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FEATURE: With the Market in the Dumps, VCs Rethink Genomics Valuations

NEW YORK, March 30 – Executives at early-stage genomics companies seeking startup capital will have to reduce their expectations regarding the valuations they can expect to command for their companies, given the sharp downturn in the stock markets, venture capitalists said Friday. 

“You would think, or any logical person would think, the market is off more than 50 percent for biotech so the valuations for early stage companies would come down,” said Steve Burrill, CEO of San Francisco-based merchant bank Burrill & Co. “Although we see a bit of an inversion in that right now, the price of your house is in large part a function of the price of the house next door.”

Over the past few weeks, publicly traded genomics companies have seen their share prices plummet, driving down the companies’ market capitalizations and forcing market watchers and investors to rethink the level of valuations that should be assigned to privately-held companies.

Some venture capitalists noted that this would ultimately help to make the valuations assigned to the genomics sector more rational and realistic.

“In a more competitive environment, companies go out to raise money and they approach venture capitalists and angels who are prepared to pay $30 million for a pre-startup company,” said Michael Brennan, a general partner at Oxford Bioscience Partners in Boston. “The long-term consequence is that after several rounds of financing a company will have to go public at a $1 billion valuation.”

Yet, while the market seeks its equilibrium, the effect of the market slump on younger genomics companies could be devastating. In some cases, startups will not be able to raise as much venture capital as those companies that received funds last year when genomics was all the rage. In other cases, money simply will not be available.

With several publicly traded genomics companies trading at or near a discount to their cash positions, venture capitalists are starting to consider these bargain-basement shares as an alternative to investing in young companies that lack a track record for being able to successfully bring products to market. 

“Early stage companies have an interesting dilemma: The progression of science doesn’t depend on the market, but in a down market it makes a lot of sense to look at the publicly traded company that is undervalued,” said Nick Galakatos, a general partner at MPM Capital in Cambridge, Mass.

He noted that concerns about genomics companies’ ability to make money down the road had also caused his fund to reevaluate the amount of money they are planning to invest in genomics companies this year. Last year, MPM invested about $80 million in genomics and post-genomics companies out of a total of $250 million. This year he has earmarked only 15 to 30 percent of $250 million for the sector, while the remainder will go to companies that are making drugs and medical devices.

Like Galakatos, Stephen Sullivan, a partner at “sweat-stage” venture capital firm Skyline Ventures in Palo Alto, Calif., said he, too, is looking beyond enabling technologies towards companies that can promise drugs.

Picks and shovels related to the genome – that’s where Myriad was 10 years ago. With population genomics, it’s much less clear where the financial upside is,” he said. “But a company that can discover a small molecule to attack the target – that is indeed something we’re interested in.”

As for later-stage privately held companies, they too are currently in a tough bind. Many of these companies raised tens of millions of dollars in venture capital at a time when they could command steep valuations. Now, several of them may be at the stage when they had hoped to raise more money through an initial public offering.

However, with the IPO markets all dried up, a later-stage company that needs cash would likely have to calibrate its valuation to be more in line with the lower valuations of publicly traded companies. 

“If companies have to go back for more money now, some of them will have to raise money at a discount to their valuations in what is known as a down round,” said Galakatos. “This is not going to make investors and existing employees very happy.”  
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