Biotech IPOs: Are They Poised For a Major Surge This Year?
By Peter Winter
Somewhere along the way from the heady days of the dot-com era in 2000 the "magic" of achieving a successful biotech initial public offering (IPO) seems to have been lost. Time was that for biotech companies and the venture capitalists who invested in them, a public stock offering was the first major milestone of business and financial success – a preferred exit strategy for VCs and an opportunity for companies to access future public market capital financings and adequately fund their product pipeline development.
In the annals of biotech IPOs 2000 still remains an unprecedented year. According to BioWorld Snapshots 63 biopharmaceutical companies completed their IPOs during that year collectively raising a total of about $6 billion.
Gone are those days and perhaps, many analysis speculate, never to return.
As described in the companion article in this issue (see Third IPO Window in 15 Years), today, a biotech IPO appears to have become "just another financing" with VCs often participating in the offering. It is no secret that the IPO market for biotech companies has been extremely challenging for the past decade, and particularly during the past four years in parallel with the global financial market perturbations.
The latest window for IPOs was officially declared open again in the second half of 2009 when three biotech companies completed their offerings.
In previous periods of biotech IPO activity the majority of biotechs that went public priced their IPOs when the markets were relatively calm and stable. During the current IPO window the equity markets have been extremely volatile and, as a result, biotechs that have gone public had to significantly adjust their pricing aspirations. In fact 80 percent of them priced below their original offering range, according to research presented at BIO 2012 in Boston by Graham Powis, managing director, head of Equity Capital Markets at Lazard and Ross Hammerman, managing director, Life Sciences, Citicorp Inc. (See BioWorld Today, June 22, 2012.)
Breaking the Mold
This trend seemed to be following the script in the months after the meeting until two biotech IPOs broke the mold, giving rise to speculation that better times were ahead for companies who were thinking about testing the market. Both Intercept Pharmaceuticals Inc. (NASDAQ:ICPT) and Kythera Biopharmaceuticals Inc. (NASDAQ:KYTH) priced their IPO at the top end of their ranges on the same day. (See BioWorld Today, Oct. 12, 2012.)
Even more gratifying for investors in these new issues, by the end of 2012 both companies had recorded share price gains of 128 percent and 89 percent respectively since their public debuts.
Further evidence fueling the notion that all is well with biotech IPOs is the fact that the average share price performance for the 2012 IPO graduates was 26.5 percent and nine of the 11 companies saw their share prices close in positive territory.
Looking at the 11 2011 IPO graduates, their collective share price performance until the end of 2012 averaged a healthy 12 percent increase.
Not bad in an environment of economic uncertainty. The question then is, will this trend be maintained?
According to a 2013 Venture View predictions survey conducted by the National Venture Capital Association (NVCA) and Dow Jones VentureSource, VCs appeared more optimistic than CEOs regarding the exit market. The survey found that 40 percent of VC respondents expect the 2013 total IPO volume to increase and 52 percent believe that IPO quality will improve. This compares to just 29 percent of CEOs who said IPO volume will increase and 37 percent who see better overall quality ahead.
Although it is early days to form any conclusive opinion it looks as though the venture capitalists' optimism may be justified with the number of IPOs completed so far this year on pace with last year. The biotech IPOs that have priced in 2013 include antibody drug developer KaloBios Pharmaceuticals Inc., which priced a slightly upsized offering of 8.75 million shares at $8 apiece for gross proceeds of $70 million and Stemline Therapeutics Inc., of New York, which closed its IPO of 3.8 million shares, including the exercise in full of the overallotment option covering 497,647 shares, at a price of $10 per share. Gross proceeds totaled $38.2 million and will support the firm's work on therapies targeting cancer stem cells.
Buying Biotech IPOs
Biotech IPOs will certainly continue to capture our attention as they have done since the early days of the industry. Not long ago in social media land, for example, a question was posed on Twitter asking what the current value would be if someone had invested in the 570 biotech companies that completed an IPO since 1979. While this calculation is yet to be solved, it can be easily computed for all the biopharmaceutical-focused companies that have jumped through the current biotech IPO window.
Drawing from data in BioWorld Snapshots – if you purchased one share of each new issue that listed on the U.S. markets during this period, your portfolio would be now be ahead by about 7 percent.
If you had decided to just purchase one share of each of the 2012 biotech IPOs then your investments would have yielded a gain of around 40 percent today, an impressive return that may encourage the companies that are lining the biotech IPO runway to take off in 2013.
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