Biotech's IPO performance pokes holes in Silicon Valley's justification for staying private so long.
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Silicon Valley has argued that the public market's focus on near-term profits is part of the reason companies stay private for so long. But those fears may be overblown, if the stock performance of money-losing biotech start-ups is any indication.
Between 2001 and 2017, only 6% of biotech companies were profitable at the time of their initial public offering, according to analysis by Jay Ritter, finance professor at the Warrington College of Business at the University of Florida. Yet, during the same time frame the average three-year buy-and-hold return for biotech companies that went public was 36.3% — beating the market by 14.0%.  The nation's top tech investors have voiced frustration about the short-term focus of stock market investors. But Ritter said the risk is overblown, and threats of corporate raiders and activist investors swooping in to boot out management "is talk rather than actual evidence."
Uber and Lyft have been poster children for the money-losing business model this year. But biotech's business model is different from ride-hailing, social networks or software companies. The reason they're unprofitable often has to do with regulatory approvals and expensive clinical drug trials. Regardless of the industry, Ritter said investors in both private and public markets are eager to take IOUs on future profits. |
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