IPO Market Heats Up for Life-Sciences Companies

When Epizyme debuted in its initial public offering at the end of May 2013, the development-stage biotech company, which is developing personalized cancer treatments, sold its shares at $15—the top of its target range—and finished its first day of trading at $22.99, more than a 50% increase. Within its first week, shares traded above $30.

G. Steven Burrill

Including the underwriters' exercise of their overallotment, Epizyme raised a total of $88.7 million, more than the $60.2 million it was expected to raise had the offering been completed at the mid-point of its target range. It sold 5.9 million shares, a million more shares than the company had planned to sell.

Epizyme's performance was a fitting finish to a month that saw a total of eight life sciences IPOs on US exchanges, the busiest month for initial public offerings in the sector since August 2000 when 16 issues debuted, according to a Burrill & Company analysis of S&P Capital IQ data. The eight life sciences IPOs in May nearly equaled the number of IPOs completed during the preceding four months of 2013. At the same time, the queue of life-sciences companies filing to go public continues to grow, reaching 17 at the end of May.

RENEWED INTEREST IN BIOTECH

The burst of activity is leading to familiar, if outdated, talk in both the trade and popular press of an "open window" for biotech IPOs. Renewed interest in life-sciences IPOs is certainly welcome. Recent activity has created the best environment seen for biotech IPOs in a long time, but it nevertheless remains a demanding market for companies seeking access to the public markets. Biotech companies often need to price deals below their targets to get them done and venture investors routinely must commit to purchasing sizeable portions of the IPO.

There are several factors that are driving the improving environment for life-sciences IPOs. Public market biotech stocks have continued to show strength, outperforming the general market. Leading biotechs Amgen, Biogen Idec, Gilead, and Celgene each closed at record highs at the end of the first quarter of 2013. Also pushing these stocks into new territory have been significant developments, such as the regulatory approval of Biogen's new oral multiple sclerosis drug, and growing expectations for Gilead's experimental hepatitis C drug.

The JOBS Act appears to have been a contributor as well. The legislation, passed in April 2012, eases regulatory demands on emerging-growth companies seeking to raise capital through initial public offerings, allows emerging-growth companies to file confidentially with the US Securities and Exchange Commission, and test the waters with investors to gauge their interest. Most of the life-sciences companies to go public this year have done so under the provisions of the JOBS Act.

Table I: Performance of 2013 US IPOs.

Last, aftermarket performance of biotech IPOs has started to attract the attention of investors and warmed them to the prospects of companies in the sector. The performance of the class of 2013 has been solid, with the new issues edging out the major indices. Through the end of May, newly public companies are up an average of 20.9%. Of the 17 IPOs during the first five months of 2013, 14 are trading above their IPO price and four are trading below.

THE BEST AND THE WORST PERFORMERS

Stemline Therapeutics, for that period, stood as the best performer in the group with a 70% increase from its IPO price. Stemline completed its IPO at the end of January, raising $38 million, but only after cutting the price of its offering to $10 a share, below its $11 to $13 target. The clinical-stage biopharmaceutical company is developing therapeutics that target cancer stem cells, as well as tumor bulk.

KaloBios Pharmaceuticals, which raised $70 million in an initial public offering also at the end of January, is the worst performer in the group. Its shares at the end of May traded at nearly 30% less than the IPO price. The biotech company is developing antibody drugs to treat respiratory diseases and cancer. To get its IPO done, the company cut its offering price by 38% from the midpoint of its original target range and more than doubled the number of shares it offered.

Investors have continued to remain selective and demanding on price. Of the 17 issues, nine priced below their target range and seven priced within their target range. Zoetis, the animal health spin-out from Pfizer, was the only issue to price above its range. Companies on average priced 17% below their targets and sold 35.4% more shares than they had planned.

The $4.1 billion raised through the first five months of 2013 has already surpassed the $2.1 billion raised in all of 2012. It is already the biggest year for life-sciences IPOs since 66 initial public offerings in 2000 raised $6.5 billion. The total raised by life-sciences IPOs this year has been buoyed by the $2.6 billion raised by Zoetis, as well as the $525 million raised by Quintiles Translational Holdings, the world's largest provider of outsourced clinical services. The Quintiles deal, which was upsized and completed at the top of its range at $40, included a substantial number of shares for selling shareholders. The offering totaled $942 million, but only $525 million represented shares sold by the company. Those two offerings represent more than three quarters of the total raised through the first five months of the year.

This year's performance to date underlines the fact that biotech is no longer a fledgling industry with unpredictable risks for investors or with limited periods of enthusiasm for companies to capitalize upon as financing opportunities. It's not a question of whether a company can go public today, or any day, but what price they are willing to accept.

G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, sburrill@b-c.com