Volatile Markets Take a Toll on Life-Sciences Initial Public Offerings

Market volatility in August 2011 battered life-science companies that went public this year, wiping away nearly $1.3 billion in market capitalization. Tumultuous trading activity hit the sector harder than the broader market, affecting initial public offerings (IPOs) in general, and biotech stocks as a whole.

G. Steven Burrill

The market's gyrations, triggered by the United States' debt-ceiling fight, worries about the nation's creditworthiness, the debt crisis in Europe, and the stalled economic recovery, threw US life-science IPOs into a dramatic reversal. As a group, the return from the 13 US life-science IPOs completed in 2011 on US markets had moved into negative territory by the end of August, down an average 7.4% from their IPO price compared with the 17.2% gain they had realized by the end of July. The group in August fell 18.9%, with 3 advancers and 10 decliners compared with 9 advancers and 4 decliners at the end of July.

In all, the life-science IPOs had actually outperformed broader market indices by the end of July, but at press time were significantly underperforming the Dow Jones Industrial Average, the Nasdaq Composite Index, the Burrill Biotech Select Index, and the AMEX Biotech Index. As a class, they have also failed to match the performance of US IPOs overall, which were down 3% at end of August, according to Renaissance Capital.

Investors took flight from risk in the recent market turmoil, and that does not bode well for life-science companies hoping to complete public offerings. If the volatile market activity that characterized August persists, it could cause private life sciences companies to turn away from the IPO market and seek financing elsewhere.

Life-science companies have demonstrated a willingness to seek funding outside the US, going where they felt they had the best chance of raising money in difficult markets. Two US companies did manage to go public in August, but on exchanges outside the US. EcoSynthetix, a renewable chemicals company, completed a $101.6 million offering on the Toronto Stock Exchange on August 4. GI Dynamics, a medical-device company commercializing nonsurgical treatments for diabetes and obesity, closed an $85 million offering on the Australian Securities Exchange on August 30, and began trading on September 7.

Table I: Performance of 2011 US initial public offerings (IPOs) in August.

That's a trend that's likely to continue. Genomatica, a renewable chemical company, added itself to the IPO queue, raising the total to 36 life-science companies in registration globally.

IPOs were not alone in being punished within the life sciences sector. Dendreon had the misfortune of reporting disappointing sales for its groundbreaking cancer vaccine Provenge as markets tumbled in response to the Congressional fight over raising the debt ceiling. The company saw nearly two-thirds of its value wiped away as its shares closed at $11.69 on August 4, down from $35.84 the previous day. Dendreon's problem in ramping up sales spilled over to other companies as investors grew concerned about the pace at which other recently approved drugs will be able to realize their market potential.

Overall, the life-science sector in August witnessed nearly 6 decliners for each advancer for stocks trading over $1 at the end of month. With values depressed throughout the sector, it could fuel increased mergers-and-acquisition activity among cash-rich pharmaceutical companies looking to expand their pipelines.

At the same time, Big Pharma's problems have not gone away. The need to find new sources of revenue to replace income from sales of drugs going off patent continues to fuel dealmaking. With values depressed, acquirers will likely find more bargains today when they go shopping. We could see a pick-up in activity between now and year-end.

The stock market's wild swings dampened activity in the capital markets for life-science companies across the board. In August, the immunotherapeutics company Agenus was the only life-science company to complete a follow-on offering. It raised just $7 million. Only four public companies in the US drew private investments, raising a total of $83.6 million.

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