December 2013 Issue
After a near decade-long drought, 2013 has seen a strong resurgence in new biotechnology IPOs. At the time of writing, there have been over 30 new offerings launched and somewhere in the region of $3bn raised. The first half of 2013 alone saw IPOs worth over $1.7bn – more than the industry saw in 2011 and 2012 combined. The NASDAQ biotechnology index was also up 47 percent for the year as of Monday 7 October, a further sign of growing confidence in the sector.
In years gone by the biotech sector has been dismissed as too risky. Investors had the overriding feeling that the relatively meagre potential returns did not justify the financial outlay. However, since 2010 the industry has proved increasingly lucrative. In recent years it has significantly outperformed many other investment sectors.
Approvals
Undoubtedly, one of the key drivers of the upswing in biotech IPOs has been the myriad new drugs approved throughout 2012. Indeed, last year alone saw the US Food and Drug Administration (FDA) approve 39 new drug therapies, more than any year since 1996. Furthermore, these significant new drug approvals have also had a profound effect on M&A in the industry over the last 12 months. Activity has been up by more than 30 percent. Expiring patents and competition from generics have increased the pressure on some of the larger organisations to act sooner rather than later, and accordingly a number of the larger pharma companies have looked to acquire smaller firms.
However, it has not been just the volume of IPOs in 2013 that has helped the previously stagnating private biotech companies and their venture capital owners. The prices, performance and type of biotech firms making the leap onto the public markets have also been particularly impressive. Since 2008, average offering prices have failed to consistently exceed expectations, but 2013 has bucked that trend, with a number of IPOs hovering at nearly twice the company’s offering price. Furthermore, the welcome return of the formerly taboo phase one and pre-clinical IPOs, a qualitative signal of strength, has also boosted the industry.
A series of legal changes, including the adoption of the transformative Jumpstart Our Business Startups Act (JOBS Act), have also made it easier for firms to gauge potential investor interest in a potential IPO. These changes have undoubtedly had an impact on the increasing popularity of biotech IPOs. One of the most striking factors of the resurgence in biotech offerings has been the absence of ‘insiders’. Previously, biotech insider activity was commonplace, particularly among venture capital backed IPOs. Over the last five years, around a third of typical biotech IPO issuance was acquired by ‘insiders’. Typically, without strong insider commitment, those offerings would have had trouble pricing. 2013, however, has been a different proposition. Many of the sector’s strongest offerings have seen little or no insider venture capital participation. As of mid-September, insider participation rates were down by just under 50 percent overall. The typical offering had only 17 percent insider participation and at least nine offerings had none.
Clearly, the current wave of biotech IPOs offers a multitude of opportunities for savvy investors. Seizing the opportune moment to invest in the biotech industry is key to making the most of this purple period. For investors, identifying the startups that bigger players are investing in, and determining how far along their research has advanced, will provide a significantly better idea of which drugs are closer to being released and increasing the potential success of their investment.
Caveats
Despite the overriding optimism, there is still concern among some analysts who suggest the current market for biotech IPOs has overheated and the current bullish streak will end as soon as drug developers hit a point where their returns sour. Furthermore, as drug development is such a high-risk field, and one particularly susceptible to failure, cash infusions can be swallowed up very quickly in research and trial cycles which can last for years and ultimately end with unanticipated or unwelcome results.
Retaining the interest of generalist investors is crucial to the sustained prosperity of the biotech sector. Should generalists become spooked and move to underweight biotech in their portfolios, the sector could quickly revert to its former troubled status. In many respects it would be difficult for the biotech industry to continue to perform as strongly as it has in recent months. However, ultimately the strength of products currently in development may help the sector to remain buoyant.
© Financier Worldwide
BY
Richard Summerfield