Venture Financing Trends in Biotech: A Decade of Healthy Investment Returns

Biotech stocks have demonstrated enormous growth during the past few years (see: The U.S. Small and Mid-Cap Biotech Shines: Stocks on the Rise). The average stock return for biotechs was found to be over 40%, depending on the date of reference during the post-IPO period (see: Post-IPO performance of U.S. Biotechnology Companies).

Biotech firms can generate huge stock returns since their IPO offer price. But what about actual returns to investors?

VC investment deal value for companies that successfully achieved an IPO exit, hit a 10-year high in 2014 (USD 8.0 bn.). It seems that biotech has recovered fully since the global financial crisis (Figure 1). Average VC investment deal per financing is also the second-highest during the same 10-year period. One major observation is while the number of financing rounds has remained almost flat since 2006 at 400 – 480 financings, the amount of funding has been increasing at a 3% CAGR.

Figure 1: Total VC Investment Deal Value by Year - Average VC Investment per Deal
Figure 1: Total VC Investment Deal Value by Year – Average VC Investment per Deal

Despite the VC investment hype for biotech, the same cannot be said for the total amount of money raised through IPO, as well as for the average IPO raised per company (Figure 2).

Figure 2: Total Amount of IPO Raise by Year - Average IPO Raise per IPO
Figure 2: Total Amount of IPO Raise by Year – Average IPO Raise per IPO

From the previous graphs, IPO Raise to Average Deal Value can be inferred. It seems that the markets hype to pay significant premiums compared to VC investments, peaked in 2011 when the corresponding multiple reached 7.2 x. Since 2011 however, the multiple has dropped to the levels of 2006 – 2007. (Figure 3).

IPO Raise
Figure 3: IPO Raise to Average Deal Value

It would be interest to see how VC investments are distributed by phase and by therapeutic area. Approximately 70% of the investments are made to biotech companies 20% to specialty pharma, while the rest of the investment to miscellaneous technologies (generics, OTC etc.). The following two graphs present the pipeline profile of the companies targeted by VC Investors (Figure 4 and Figure 5). It is clear that VC investors target companies whose pipeline is mostly at an early stage (62% pre-clinical and drug discovery), as investors understand that innovation comes at early stage and the value added of these medicines is strongly correlated with scientific expertise and money invested during those stages.

Investment by Phase
Figure 4: Pipeline of Target Companies by Phase at the time of Investment

A similar trend is observed when looking at pipeline of target companies by therapeutic areas. Approximately half of the pipeline of firms targeted by investors is in CNS and Oncology which are the most challenging areas both in terms of finding treatments and in terms of chance of success during clinical trials.

Figure 4: Pipeline by Therapeutic Area at the time of Investment
Figure 5: Pipeline of Target Companies by Therapeutic Area at the time of Investment

From these trends the are two major observations and 1 key takeaway:

Observation 1: The typical profile of a firm receiving investment from VCs, is a firm with CNS and Oncology drugs still at the drug discovery and pre-clinical stages. Investors are targeting these high risk biotech firms as they have a huge potential of bringing more than satisfactory returns through successful exit.

Observation 2: Total VC investment experienced a growth during the last 4 years, while the annual average deal size has been constantly declining from 2006 to 2013 demonstrating an upward trend only in 2014. Average IPO raise per year has been ranging from USD 65 mn. to USD 80 mn. Although in 2014 a decreased multiple of IPO raise to VC investments (4.5 x) is observed compared to previous years, it still demonstrates a strong appetite by capital markets to invest in those companies.

Key Takeaway:  VC investors believe in high-risk early stage biotech firms with promising pipeline in challenging areas that will bring high returns through exit. At a market level, market investors continue to invest in biotechs that have successfully exited and have huge potential for realising stock returns far exceeding market-average.


Dimitris uses its unique blend of studies in Management and Biotech combined with his quick witted entrepreneurial spirit to provide deep insights into strategic and financial aspects of the Biotech industry.

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