Biotech companies and investment risk – new study

Biotech News: Contrary to public perception, investing in biotech companies may not entail higher risk than investing in non-biotech companies, according to a new report.

Researchers studied the financial performance of 319 biotechnology companies focused on developing therapeutic products that completed Initial public offerings (IPOs) from 1997-2016.

When it came to companies that eventually had their stocks delisted, there was no statistically significant difference between biotech companies and firms in the control group. In both cases, the most common reason for delisting was a merger or an acquisition.

With respect to acquisitions, more biotech companies with a market capitalisation of greater than $1 billion were acquired compared to non-biotech companies.

According to the study, bankruptcy or liquidation was not common in either group (3.1% for biotech and 2.5% for control). There was also no difference between groups for the interval between IPO and delisting. Overall, this indicates that biotech and control companies had similar rates of success and failures.

“Despite the extraordinary performance of the biotech sector in recent years, biotech is still often portrayed as a high-risk investment. Our study suggests that, in fact, the high-risk, high-return pattern associated with biotech companies after their IPO is a common characteristic of companies completing IPOs from other sectors as well,” said Dr. Fred Ledley, Director of the Centre for Integration of Science and Industry “This study also suggests that, for these emerging, public companies, the science-based, biotech business model generates equivalent economic value to more traditional, revenue-based business models.”

The authors noted that caution should be used in interpreting these findings, as most biotech companies with products in development were acquired before the end of the study period and most revenue from these products would not have been accrued until after acquisition. Thus, the revenues were not recognised in their analysis.

According to the study, a measure of company success in the biotechnology sector is less likely to be based on sustained revenues or profits, but rather acquisition.