Brace Yourself: Biotech IPOs Are Beating Tech’s Big Names

8/13/12Follow @xconomy

The average American on the street has a Facebook account, an opinion about Facebook, heard about the Facebook initial public offering, and knows it collapsed. That same person doesn’t see how their life connects with biotech, probably can’t name a single biotech company, and certainly hasn’t heard of any members of the biotech IPO class of 2012.

But here’s something that might surprise both biotech insiders and the average guy or gal on the street. The biotech IPO class of 2012 has made money for investors, while tech’s most glamorous up-and-comers have been stumbling.

Regular readers of this column know that I’ve long been skeptical about how much appetite investors have for biotech IPOs. But I did notice some “modest signs of life” in the IPO market a few months ago, and was curious to follow up and see what has happened. By my count, there have been nine biotech IPOs so far this year, compared with 12 in all of 2011. That still says to me there’s limited demand from investors for new drugs, devices, and diagnostics. But of those nine companies that made it through the IPO gauntlet, six are trading above their IPO price and none have crashed.

Consider that for a second how the household names of tech are doing. Facebook (NYSE: FB) has plummeted from $38 to $21.81. Groupon (NASDAQ: GRPN) debuted at $20, and now trades for $7.44. Zynga (NASDAQ: ZNGA) has gone from $10 to $2.95. (For more on the tech vs. biotech stock market performance, see this recent post from Bruce Booth.)

Now take a look at the following scorecard for the biotech IPO class of 2012.

Name Location IPO Price Last close What it does
Merrimack Pharmaceuticals Cambridge, MA $7 $7.38 Cancer drugs
Chemocentryx  Mountain View, CA $10 $11.02 Autoimmune, cancer drugs
Cempra  Chapel Hill, NC $6 $7.60 Antibiotics
Verastem  Cambridge, MA $10 $8.92 Cancer drugs
Supernus Pharmaceuticals Rockville, MD $5 $12.48 Drugs for CNS disorders
Durata Therapeutics Morristown, NJ $9 $7.35 Antibiotics
Hyperion Therapeutics South San Francisco $10 $10.35 Treats rare diseases
Tesaro Waltham, MA $13.50 $13.42 Cancer drugs
Globus Medical Audubon, PA $10 $13.90 Spinal devices

This kind of solid, steady performance is critical to the overall health of biotech, which creates most of the valuable advances in medicine. Thankfully, I don’t see signs of the irrational exuberance that might encourage a bunch of smoke-and-mirrors biotech companies to jump in to take the money and run.

That’s always going to be a worry in this speculative industry, but right now the bigger worry is that there aren’t enough people willing to invest in taking biotech companies to the public markets. When the biotech IPO market suffers, it makes it much tougher for venture capitalists to get a good return on their investments in startups, because that leaves them with only one good option left for cashing out—selling their best portfolio companies to Big Pharma. During this year of discontent in life sciences venture capital, while many firms are struggling to raise new funds to survive, many VCs are grasping for any positive sign they can find. If they can’t be rewarded for their investments, then a lot of the best ideas in biomedical science will stay stuck in neutral, without the money needed to really test them, and turn them into viable products.

It should be noted that the biotech IPOs are riding a bit of a wave in what’s been a solid overall year for biotech stocks. The NASDAQ Biotech Index is up more than 27 percent so far this year, compared with about a 15 percent gain in broader NASDAQ Composite. That gap opens eyes among fund managers who can put large amounts of money to work in many different places. Many big funds don’t have any special commitment to biotech, like specialist funds do with teams of MDs and PhDs on their staff. The return of “generalist” investors—who can hire scientific consultants to help them evaluate the science—is critically important to biotech’s ability to grow strong new companies.

John Maraganore, the CEO of Cambridge, MA-based Alnylam Pharmaceuticals (NASDAQ: ALNY), said he’s encouraged by what he’s seen so far from the biotech IPO class of 2012, and the trends in the broader market. Investors have been drawn back into biotech this year because of the overall sector performance, a string of FDA approvals of new drugs, and signs of a healthy working relationship with the FDA, which was recently written into law through an extension of the Prescription Drug User Fee Act.

Maraganore, who serves on the boards Cambridge, MA-based Agios Pharmaceuticals and Cambridge, MA-based Bluebird Bio, noted that some venture-backed companies are attracting “pre-IPO” financings that will support them through the transition to become public companies, if they go that route.

Alnylam CEO John Maraganore

“I do think things are getting better for biotech IPOs,” Maraganore said via email. “First, more new issues are trading up. Also, biotech has had a strong year in the public market and new issues provide more places to invest…. A good thing to have when a whole sector is trading up.” The series of Big Pharma acquisitions and FDA approvals have helped attract more investors, he says. “I’m optimistic here. Barring any macroeconomic meltdowns, the back half of the year could be very strong.”

For the sake of all kinds of emerging fields of biomedicine—think stem cells, RNA interference, genomics and more—it’s important that the strong investment trend holds up for a good long time. I don’t think the world needs another social network for data mining, or putting precision targeted ads in front of people. The world does need new drugs for debilitating diseases, faster/cheaper/more accurate diagnostics, more good vaccines, potent new antibiotics, and medical devices that make sick people productive again. Investors should know this is inherently very risky business that produces big winners and big losers. But it’s well worth the whole thrilling, terrifying roller coaster ride that takes so much time and money. That’s something I don’t think people will be saying 10 years from now about Zynga, Groupon, or Facebook.

By posting a comment, you agree to our terms and conditions.

  • http://twitter.com/biotechbaumer Jonathan Mandelbaum

    Great article Luke! Can we consider biotech IPOs as being more like ‘financing’ events whereas the current tech IPOs are true ‘exits’ for private investors? Are biotech valuations at IPO more like even-rounds, which wouldn’t really constitute an exit for investors, however, would still raise important capital to further their product development…? Important to consider if weighing an M&A vs. IPO option…

  • R. Jones

    The CEO of Alnylam has divested his company of 25% of its employees in 2010 and 33% this year. If you had invested your money or education in Alnylam you’d be working at Walmart today.

    I think you have a responsibility to be more critical Luke. You’re a journalist not a cheerleader. I realize that you don’t want to bite the hand that feeds you but… RNA interference is an emerging field of biomedicine? John Maraganore is clearly a friend of yours but you are a journalist. Alnylam and RNA interference don’t really deserve a spot in an article touting the bright future of biotech investing.

  • luketimmerman

    Jonathan–I think of a biotech IPO as having a few potential benefits. It’s a way of getting access to large pools of financing for R&D that can’t be accessed in VC-land, and it’s a way of rewarding investors and early employees. It’s definitely a good sign for R&D if these IPOs trade up a bit, because that will make it easier for these companies to raise future rounds of financing from the public markets at decent terms, without excessively diluting the value of existing shares.

  • luketimmerman

    R. Jones–Alnylam has gone through a couple of rounds of layoffs, and I’ve reported on those actions just like I’ve reported on its recent clinical trial successes that have lifted its stock. That’s part of being a journalist, reporting on both the ups and downs, and attempting to put it all in context.

    Regular readers know I write consistently about the perils of biotech investing, with its increasing timelines, ever-escalating R&D costs, and the unsustainable pricing of cancer drugs, to name just a few problems.

  • http://abdallahalhakim.tumblr.com/ Abdallah Al-Hakim

    I think your point regarding the return of the ‘generalist’ investor towards biotech is a great observation. Many VC funds have become more specialized in the past few years which I think is a good trend overall BUT the biotech industry would gain from ‘generalists’ VC or fund investors.

  • http://abdallahalhakim.tumblr.com/ Abdallah Al-Hakim

    @luketimmerman:disqus this is a minor point but why is your disqus chat box organized in such a way that it is difficult to follow comments/replies? I appreciate the social conversations that occur on these posts

    • http://www.xconomy.com/ Luke Timmerman

      Abdallah–do you have a recommended setting I should use to make it easier to follow/reply?

      • http://abdallahalhakim.tumblr.com/ Abdallah Al-Hakim

        here is an example of a blog site http://www.avc.com/a_vc/2012/08/mba-mondays-guest-post-from-scott-kurnit.html – that has a discussion with lots of social conversations ongoing.

        I think the key part is to use the reply option rather than writing in comment box (like you did with reply to my comment). Also, another quick tip (if you didn’t know) – you can give a shout to one of commenters by using @ before their name (you will get a drop box with list of current commenters).

        I hope this was of help.

  • R. Jones

    I’m one of your regular readers Luke. I too care about this industry and I want to see things get better. Alnylam however is one of those companies that turn investors away from the entire biotech/pharma sector. They are the boy who cried “Success!”

    All biotech failures and all biotech successes have one thing in common. They have fabulous early stage results.

  • Saumitra Rahatekar

    Hello Luke – This article shows your passion about Biotech but you indeed were careful and realistic in your assessment. Zynga , Instagram and FB of the world are I believe rise fast , fall faster sort of companies and as it is very easy to rise fast in IT area as the competition arrives faster than these companies can comprehend. Biotech is maturing fast and there are scores of experts like yourself are covering this area (helping to avoid the bubble) and as disease and drugs knows no geographical boundaries the potential for successful companies is immense. Now only if we are able to analyze and breakdown the failures of some , the whole industry will benefit from the same. Keep up the good work !