As I wrote in last week's column, 2004 was a great year for the public debut of biotech companies. This IPO class is an interesting group, with some newcomers already off to a fast start, including Eyetech, Pharmion, and CoTherix. Unfortunately, some others are working through setbacks. So ultimately, the group gets an Incomplete and cannot be judged until enough time has passed for the drug programs to mature. Since drug development takes so long, let's check back in on the group in five years.
In the meantime, let's take a look back at a previous class of biotech IPOs to see how these companies do in the long run. Biotech IPO windows are interesting events that happen every few years where a few dozen private companies enter the big leagues. Before last year's crop, there were flurries of IPO activity in '91-'92, '95-'96, and '99-'00.
I've looked at the genomics-era companies that went public in '99-'00, and I can tell you that with a few exceptions, nearly every single one of them has a stock price far below what it was at its boom-time debut. That probably won't surprise anyone, so I don't think we'll learn much by studying this group right now.
Instead, I went to the class of '95-'96 to see how biotech companies have fared as a group over the long haul. Even though drug development takes a really long time, nearly a decade in the public spotlight should be sufficient for even the most patient among us to assess how well these companies have done.
As a biotech analyst I find the results to be quite disappointing. If you are a fellow biotech devotee, I have to warn you that this is going to be really ugly. Not just ugly, but troll-living-under-the-bridge U-G-L-Y.
The slackers in the back row
To get a start on this project, I obtained the names of biotech companies that went public in '95-'96 from two sources. The first was an article, written in 1999, from the always top-notch Signals website. The other source is one of my favorite books on the biotech industry, From Alchemy to IPO: The Business of Biotechnology by Cynthia Robbins-Roth. Go pick that up; it's a great read.
From these two sources, I found 41 biotech IPOs that took place from mid-1995 through the end of 1996. This group contains some very popular companies, including Affymetrix
But before I get into the results, let me pose a few questions. If you had to guess, how well would you think this batch of 41 biotech companies did for investors over the decade since they went public? How many are still in business? How many are profitable? How many have a share price today that is higher than on the stock's first day of trading?
Guesses ready? The results are in the table below. Have a seat, take a deep breath, and then read on.
Out of 41 biotech companies that went public in '95-'96:
- How many are still independently operating? 25 (61%).
- How many went out of business? 4 (10%).
- How many were acquired? 12 (29%).
- How many were acquired at a loss? 7 (17%).
- How many are profitable today? 6 (15%).
- How many have a current share price higher than the close from the first day of trading? 15 (37%).
Looking at these results, I find the performance of this group to be largely disappointing. Only 25 are still in business today, with the remainder either going bankrupt or getting acquired. While acquisitions aren't bad in and of themselves, it is a poor outcome for shareholders when the company is sold for less than what it was worth on the day of its IPO -- as was the case for over half of the companies that were acquired. That is far from an ideal return for investors looking to invest in fast-growing companies.
Despite the bankruptcies and buyouts for pennies on the dollar, many of the companies are still around today. Does this mean that they have performed well for long-term shareholders?
Unfortunately, no. Of the 25 that are still in business, a measly six are profitable today. I certainly wouldn't call that stellar performance. It is interesting that of these six, only one is a high-profile name in the industry -- Affymetrix. The other five are Connetics
While profitability is great, it is not necessarily a requirement for good investment returns in the biotech sector. So perhaps despite a lack of profitability, the 25 companies still hanging around could have done well for investors. Maybe?
That result can be called mixed, at best. Accounting for stock splits, out of the 25 companies still around, 15 have a share price that is higher today than the closing price from the company's first day of trading. Not surprisingly, five out of six of the profitable companies are among this group. Rounding out the group are biotech companies for which profitability is now legitimately on the horizon. This includes Cubist Pharmaceuticals
If the important measures of a public company are profits and the creation of shareholder value, then the biotech IPO class of '95-'96 is generally a disappointment.
The dean's list
So far, the results from the class of '95-'96 have been so mediocre that you may be wondering whether it is worth investing in biotech companies. Should investors ignore biotech entirely and stick with index funds or Fortune 500 companies with long track records and -- gasp -- dividends? Not so fast. I have yet to showcase the big winners.
I mentioned above that there were 12 acquirees out of this IPO class and that seven were not transactions that were beneficial to shareholders. What about the others?
As it turns out, there were four major acquisitions that took place, generating great returns for shareholders. Chiron
Those are some serious figures being thrown around, and these are the types of deals that generate the market-trouncing returns that biotech investors are aiming for. Maybe there's hope for this class yet.
I am strongly tempted to give the IPO class of '95-'96 an F based on massive destruction of investor capital. I'm also tempted to give it an Incomplete because the weak have already been weeded out. And if you look at the remaining companies, there are some future stars in the group. Maybe the Millenniums, Neurocrines, or Transkaryotics have yet to turn a profit, but they are companies on the verge.
But it's a bit of a cop-out to let them slide with an Incomplete 10 years on. Let's give them an F based on their aggregate performance, but keep in mind that savvy investors who picked the right companies at the right time may have gotten A's. And that's kind of the point -- biotech is something of a minefield, not an area where you can just "buy the sector" and wait for profits. We'll have some misses, but we'll also have more than our share of home runs.
I see several clear themes emerging from this exploration of biotech's history. The most important is that products matter a lot and are probably the single most important factor as to whether or not a biotech company will be a great long-term investment. As an investor, patience will not make up for the lack of a tangible product. The results of this survey strongly suggest that long-term performance requires not only great science, but drugs that are on track to launch in a short period of time.
So have venture capitalists, entrepreneurs, investment banks, and investors learned anything over the past 10 years? The biotech IPOs of '03-'04 in many ways address exactly these concerns. Unlike what we saw in '95-'96, or even '99-'00, many of the new companies had advanced products with which to entice investors. Eyetech and Pharmion owe a good deal of their success to the fact that investors didn't have to wait long to see product revenues come rolling in.
But even companies that have had mediocre-to-downright-nasty receptions in the public markets -- such as Corgentech
For additional articles on the drug industry, see:
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