Biotech IPOs Start to Show Some Modest Signs of Life
[Updated: 2:10 pm ET, 5/2/12] Something feels wrong about putting the words “biotech” and “IPO” together in a headline. This market has been lifeless for so long that few investors even play the game anymore. Biotech entrepreneurs I talk to seem to feel a bit sheepish about saying they are considering an IPO, probably because they know most people will just roll their eyes.
But a strange thing has started to happen in 2012. A few biotech IPOs have been modestly successful. And even though biotech executives could be excused for missing the news that 2012 is shaping up to be the biggest IPO year since 2000, there are signs that biotech IPOs have a fighting chance.
This feels odd to say, since I’ve been dismissive of biotech IPOs for some time. I wrote back in January that even though people were predicting the return of biotech IPOs, “it’s nothing more than wishful thinking.”
There is plenty of reason for pessimism. Back in 2010, the blue chip offering from Cambridge, MA-based Ironwood Pharmaceuticals (NASDAQ: IRWD) was supposed to open the proverbial “window” for others. It didn’t. The next year, one of the bellwether private biotechs—Berkeley, CA-based Plexxikon—looked at the IPO options, and discovered that Big Pharma valued its melanoma drug far more than Wall Street did. Before the year was done, LinkedIn and Groupon made IPO debuts that dwarfed the entire biotech industry IPO class of that year.
It would be wrong to say that things have fundamentally changed in a positive way for biotech. Technology has produced 21 IPOs already this year, while healthcare has cranked out just four, according to Renaissance Capital’s IPO Home. But those four biotech companies—Cambridge, MA-based Merrimack Pharmaceuticals (NASDAQ: MACK), Mountain View, CA-based ChemoCentryx (NASDAQ: CCXI), Chapel Hill, NC-based Cempra (NASDAQ: CEMP), and Cambridge, MA-based Verastem (NASDAQ: VSTM) have all held their own in their early days of trading as public stocks this year. See their performance in the chart below:
|Company Name||Location||IPO Price||Last Price||%Change||Market Cap|
|Merrimack Pharma (MACK)||Cambridge, MA||$7||$7.26||+4||$571 million|
|ChemoCentryx (CCXI)||Mountain View, CA||$10||$16.62||+66||$603 million|
|Cempra (CEMP)||Chapel Hill, NC||$6||$6.81||+14||$142 million|
|Verastem (VSTM)||Cambridge, MA||$10||$9.90||-1||$208 million|
This performance, while hardly anything to scream about from the rooftops, has inspired a handful of private biotech companies. It could just be gamesmanship by those who are hoping that by filing an IPO prospectus, they will be able to show a prospective acquirer that they are able to stand on their own two feet. It’s also possible that some of these companies foresee a long-term future as publicly traded independent companies, who get by with help from Big Pharma partners here and there. Here is the list of private biotech companies with active S-1 filings in the IPO queue that I was able to find. If you know of any companies in the queue that I overlooked, please shoot me a note at firstname.lastname@example.org. (Corrected, 2:10 pm ET, 5/2/12, to drop Horizon Pharma, because its S-1 financing document on file with regulators isn’t for an IPO transaction, and updated to include Stemline Therapeutics–LT)
|Company Name||Location||Date of S-1 filing||Amount Seeking||Investment bankers|
|Stemline Therapeutics (STML)||New York||April 2012||$50 million||Oppenheimer & Co., JMP Securities|
|Hyperion Therapeutics (HPTX)||South San Francisco||April 2012||$58 million||Leerink Swann, Cowen & Co., Needham & Co.|
|Radius Health (RDUS)||Cambridge, MA||February 2012||$86 million||UBS, Leerink Swann, Cowen & Co., Rodman & Renshaw|
|Rib-X Pharmaceuticals (RIBX)||New Haven, CT||November 2011||$93 million||Deutsche Bank, William Blair, Lazard, Needham & Co.|
|Durata Therapeutics (DRTX)||Morristown, NJ||March 2012||$86 million||BofA Merrill Lynch, Credit Suisse, RBC Capital Markets, Wedbush PacGrow|
|Supernus Pharmaceuticals (SUPN)||Rockville, MD||December 2010||$55 million||Citigroup, Piper Jaffray, Cowen & Co., Stifel Nicolaus|
|Tesaro (TSRO)||Waltham, MA||March 2012||$86 million||Citigroup, Morgan Stanley, Leerink Swann, BMO Capital Markets, Baird|
So if there are four biotech IPOs so far this year, and seven in the queue that could reasonably be expected to go public over the next 3-4 months, that means there could be 11 IPOs done before entering the fall. There were only 11 total biotech IPOs last year, so it’s possible that this year could end up quite a bit ahead of last year. [Updated 10:35 am ET to include two more IPO candidates, Durata and Tesaro--LT.]
Still, this isn’t exactly a cause for celebration. “I’d say there are some rumblings of positivity,” says Bob Nelsen, a managing director at Arch Venture Partners in Seattle. He knows how rough the IPO market can be, as one of his biotech portfolio companies with a lot of actual revenue (Ikaria) withdrew an IPO application in November 2010.
There are real reasons for 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).
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.