By Thomas Lee, San Francisco Chronicle
Tech startups normally get the glory, but biotech firms these days are getting the money.
At a time when software unicorns — startups worth $1 billion or more — are scrambling to find cash amid a slowing economy and weak demand for IPOs, pharma companies are shelling out billions of dollars for targets who are demanding big valuations.
“It’s still a seller’s market,” Neel Patel, vice president of corporate development at inVentive Health Consulting, told the audience at a major biotechnology conference in San Francisco Thursday. “Prices are still high.”
Deal activity — mergers and acquisitions, assets purchases, and partnerships — totaled $400 billion last year, about double the amount in 2009, according to an inVentive report. Small-cap drug firms and venture-backed startups drove much of the growth, attracting $25 billion, compared to just $6 billion six years prior.
Though things might slow down a bit in 2016, companies that have already received financing “are not backing down from valuations as much as we assumed,” said Ellen Lubman, vice president of external science and innovation at Allergan in Irvine.
That’s not to say software firms are not getting money. For the first three months of the year, software companies attracted $5.1 billion in venture capital, still the most of any industry, according to the MoneyTree report by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson Reuters. But the number of deals fell 5 percent from the fourth quarter of 2015.
Meanwhile, biotech firms in the first quarter received $1.8 billion from 118 deals, a jump of 11 percent in dollars and 19 percent in number of transactions.
In 2015, biotech startups enjoyed a 20 percent jump in venture dollars from the previous year, compared to just 7.7 percent for software companies.
Firms that rely on software have always had an easier time raising money than biotech companies. Building software requires much less capital and offers the prospect of a quick and large payout, whether through an initial public offering or acquisition.
By contrast, it can take several years and billions of dollars to develop and test a drug and get approval from the Food and Drug Administration.
So people should not be surprised that the vast majority of the 150 unicorns in the United States are Internet players like Uber, Airbnb and Snapchat.
However, three factors have made biotech firms more appealing to investors.
Investors have arguably overvalued software startups because they assumed cash-rich companies like Apple and Google would buy them. But tech giants still do quite a bit of innovation on their own and generally have avoided overpaying for acquisitions.
For several years, the drug industry has dramatically changed its business model. Big Pharma used to develop therapies in-house, but now the industry essentially outsources research and development to outside firms, whether through partnerships, joint ventures, or outright acquisitions.
“We need a partner who can drive (a potential drug) toward a proof of concept,” Lubman said. “We don’t have the manpower to do it whereas we have the cash.”
Second, technology to treat tough diseases like cancer and Alzheimer’s have advanced to a point that the industry is much more optimistic about new therapies, which means more cash for biotech businesses.
With cancer, “we can now start to enter ‘cure’ into our vocabulary,” said Christian Hordo, head of business development for Juno Therapeutics in Seattle.
The federal government has also made some drug investments more attractive. For example, in 2012, President Obama approved legislation that would extend by five years the permission for companies to exclusively sell new antibiotic treatments without competition from generics.
The government has been especially interested in developing therapies to combat bacterial infections because of the proliferation of “super bugs” that have proved resistant to standard antibiotics.
“Antibiotic development was an area largely abandoned by large pharmaceutical companies, but has witnessed a resurgence of interest driven by the more favorable regulatory environment and corresponding economic benefit,” the inVentive report said.
©2016 the San Francisco Chronicle Distributed by Tribune Content Agency, LLC.
