The easy answer: offering companies that investors can get excited about.

With Facebook executives heading out for their roadshow, many on Wall Street hope the social media giant will spark some investor enthusiasm for IPOs. But whatever the outcome of that financing, it’s not likely to do much to change the lackluster market for initial life sciences offerings.

Jonathan MacQuitty, partner at one of Supernus’ venture investors Abingworth Management, said during a panel session at this week’s Deloitte Recap Allicense conference in San Francisco that the Supernus IPO was a financing event. “We knew it was going to be beaten to a pulp, but we had invested so little in the company that there was no way the company could be squished down to a level that was a problem to us,” he said. “I think this financing event was very good in the current environment, if you just look at it as a financing.”

Other companies, such as Argos Therapeutics, have been unwilling to accept terms from the street to complete an initial public offering. Argos pulled its IPO in March and then in April announced a $25 million venture round from existing investors to keep it on track with its late-stage clinical trial for its personalized immunotherapy. The funding gets Argos to the middle of next year with partial data from its trial, but not through the completion of the trial.

“We did have that plan B lined up and it really gave us the leverage we needed when we were on the road and we were negotiating with new investors and thinking about what were we willing to take,” said Jeff Abbey in a Burrill Report Podcast following the financing. “Ultimately we didn’t feel that the new money that was willing to come in was willing to come in at a value that we thought was commensurate with what had created at Argos to this point.”

This is the dilemma for life sciences. Take the money and settle for what you can get, or roll the dice and see if you can build enough undeniable value to get your price. The reality is a company is only worth what someone’s willing to pay and right now Wall Street is not too willing to shower money on biotechs.

Part of the problem is that the performance of IPOs in the sector has been pretty lackluster. But therapeutics companies that have gone public since 2011 have improved and now moved into positive territory. As a group, these 12 companies are up an average of 10.6 percent as of May 3. This is an improvement over their respective IPOs. Collectively they raised 24 percent less money than hoped while selling 22 percent more shares at an average 40 percent below their target prices.

The bigger problem, however, is that Wall Street is generally not getting to see the companies that are most likely to generate excitement that extends beyond investors in the sector to spark enthusiasm from a broader group of investors needed to get things moving. There are some notable exceptions, such as Clovis Oncology, which completed a $130 million IPO in November 2011, a company with an executive team with a track record for success and solid financial backing.

Matthew Perry, portfolio manager for the Biotech Value Fund, has voiced this concern for some time at various conferences and reiterated it again at the Allicense conference May 2. He complains that most of the life sciences companies going public today are “lower quality companies.” “The best companies in this industry are being sold,” he said. “The VCs built them, the VCs need exits, the VCs are having a difficult time raising new funds—the best companies are being sold. That’s a bad position for our industry.”

While there’s been much discussion in recent years as to whether the venture capital model is broken, far less attention has been paid to the IPO market in this sector. If the venture capital model is broken it is because there is not a well-functioning IPO market. So as venture firms try to reinvent the way they invest and what they invest in, it may address the venture capital problem of how to build toward an exit, but it leaves the financing mechanism for the industry in sorry shape.

The recently passed JOBS Act is meant to ease the pathway for emerging growth companies to go public by lowering barriers. That will make it easier and less expensive for some companies to pursue initial public offerings, but it doesn’t address the fundamental problem that the companies best able to generate investor excitement are kept from the public market. 

By DANIEL S. LEVINE AND MARIE DAGHLIAN