A recent paper in Nature Biotechnology analyzed British biotech firms focusing on their returns generated, available funding, and management/director's compensation.
Figure 3 of the article was the most interesting, analyzing company exit valuations vs fund invested. For the most part, most of the exits (whether via merger or IPO) yielded positive returns, however, UK exits via merger/acquisition represented a conspicuous majority in the negative return portion of the graph. Why is that?
One factor proposed is undercapitalization of the companies in the first place. "Underfunding ... results in companies being valued poorly when they float on the stock market, raising only small amounts of cash from the sale of shares at initial public offerings (IPOs)". The latter part of the article discusses how board compensation schemes drain cash reserves of companies, especially in cases where their shareholdings are low in the first place. The authors also point out that "companies with more robust cash positions tend to have founders retained as executives and board members". Of course, retaining key figures is a good sign in other industries, not just in biotech.
However, despite focusing on the compensation level influence on company performance, the authors mention one key thing prior to diving into the meat of their paper: "a biotech with cash has the option of using its cash reserves and scientific expertise to acquire new technology, through in-licensing or acquisition of a cash-strapped peer or one on the verge of bankruptcy. If it has little cash, it cannot do this and must pursue what it has in its portfolio." As is the case in other countries, it seems that poor investment in nascent stages of biotech firms in effect can doom the company to mediocre performance in the future.
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