Biotech companies continue to rely on mergers & acquisitions over IPOs as a primary exit strategy, according to a new report by the San Diego Business Journal.

The San Diego Business Journal reported:

Normally, we can get a better valuation by doing a trade, sale or merger than an initial public offering,” said Ivor Royston, managing partner and founder at Forward Ventures. “We get better returns. I see a continuation of mergers and acquisitions that has been so dominating over the last two years. We just don’t see that many IPOs" . . . .

Royston, who was a founding partner of the former Hybritech, the first San Diego biotech, said large pharmaceutical companies are increasingly interested in acquiring startups as their pipelines run dry.

“Drugs are going off patent, and there is stifled innovation,” Royston said. “There are good relations now going on between private biotech and large pharmaceutical companies.”

Despite the continued trend toward reliance on mergers & acquisitions to cash out, the biotech industry has seen some IPO activity in the last year.

The San Diego Business Journal further reported:

The value of IPOs in the biotech industry in 2006 was $944 million, up 50 percent over 2005, according to the Ernst & Young 2007 Global Biotechnology Report.

But just $80 million, or 8.4 percent, of the total raised by companies going public in 2006 came from the San Diego region. Cadence Pharmaceuticals Inc. and SGX Pharmaceuticals Inc. were the only two [San Diego] biotech IPOs in 2006.

The San Francisco Bay Area had twice as many in 2006, according to the report, raising a total of $211 million — making up 22 percent of the amount raised by biotech IPOs in the nation last year.

IPOs in the Mid-Atlantic region and New England each made up 20 percent of the nationwide total raised from stock offerings in biotech.

The San Jose Business Journal’s report is consistent with what I have always seen in the biotech industry–that the ultimate plan of most biotech companies is to sell the company.   Of course, in recent years, high tech companies have been following a similar strategy.  IPOs in the Silicon Valley have been few and far between, but there have been many transactions by merger or acquisition.  So, for many companies across the board, mergers and acquisitions rather than IPOs have become the preferred manner by which to raise capital or exit the business. 

Will this trend continue?  My prediction is a definite "yes."  While I think IPO activity is starting to pick up and there may be more IPOs in the biotech industry as well as other industries in the coming year, I predict that mergers and acquisitions will continue to be the primary exit startegy for biotechs for many years to come.