Despite lower sales, lack of profits and heavy R&D spending, biotech companies that went public between 1997 and 2016 reached similar market caps as non-biotech companies, according to an academic study.
Before they ever make a dime, biotech startups incur steep costs to research and develop new therapies.
But despite a business model that relies heavily on upfront capital, biotech is no riskier than other industries, at least as measured through the lens of initial public offerings, or IPOs.
That’s the conclusion of a study published this month in PLOS ONE by a team of researchers at the Center for Integration of Science and Industry at Bentley University in Waltham, Massachusetts.
Biotech firms may not be making money. But they are still generating value, said Dr. Fred Ledley, the center’s director and a professor in the departments of management and natural and applied science at Bentley.
“These companies are creating real value by doing what they do, by advancing the science, by advancing the pipeline, by establishing the foundation on which real, traditional value will be recognized at some point,” Ledley said in a phone interview.
The study examined 319 biotech companies that went public between 1997 and 2016, a period that covers advances in genomics, precision medicine and other fields. The companies were compared to a similarly sized control group of non-biotech companies that went public on the same dates.
The biotechs made fewer sales, lost money and spent more on research and development, the study found. But the stock market did not value them much differently over time.
The market capitalization of biotech companies overall grew by $127 billion during the study period, while the control group’s market cap rose by $133 billion. And the two groups had relatively similar records when it came to producing high-value and low-value companies.
Among biotechs, 134 companies reached a valuation of $1 billion, compared to 129 in the control group. Failures, defined as companies whose market cap fell below $100 million, totaled 45 among biotechs and 41 among non-biotechs.
The non-biotech group, however, did better when it came to delivering net value, defined as a company’s end valuation relative to net capital. Net capital is the total capital raised by a company minus capital returned to shareholders as dividends or stock buybacks. The control group’s net value grew by a combined $411 billion, compared to $93 billion for the biotechs.
The difference reflects the heavier capital requirements of biotech companies, the study said.
Other differences arose in the traditional metrics used to evaluate companies.
Biotech companies generated significantly lower sales, for example. Median annual revenue for biotechs was $10.1 million, compared to $192 million for the control group, according to the study.
The difference could be explained, in part, by the fact that biotech companies with successful products are often bought before they generates significant sales, the study said. Only four biotech companies in the study period reached $1 billion in annual revenue: United Therapeutics, Jazz Pharmaceuticals, Biomarin Pharmaceutical and Horizon Pharma. Only one cracked $500 million, Acorda Therapeutics, according to the study.
Annual R&D spending also was much higher: a median of $32.9 million for biotechs compared to $1.6 million for the control group. In addition, biotechs lost a median $36.2 million per year, versus a median profit of $2.86 million for the control group.
“Together, these data point to the institutionalization of a distinctive business model for public biotechnology companies in which the measure of company success is less likely to be sustained revenues or profits, but rather acquisition,” the study concluded. “In this model, the risk of investment is mitigated both by pursuing multiple product opportunities and through a portfolio that includes some products in later-stage development.”