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.
“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.
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