The IPO Market: Is This a Revival or Just a Bubble?
By Catherine Shaffer
SAN FRANCISCO – After years of watching and waiting, biotechs are seizing the opportunity to jump into the public markets while investors are eager and interested.
The initial public offering (IPO) market is a topic of keen interest at the annual BIO Investor Forum in San Francisco, where representatives from five major banks and investment groups set the stage Tuesday with a discussion of market trends and whether companies can expect more of the same in the months and years to come.
“Some people feel there’s a bubble right now,” said Dave Thomas, director of industry research and programs for the Biotechnology Industry Organization (BIO), in his opening remarks for the session. Referring to an image of a bubble about to be burst by an approaching finger, he asked, “Is this finger the debt ceiling or Syria or something?”
Thomas proceeded to argue that the current success of the IPO market represents a “boom” not a “bubble.” For example, he said, the Nasdaq Biotechnology Index has crossed over 1,600, “and it’s kept going up,” he said, noting that the previous all-time high for the index was in March of 2000.
In contrast to the peak in 2000, which turned out to be a bubble, Thomas said the current marked surge is backed up by solid data being produced by companies, particularly the larger biotech companies.
“If it was a bubble, the smallest companies, and the riskiest, would be outperforming,” Thomas said. Instead, market attention has been directed to those larger companies that are producing results, and the smaller companies have actually been lagging in investment dollars. “This is not the type of behavior you’d see in a bubble,” Thomas said.
Thomas also pointed out shifts in valuations. “Thirteen years ago, p/e ratios were through the roof . . . now they’re hovering just around the 1.0 mark. That’s also not something you’d see in a bubble.”
Thomas’ conclusion, based on analysis of data gathered by BIO, was that the market is just now “getting back to where it should be” after several years of poor performance and undervaluation.
“Cash is flowing into global equity markets in a big way this year,” said panel moderator Eugene Rozelman, a managing director for Biopharma Investment Banking for Canaccord Genuity. “That’s in stark contrast to what we’ve seen in the prior three years.”
And that money is being put to work, Rozelman pointed out. The cash infusion has contributed to strong demand for growth sector IPOs in 2013, with biotech IPOs leading the charge in the health care space.
In her remarks, panelist Ashley Dombkowski, a managing director for Bay City Capital, emphasized the importance of underlying fundamental drivers for value in biotech companies. The pharma industry, Dombkowski said, is “cleaning house” by laying off thousands of employees and spinning out businesses that are not profitable. “They’ve got cash, and they need growth, so they’re looking to these companies.”
As an example, Dombkowski cited the recent acquisition of Onyx Pharmaceuticals Inc. by Amgen Inc. for $10.4 billion. The prime value driver in that transaction was the multiple myeloma drug Kyprolis (carfilzomib), which gained accelerated approval last year for patients who failed at least two prior therapies. (See BioWorld Today, Aug. 27, 2013.)
Onyx acquired that product with its purchase of Proteolix Inc. in 2009 for $851 million. In turn, Proteolix developed that drug on a budget of $142 million raised in three financing rounds between its inception and acquisition by Onyx. Those funds took it to the brink of Phase III testing with the drug.
Panelist Effie Toshav, a partner with Fenwick and West LLP, noted the tremendous effect of the JOBS Act on the IPO market, a topic that will be discussed at greater length in a separate panel Wednesday. “The ability to go test the waters and see what people think and get your valuations correct . . . has had a dramatic impact,” she said.
“The stock market is a supply and demand equation,” said Evan McCulloch, a portfolio manager with Franklin Templeton Investments. “I’ve sat on these panels before, three or four years ago, insisting the IPO window was open – you just might not like the price. Irrespective of what those investors thought the true value of the company was, the objective was to make their investors money. I think what has happened is that the valuations across the sector have gone up,” McCulloch said.
Entry of generalist investors may also be a contributor to the current success of biotech IPOs – one that could create even more value in the sector later, if the trend picks up. “If you look at some of the more recent IPOs, 10 to 15 percent are oversubscribed. It’s a different world,” said Mark Charest, vice president of New Leaf Venture Partners. “A big part of that is generalists coming in. As part of the road show, some generalist firms are actively taking meetings.”
“There’s a bottomless pit of capital for the sector,” Franklin Templeton’s McCulloch added. “At our firm, we probably have 5, 6, 7 hundred million dollars in Gilead. Just think if a tiny portion of that shifted. A public mutual fund can write a check for $10 million.” McCulloch speculated that a huge investment group like Fidelity or T. Row Price could dramatically affect the biotech sector if it began investing, but that thus far “valuations may have put a governor on that.”
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