Bentley Experts Say New Business Model Could Help Save Biotech IPOs
During the biotech IPO boom in 2000, a lot of people made money; but very few products ever made it into the hands of consumers. Research by Bentley University’s Laura McNamee and Fred Ledley credits the problem to poor business models that have a glaring gap between science and business.
Scientists and investors, they point out, have very different value systems. “Investors want to return money to shareholders, and scientists get excited about cutting edge research,” notes McNamee, research associate in Bentley’s Center for Integration of Science and Industry and Natural and Applied Science faculty member. “To bring potentially life-saving drugs to the public these two communities need to come together.”
To reflect the eight-year average time it takes for a drug to get approved, Ledley and McNamee’s pioneering research analyzed the performance of 46 therapeutic biotech companies during a 10-year span rather than looking at short term investor returns. Companies were classified by how mature their core technologies were at the time of their IPO. They were classified as:
• Established: proof of concept and drugs on the market for more than 10 years
• Growing: proof of concept for 10 years but no drug on market
• Nascent: focused on very new technologies less than 10 years old with no proof of concept
Company valuation, market valuation and clinical pipelines were another important piece of the study.
“Nascent technologies had a significantly higher value at the time of public offering, partly because companies were touting technologies of the new genomics era,” McNamee explains. “Even though they had no products in clinical development, the market was valuing them high because of their potential and media hype.”
The hype didn’t pay off. A decade later, nascent technologies had almost nothing in clinical development and were barely worth the money investors had put into them. Most companies had completely abandoned promising nascent technologies. Growing and established companies, however, had at least two times the value, had products that reached market, and continued to build a product pipeline.
“It’s not that these nascent technologies weren’t good, they just weren’t ready for primetime yet,” says McNamee. “While they had enormous potential, they weren’t a likely candidate for the business models associated with a public company.”
Findings call for a business model that will evaluate the stage of the technology and appropriately value it, or filter nascent technologies until they have significantly matured and are deemed ready for an IPO. The research also points to the growing need for business people informed in the sciences — investors who can speak both languages to garner an appreciation and understanding of the industry and how the regulatory process works in order to make the right decisions and move technology forward.
McNamee is already prepping Bentley students to do this. Using Pharmaprojects database, they employ both business metrics and clinical metrics to determine the market caps of clinical trials over time.
“My undergraduate research experience at Bentley prepared me for a career in biotech industry,” says Katie DiTomaso ’13, who worked with McNamee and is currently corporate clinical trial study coordinator at Fresenius Medical Care. “Now that I’m working in the industry, I really see how hard it is to turn scientist’s ideas into marketable products.”
A scientist by training, McNamee moved from the lab bench to a business university to explore the impact of science on the world and discover more effective ways to translate science into public value.
“There are so many exciting, cutting-edge results on the table, but that doesn’t always translate into products for tomorrow,” she notes. “Part of increasing the efficiency in which the public gets products requires smarter investment decisions and a new way of doing business.”