Biotech IPOs Start to Show Some Modest Signs of Life

4/30/12Follow @xconomy

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people to make some positive rumblings. The NASDAQ Biotech Index is up 20.7 percent year-to-date, while the broader NASDAQ Composite is up 17.8 percent in the same period. While biotech on Wall Street is dominated by a cadre of super-specialists with Ph.D and MDs, there are signs that more general-interest investors (think Harvard Business School instead of Harvard Medical School) are coming back to the sector. An additional $2 billion has flowed into biotech sector funds this year, and 16 of the 19 weeks this year have seen positive inflows of biotech investment cash, according to Chris Raymond, an analyst with Robert W. Baird and Co.

Plus, there has been a wave of acquisitions, as AstraZeneca, Amgen, and Jazz Pharma all made sizable purchases last week. GlaxoSmithKline was reportedly rebuffed in its $2.6 billion bid to take over Human Genome Sciences (NASDAQ: HGSI).

Bob Nelsen of Arch Venture Partners

A couple of other small positive indicators have been emerging for biotech in Washington, D.C., Nelsen says. Bills moving through Congress would broaden the scope of the accelerated approval regulatory pathway for drugs at the FDA, and encourage development of more antibiotics. “Folks at the FDA like Janet Woodcock are being open-minded,” Nelsen says, about regulatory reform proposals being negotiated as part of the Prescription Drug User Fee Act renewal.

Still, there’s a lot that’s fundamentally out of whack with biotech investing. There are about 1,000 private biotech companies at any given time operating in the U.S. and there are only about 10 to 20 funds that even consider investing in biotech IPOs, Nelsen says. This tight little club of specialists, which Nelsen says is dominated by about 10 funds, determines which companies can go public, and which can’t. “The real question is, at what point do bigger funds, not just healthcare specialists, move in to biotech?” Nelsen says. Because if these bigger funds steer some of their capital into biotech to diversify their tech-heavy portfolios, then suddenly there could be a bigger pool of willing buyers of biotech IPOs.

In an ideal world, this would happen and provide something close to equilibrium. Strong companies like Plexxikon would pull off strong IPOs, borderline companies would have a chance to sink or swim as public companies, and the really bad smoke-and-mirrors operations would never make it onto the NASDAQ. Surely, if more biotech companies start to go public, that means more investors are going to get burned—this is still a high-risk business. But it’s encouraging that we’re starting to see some signs—albeit modest signs—that more people are beginning to act like it’s a risk worth taking.

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