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Saving the Biotech IPO
This article originally appeared in the Bentley Magazine.
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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. Bentley’s Laura McNamee, PhD, and Fred Ledley, MD, trace the problem to business models with a glaring gap between science and commerce.
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,” explains McNamee, a research associate in Bentley’s Center for Integration of Science and Industry. “To bring potentially life-saving drugs to the public these two communities need to come together.”
The message is timely, as FactSet and other sources mark 2013 as the busiest year since 2000 for life sciences IPOs.
A High Price
Their study made a special effort to reflect the eight-year average required for a drug to earn FDA approval, by analyzing performance of 46 therapeutic biotech companies during a 10-year span, rather than looking at short-term investor returns. They classified companies based on maturity of their core technologies at the time of the IPO.
· Established: Mature technology with products that are FDA approved or near approval
· Growing: Technology with clinical proof of concept, but no products approved or near approval
· Nascent: Technology without clinical proof
The study also looked at company valuation, market valuation and clinical pipelines.
“Nascent technology companies had a significantly higher value at the time of public offering, partly because companies were touting technologies of the new genomics era,” says McNamee, who also teaches in the Natural and Applied Sciences Department. “Even though they had no products in clinical development, the market valued them high because of their potential and media hype.”
The hype proved unwarranted. A decade later, nascent technologies had almost no products in clinical development and were barely worth the money investors had put into them.
Growing and established companies were a different story. Most had doubled in value, brought products to the 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,” 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 either evaluates the stage of the technology and attaches an appropriate value, or filters nascent technologies until they have matured sufficiently for an IPO. More broadly, the research points to the growing need for business people informed in the sciences. Investors must speak both languages to understand the biotech industry and the regulatory process, then make the right decisions that move technology forward.
McNamee is already schooling Bentley students in these skills. Her research assistant on the biotech IPO study, Katie DiTomaso ’13, used software to apply both business metrics and clinical metrics in determining the market capitalization of clinical trials over time.
“The project really opened my eyes to the gap between science and business,” recalls DiTomaso, who joined Fresenius Medical Care as a corporate clinical trial study coordinator. “Now that I’m working in the industry, I see the challenges that companies face in moving through the clinical trial process.
Results-oriented initiatives are at the core of Bentley’s Center for Integration of Science and Industry. The center director, Fred Ledley, holds appointments in both the Management and the Natural and Applied Sciences departments.
“The hardest thing for students to learn is how to incorporate all the ‘right answers’ from four years of classes into an integrated understanding of complex, often chaotic business systems,” says Ledley. “Our center teaches students to draw on what they have learned in in different disciplines, and come up with new ways of thinking about how businesses create value from scientific discoveries and technological innovations.”
McNamee shares the philosophy. “There are so many exciting, cutting-edge results on the table, but that doesn’t always translate into products for tomorrow,” she says. “Part of getting these products to people is by making smarter investment decisions.”