Recent Therapeutics IPOs Outshine Market, but Performance Mixed for Broader Life-Sciences Issues

It hasn't been an easy time for life-sciences companies seeking to go public. Companies have had to wait patiently to find market opportunities and often have had to lower their expectations about how investors value their companies. Despite the challenges, drugmakers that have gone public in recent years are beating both the general market and other initial public offerings (IPOs) overall.

G. Steven Burrill

Therapeutics companies that have gone public since 2011 are up 27.1% as of the end of August 2012, outperforming the average 8.6% return for US IPOs during that time and beating both the Dow Jones Industrial Average (up 13.1%) and the Nasdaq Composite Average (up 15.6%) for the same period. The performance of these IPOs may come as a surprise given the difficult environment companies in the sector have faced for completing offerings.

The performance of therapeutics IPOs has been bolstered by a handful of companies, led by the 159.4% rise through the end of August 2012 in shares of Pacira Pharmaceuticals from its public market debut in February 2011, and the 145.6% rise in shares of Supernus Pharmaceuticals from its April 2012 IPO during that same period.

Pacira has been rising since its April 2012 launch of Expareo, a nonopiate, postsurgical pain killer. Supernus, a specialty pharmaceutical company focused on central nervous system disorders, has risen on news of tentative FDA approval of Trokendi XR, its once-daily extended-release formulation of the anticonvulsant topiramate.

In both cases, fundamental developments drove stock performance as these companies advanced towards new product revenue. The lesson here is that Wall Street will respond positively to the sector when a company makes progress to justify it. But these IPOs share another notable feature. Pacira and Supernus both took significant cuts to the target price of their offerings and raised considerably less than they had set out to raise. Pacira sold its shares at 53.3% below its initial target and Supernus sold its shares at 61.5% below its target. Overall, both companies downsized their offerings, each raising about 38% less than they had initially set out to raise.

The cut in target price that companies have been willing to take to get their deals done has been one indicator of performance. As a group, the IPOs that came in at 50% or more below their target range were the best performing group, while those deals that sold above their target range were the worst performing group.

Table I: Initial public offering (IPO) performance by sector.

Since 2010, the four life-sciences IPOs that priced above their expected range are down 50.3% while 11 issues that came within their target range are down 46.5%. By contrast, the 11 issues that initially sold at 50% or more below their target range are up 20.7%.

Table II: Life-sciences best and worst initial public offerings (IPOs).

When all life-sciences IPOs since 2010 are considered, the picture grows grimmer. As a group, all 44 life-sciences companies that have gone public since 2010, including therapeutics, tools and technology, medical devices, and industrial and agricultural biotech deals, are down 18.5% during that period.

That figure compares with an average increase for all US IPOs of 9.4% during the same period. By comparison, the Dow Jones Industrial Average (up 25.5%) and the Nasdaq Composite Index (up 35.1%) trounced the performance of the IPO group. Life-sciences companies that went public in 2010 have dragged on the overall performance of the life-sciences IPOs, with companies that went public that year down 47.6%.

Industrial and agricultural biotech IPOs have been the worst performers, with a 55.6% decline for all deals since 2010. Amyris, which is using synthetic biology to develop alternatives to petroleum-based specialty chemicals and transportation fuels, was one of the worst performers among the industrial and agricultural biotech companies, falling 80.5%. The company pulled back production plans and shifted its strategy in February 2012 after it acknowledged difficulty in scaling its technology up to commercial scale.

Tools and technology companies have also been hard hit. As a group, the four companies in this sector that completed IPOs since 2010 are down an average of 45.3%. The next-generation sequencing companies Complete Genomics (down 66.2%) and Pacific Biosciences (down 87.7%) were among the worst performing life-sciences companies as both faced difficulties building demand for their products.

IPOs continue to be scaled back and are coming to market at a modest pace. Overall, the amount of money raised in IPOs through the first eight months of 2012 is down from a year ago. Through August 2012, a total of 12 life-sciences companies completed IPOs on US exchanges to raise a total of $871 million. That is a 21.6% drop from the $1.1 billion raised in 13 IPOs during the same period a year ago. The drop is even sharper globally as life-sciences IPOs around the world raised just $1.8 billion through the first eight months of 2012 in 25 IPOs. That number represents a 48% drop from the $3.4 billion raised globally in 35 offerings during this same period a year ago.

Certainly, one thing that has helped improve the performance and outlook for IPOs has been improved stability in the market. August 2012 represents a stark contrast to August 2011, when the fight over the debt ceiling in the US and the unfolding debt crisis in Europe sparked a sharp drop in stock prices and fueled a period of volatility.

Medical device maker Globus Medical was the sole life-sciences IPO to be completed in August 2012 on a US exchange. The company raised $99.6 million by selling 8.3 million shares at $12 each. The offering came in below the company's target range of $16 to $18, but it also represented scaled-back plans for the company, which originally expected to sell 11.8 million shares with an eye to raising twice the amount it actually did.

The backlog of deals in the queue is growing. There are 20 life-sciences companies in registration as of the end of the end of August 2012. That compares with just 13 at the same time a year ago. Nine companies have withdrawn their IPOs so far this year.

The market is more receptive to therapeutics companies right now, as long as those companies are realistic about their values. However, the five industrial biotech companies in registration face a hard road to going public until the ability to commercialize these technologies is better established and investors warm to their prospects. At the end of August, Elevance Renewable Sciences withdrew its planned IPO and announced it had instead raised $104 million series E round with two private equity firms. Elevance noted market conditions for its decision.

The difficult IPO market will not likely change anytime soon, however, it does remain a viable source of capital for companies that can show real or near-term revenue, progress, and growth. Companies will need to pick and choose their opportunities. They will also need to recognize the value of being a public company with the ability to access capital on better terms in the future in exchange for settling for today's Wall Street valuations.

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