Biotech IPOs on a Hot Streak

When five biotech companies completed initial public offerings (IPOs) in the closing days of January, it quelled speculation that the robust market for these offerings might cool down in 2014. Instead, new issues just kept coming at a faster pace and turned the first week of February into the busiest single week for biotech IPOs in 14 years as eight more companies raised a combined $490 million.

By the end of February, 22 life-sciences companies had completed IPOs on United States exchanges, raising a total of $1.4 billion. They included 18 companies focused on therapeutics or diagnostics and four medical device makers. That compares with four IPOs during the same period last year.

These 22 companies were up an average of 37.9% above their initial public offering price at the end of February, a performance that bested the general market indices (the Nasdaq Composite Index up 3.1% and the Dow Jones Industrial Average down 1.5%) and the biotechnology indices (the Burrill Select Index up 17.9%). Seventeen companies ended February above their IPO price and five companies ended the month below. Twelve more companies added themselves to the IPO queue in February, including three Israeli biotech companies planning to go public on US exchanges. Two companies, Circassia and Horizon Discovery, said they were planning IPOs on London Stock Exchange’s AIM.

Investing in Biotech
For many years, general investors had been reluctant to invest in biotech because of uncertainties overhanging the industry, but that has changed. They see that the new drugs coming out of biotech are driving value. Unlike the disappointment that overshadowed drug launches in recent years, these new products are meeting and exceeding expectations as they are proving to be not only effective, but also safer and more easily tolerated than alternatives. The list of newly public companies is rich with cutting-edge innovation. Three biotechs are focused on therapies for rare diseases (GlycoMimetics, Ultragenyx Pharmaceuticals, and Auspex Pharmaceuticals). Two biotechs are developing gene therapies (Celladon and UniQure); and one biotech is developing RNAi-based therapeutics (Dicerna Pharmaceuticals).

Dicerna, which plans to begin clinical testing of its experimental treatment for hepatocellular cancer and solid tumors, priced an upsized IPO at the end of January at $15 a share, 25% above the midpoint of its target range. Shares began the first day of trading at $30 and kept on climbing, ending the day at $45.50, up 203.3%. It was the largest opening day gain of any biotech IPO in at least nine years. At the end of February, Dicerna was 165.5% above its IPO price.

The path to an IPO for biotech companies, which had been to cut the offering price, increase the number of shares offered, and often get insider buy-in to get the deal done, has turned around. As strong market performance of biotechnology companies and a flood of new money into the equity markets created a favorable environment for new issues in 2013, generalist investors that had previously shunned the sector now feared that if they didn’t embrace biotechnology, they risked underperforming the market. That fear caused the biotech IPO market to surge. Companies began to complete IPOs within their target ranges. Products and revenue were no longer necessary if a company had a compelling story. And although insiders would sometimes still take down a large portion of an initial public offering, it was not as a requisite to getting the deal done, but rather because they wanted to buy more stock.

An Upbeat Market
The exuberant mood was exemplified by Agios Pharmaceuticals’ IPO, which went public at the end of July 2013. Founded in 2007, the biotech’s lead program, in preclinical development, targets genetically driven cancers. It also had an ongoing collaboration with Celgene. Agios raised $106 million through the offering by selling 5.9 million shares at $18 a share. Demand to participate in the IPO was so strong that the company commanded an offering price 20% above the midpoint of its target and sold 18% more shares than it had expected to sell, none of which were sold to its existing investors. The biotech’s shares popped 73.8% in its first day trading, and the only preclinical-stage biotech to complete an IPO on a US exchange in 2013 ended February up 73.7%.  

In fact, 2013 was the best year for life-sciences IPOs in terms of capital raised and the best since 2000 in terms of the number of issues. The big IPO story took place in the US where life-sciences IPOs benefited from the sector’s strong market performance. The year ended with 52 life-sciences companies completing IPOs on US exchanges to raise a total of $7 billion. That compared to 16 companies that went public in the US in 2012 and raised $1.1 billion.

The life-sciences companies that went public on US exchanges in 2013 ended the year up an average 48.4%. A total of 42 companies, or 80%, ended the year above their IPO price, and six of them more than doubled their initial offering price. As a class, therapeutics companies performed best within the group. The 37 therapeutics companies that went public in 2013—71.5% of all the new issues—rose an average of 49.6%.  More than two-thirds of these companies had a lead program that was not yet in late-stage clinical testing. By contrast, of the 11 human therapeutics companies that completed IPOs in 2012, only three, or 27%, had a lead program that had not yet reached late-stage clinical testing. Scientific and technological advances in understanding the molecular underpinnings of health and disease has given investors more confidence in placing bets on earlier-stage companies. The 17 human therapeutics companies that have completed IPOs as of the end of February 2014, seven have products in mid-stage testing (see Figure 1).

Investor enthusiasm for these offerings has allowed more biotech companies to get their price. In 2014 so far, 12 human therapeutics developers have priced within or above the target price out of 17 IPOs, or 70% of the offerings.  

The biotech industry has matured. Many of the top-selling drugs of big pharmaceutical companies have come out of biotech companies. There are more than 900 products in late-stage trials. Investors see the sector’s potential to deliver innovative products to help patients as new drugs reach market and promising ones in the pipeline advance with encouraging clinical data. There is money to be made. 

About the Author
G. Steven Burrill is chief executive officer of Burrill Media LLC, San Francisco, CA, 415.591.5400, [email protected]