As the biotech sector has come back into Wall Street's graces, the number of secondary offerings has increased.
Michael Brinkman, managing director at Jefferies & Co., credits the overall strength of the sector, recent product approvals, and mergers and acquisitions – which help to recycle investors' cash back into the sector – for the increase in secondary offerings. "The pace is well ahead of last year," he told BioWorld Insight.
Some biotechs have been desirable enough to price their offerings at the market rate. Ironwood Pharmaceuticals Inc., for instance, raised $79.2 million this month, pricing shares of its offering at $15.09, the closing price on the day the financing was announced. Its shares closed at $15.35, up 1.7 percent, the following day. (See BioWorld Today, Feb. 13, 2012.)
In good markets and bad, biotechs have the same requirements for attracting capital. "Investors are looking for a novel product with data you can sink your teeth into," Brinkman said. Ironwood seems to fit that bill with linaclotide under FDA review for irritable bowel syndrome and chronic constipation.
Strong companies that are pricing close to or at the market are able to attract fundamental long-term investors rather than investors looking to flip shares to make a quick buck, but it's a "self-fulfilling prophecy," said Brinkman. The strong companies don't need to offer warrants, so fast money isn't given the opportunity to play.
According to Jefferies, healthcare companies have accepted a 9 percent discount on average for their secondary offerings this year, much improved from the 14 percent average discount in the second half of last year, but only slightly better than the 11 percent to 12 percent typically seen.
Brinkman doesn't see the pace slowing down anytime soon. "We'll continue to see a strong flow of secondaries for the foreseeable future – absent any changes in the macro market or disastrous events in biotech," he said.
Firms have the option of doing a traditional public secondary offering, but Brinkman advises against it because "the whole world knows you're offering, so people can play games with the stock." Using an investment banker to query blue chip investors confidentially about their interest in investing can produce better results, Brinkman said. Jefferies has tracked stock prices from when the investment bank begins confidential marketing and has seen no negative impact on the stock price. Hence such deals, sometimes referred to as "wall-cross offerings" or "confidentially marketed public offerings," have become the norm in biotech circles. (See BioWorld Insight, Oct. 4, 2010.)
Deciding on the timing of a secondary is as difficult as always. Biotechs have typically waited until after value inflection points to raise capital, but Brinkman said that investors are more open to investing ahead of binary events than they used to be. "Today companies are being rewarded for positive news so investors are more open to risk," Brinkman said.
In addition to company-specific characteristics, a company's value is affected by the macro environment, which Brinkman characterized as improving with the usual caveat that "you don't know where good news or bad news will come from."
With so many moving parts, Brinkman advised, "When they pass the cookie jar, you should take a cookie."