The Biotech IPO Phenomenon of 2013: Enjoy It While It Lasts

7/22/13Follow @xconomy

The year is only half over, but one of the biggest biotech stories of 2013 is going to be the resurgence of the biotech IPO market. It’s a good news/bad news story, depending on where you stand, and how far you look out into the future.

First, the good. The IPO surge is a vote of confidence in biotech from generalist investors who have spent years ignoring the industry. It’s good news for biotech entrepreneurs and venture capitalists who back them. A lot of money will get pumped into researching and developing drugs for diseases that have been long neglected, like Duchenne Muscular Dystrophy. Regional innovation clusters will get a boost. Many small companies will have more negotiating leverage when they talk to Big Pharma companies about acquisitions. It might spur more much-needed venture investment in biotech startups.

That’s all wonderful. But here’s the downside. This IPO party won’t last long, probably no more than a few months. There are only so many good private companies worthy of graduating to the public markets. If the past is any indication (remember the genomics craze of 2000?), there will be a hangover when it ends. Quite a few investors, big and small, will lose money and lose interest. Companies would be wise to fill up their coffers now, and stay disciplined in their spending.

So far this year, 24 life science companies have debuted on the public stock markets, based on my review of data from Renaissance Capital. That’s about double the number of IPOs you’d normally see in an entire year in the cautious world of post-financial crisis investing. This week, we could see as many as five more biotech companies take advantage of the new investor appetite for biotech. Agios Pharmaceuticals, Cellular Dynamics, Heat Biologics, Conatus Pharmaceuticals, and OncoNova Therapeutics are all on deck.

What’s driving this surge? There are some fundamental reasons to be positive about biotech, but this is also about herd behavior in the markets, and greed.

First, consider the fundamentals: Many losers were … Next Page »

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