IPOs not as favored as M&A deals in Q1: Altus Pharmaceuticals’ $105 million is largest of first quarter

VC-backed companies were more likely to be acquired than to launch a public stock offering in the first quarter of 2006, according to the Exit Poll report by the National Venture Capital Association (NVCA) and Thomson Venture Economics (publisher of PE Week).

The first quarter of the year was in fact the strongest for venture-backed M&A activity since the first quarter of 2001, with a total value surpassing $4.8 billion for 43 disclosed deals, the report said. (In all, there were 95 VC-backed mergers or acquisitions in the three month period, but only 43 disclosed the financial details, according to the report.)

The average deal size was $122 million, which is 20% larger than the $94 million average in the first quarter of 2005.

The largest disclosed deal so far in 2006 was the $600 million acquisition of wireless network products developer Flarion Technologies by Qualcomm in January.

Bedminster, N.J.-based Flarion had raised about $75 million in VC funding since its 2000 inception from Bessemer Venture Partners, Charles River Ventures, New Venture Partners, SK Capital, Cisco Systems, Equitek Capital, Lucent Technologies, Nassau Capital, Pequot Capital Management and T-Venture Holding.

IPOs come out weak

During the same three months, only 10 VC-backed companies launched IPOs, for a total offering amount of $541 million.

While the first quarter is typically the slowest of the year for IPOs, the offering amounts were down considerably. The first quarter’s average offer amount of just over $54 million is the lowest average since the third quarter of 2002, when the average offer amount was $30 million. The average offering amount was just over $72 million in the first quarter of 2005.

Mark Heesen, president of the NVCA, says that the poor IPO activity to start 2006 makes him uneasy.

“We are becoming increasingly concerned about the economic implications of the lackluster IPO market for venture-backed companies,” he says. “Although we are bolstered by the continued strength of the acquisitions market, we cannot rely on it as the only avenue to produce above-average returns for the venture industry.”

Still, if there’s a bright spot in IPOs it’s the strength of life sciences. The sector drove the IPO activity in the first quarter, accounting for seven of the 10 IPOs.

The largest IPO of the quarter came from Altus Pharmaceuticals Inc., which priced a $105 million IPO in February.

The company, a Cambridge, Mass.-based developer of protein therapeutics for chronic gastrointestinal and metabolic disorders, raised about $103 million in VC funding from Warburg Pincus, U.S. Venture Partners, Vertex Pharmaceuticals, Nomura, BankInvest, CMEA Ventures and China Development Industrial Bank.