-stage companies, while bankers who missed out on expensive buyouts will eye IPO prizes and take companies public, perhaps even when they shouldn’t. “Unlike VCs, bankers can be real pigs,” he joked – I think.

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