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Excitement in Biotech Industry Brings Wave of IPOs, Merger Offers

Large pharmaceutical companies, in the market for profitable new drugs to replace revenue streams from top drugs with expiring patents, are looking to smaller biotech companies for innovative products. That demand, along with a simplified Food and Drug Administration approval process for therapies for important unmet medical needs, has brought a wave of proposed and actual acquisitions of venture capital-backed biotech startups in just the first half of this fiscal year.

According to reports, five such companies have been acquired in the second quarter alone, and 16 have gone public just this year. Moreover, on average those IPOs are up 48 percent over their initial offering prices. Research partnerships between biotech startups and pharmaceutical giants are on the upswing, as well.

The activity could signal growing strength in investors’ risk tolerance, along with a vigorous deal-making environment, at least in the pharmaceutical industry. “People are hungry for growth,” says a University of Michigan professor specializing in life sciences entrepreneurship. Nevertheless, the downside risk is real, as demonstrated by the recent 50-percent drop in Aveo Pharmaceuticals’ stock price after an FDA panel urged rejection of its kidney cancer drug.

One reason interest in the industry may outstrip its downside potential is the creation of a new FDA “breakthrough therapy” designation last July through the Food and Drug Administration Safety and Innovation Act. That act gives the FDA authority to prioritize new therapies for life-threatening conditions in its review, particularly when few or no effective therapies exist.

For biotech, this could mean not only that important new therapies are developed, but also that those therapies make it through the FDA process more quickly and profitably than average. “If you can stratify the patient population you want to treat through genetic analysis, for example, you can move quite quickly through early-stage trials,” a partner at an investment firm that works in the industry.

Biotech entrepreneurs may not be willing to forego the potential profits of their work through mergers with larger companies, however. The CEO of Epizyme, a biotech company with leukemia and lymphoma drugs currently in testing, acknowledges his company is considered a prime takeover target but said “we have no intention of positioning ourselves to be acquired.”

Source: The New York Times’ DealBook, “Potential for Deals Drives a Big Surge in the Biotech Sector,” Arlene Weintraub, July 11, 2013

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