Last year, biotechnology companies looking to go public followed a somewhat predictable path. They would have to cut their offering price to below their target range, increase the number of shares they were offering to offset that, and get existing investors to commit to buy between a quarter and half of the offering. The companies that were able to attract enough public market interest to go public a year ago generally had products and revenue, or a clear path to getting there.
One year later, the biotech initial public offering (IPO) market has surged ahead. IPOs are getting done within their target ranges, products and revenue are not necessary if a company has a compelling story, and insiders may still take down a large portion of an initial public offering, not as a requisite to getting the deal done, but rather because they want to buy more stock.
Consider that some of the most successful IPOs of 2013 are development-stage companies that offer exciting therapeutic approaches, but are years away from having a marketable product. These include the $101-million IPO by the mid-stage gene-therapy company Bluebird Bio (up 46.5% at the end of August), the $38-million IPO by the mid-stage cancer stem-cell company Stemline Therapeutics (up 244.6% at the end of August), and the $88.7-million IPO by the early-stage epigenetics company Epizyme (up 84.8%) (see Table I).
In fact, 16 of the 22 human therapeutics companies that completed IPOs in 2013, or 73%, 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.
|Table I: Performance of 2013 US IPOs. Source: Burrill & Company|
|Target Price Range (USD M)||Target Number of Shares (M)||Capital Raised (USD M)||Actual Number of Shares (M)||Offering Price (USD)||Price 8/30/13 (USD)||Return from IPO|
|Marrone Bio Innovations||MBII||Industrial/Ag||8/1||14-17||4.2||57.0||4.8||12||13.25||10.4%|
|Cellular Dynamics International||ICEL||Tools/|
|Average return from group||35.0%|
|Note: Target range and number of shares is original proposal, which changed as the company failed to price in that range. Omthera Pharmaceuticals sold to AstraZeneca—final price is price paid|
The line of biotech companies seeking to go public continues to grow. It’s unclear how long investors will maintain their enthusiasm for the sector or whether tensions in the Middle East, political squabbling over the debt ceiling, or some other unforeseen development will derail their appetite. But one thing is clear: biotech companies are enjoying the best IPO market since 2000 and they are moving to capitalize on the opportunity to raise capital in the public market.
Overall, through the end of August 2013, the number of life-sciences companies that completed IPOs in 2013 were up an average of 35%. That increase far outpaced the major market indices during the same period as the Dow Jones Industrial Average rose 13%, the S&P 500 climbed 14.5%, and the Nasdaq Composite Index gained 18.9% during the same period.
As a class, therapeutics companies have been the best performers in the group. The 24 therapeutics companies that have gone public since the start of 2013--75% of all the new issues--are up an average of 48.8%. That increase compares to an average 17.6% gain for the three tools and technology companies that have debuted since the start of 2013, a 16.2% average decline for the two industrial/ag biotech companies, and a 23.9% average decline for the three diagnostics companies that have gone public during that period. Of the 32 new life-sciences companies that debuted in 2013, by the end of August, 24 companies were trading above their initial offering price, seven below, and one was essentially unchanged.
There are several reasons for the strong IPO market, not the least of which is the impressive performance of public market biotech stocks this year. The Burrill Select Index, an index of leading biotechnology stocks, posted a 40.36% gain through the end of August with top companies, such as Amgen, Gilead, Biogen Idec, and Celgene, reaching all-time highs this year. The gains have been driven by clinical successes, new drug approvals, and sales of product. The positive activity has also brought the general investor back to biotech, expanding the market for biotech shares.
Regulatory burden lifted
Though biotech has always been viewed as a high-risk, high-reward sector, there has been a change in perception among investors as the environment has changed. Healthcare reform is no longer an unknown threat. The Prescription Drug User Fee Act won easy renewal without any punitive new demands on the industry, and new mechanisms to accelerate the pace with which drugs can be approved--namely the Breakthrough Therapies designation--have been introduced. New drug approvals in 2012 reached a 16-year high and are on pace to match that again this year.
The sector is also benefitting from the JOBS Act, the 2012 law that allows companies that meet the definition of an emerging-growth company under the Act to ease the regulatory burden and cost of going public. For biotech companies, it means the ability to file confidentially without fear of disclosing competitive information or hurting the reputation of the company should it decide to pull the offering. Companies have also seen great value in the ability to meet with institutional and accredited investors to generate and gauge interest in the IPO.
Because of the JOBS Act, it is difficult to know how many companies are now preparing to go public because many companies avail themselves of the ability to file confidentially. The IPO queue at the end of August included 17 life-sciences companies, although indications are that many more have taken steps to go public even if they have not made their intention known. Barring any major disruption to markets, there will be a rush of activity to get deals done.
Biotech watchers like to talk about IPO windows. There’s enough maturity in this industry that the concept is a dated one. In reality, companies can go public in good markets and bad ones. It’s just a question of what price they are willing to accept. In 2013, about 35% of the life-sciences companies completing public offerings did so below their target ranges and 15% went above them. That compares to 69% that completed their IPOs below their target range in 2012 and none that completed offerings above them that year. Though some companies have had to adjust their expectations in order to get their offerings done, there has been a dramatic shift in demand for life sciences IPOs. For now, the industry is in one of those periods when investor enthusiasm is allowing biotech companies to get their price.
About the Author
G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, [email protected].