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 weeded out of the markets the past few years, leaving stronger companies to survive. The FDA has appeared to be friendlier toward industry the past couple years, clearing more products for sale. Even though insurers in the U.S. are seeking to corral costs, drugmakers have still been able to command sky-high prices for new products. The industry’s big players (Amgen, Gilead Sciences, Celgene, Biogen Idec) have done extremely well the past couple years. The broader biotech indexes have outpaced the market for some time.
The problem here is that you can’t just paint a broad brush over the biotech sector, and assume all those trends will work in favor of fresh IPO candidates. These companies largely still lack proof from clinical trials that they have something valuable for patients. And yet, investors appear eager to get in early on this new group of companies, without demanding they prove themselves.
Of the 24 biotech IPOs, 21 closed on Friday above their IPO price. A couple of newly public biotech companies—Epizyme (NASDAQ: EPZM) and Bluebird Bio (NASDAQ: BLUE)—have seen their shares double in their early days on no real news. OncoMed Pharmaceuticals (NASDAQ: OMED), the third cancer stem cell company to go public in the last couple years, shot up 60 percent on its first day of trading last week. Analysts at the big financial houses are sending out their reports touting many of these new companies, usually a few weeks after their investment bankers down the hall pocketed some big fees.
There are some promising companies in this 2013 class, but they aren’t that promising. It all looks like the herd is moving into biotech, out of fear of missing out on the next big thing, and desire for the quick buck. That ultimately isn’t good for biotech, which needs investors who focus on the long term. Many of these investors will not be there when these companies need them in the future, when they need more money to prove their drugs work. The performance also creates an opening for smoke-and-mirrors biotech operators, who will lure investors in with their storytelling abilities, but end up burning them and giving the whole sector a bad name.
Of course, that’s just how the story is likely to unfold in the months and years ahead. For now, what matters is that more money is flowing into biotech after many lean years. Given that there are a lot of data points to look at—24 new public companies and counting—I dug through the data with a few different questions to see if any interesting patterns emerged.
Here are a few things I noticed:
There’s no irrational exuberance for diagnostics or medical devices: Of this group of 24 companies, 20 are drugmakers, three are diagnostics companies, and one was a contract research organization. None are developing medical devices. The investor interest is clearly limited to pharmaceutical companies, as two of the three diagnostics companies have traded down from the IPO price. The contract research firm, Quintiles (NYSE: Q), is up just a bit from its $40 IPO price.
The IPO money is being spread widely across the map: While Boston and San Francisco are the top two clusters for life science innovation, they aren’t dominating the IPO class of 2013. Five new public biotech companies are from New York/New Jersey, if you consider Princeton, NJ part of that greater region. Boston has four of the new companies (Epizyme, Bluebird, Tetraphase Pharmaceuticals and Enanta Pharmaceuticals), while SF can claim three (Portola Pharmaceuticals, KaloBios Pharmaceuticals, and OncoMed Pharmaceuticals). North Carolina has three, Europe has two, and San Diego has two.
A handful of venture firms are getting a lift: Several venture firms show up in the ownership tables of more than one new public biotech company. Interestingly, a couple funds that invest in both private and public biotechs show up the most. Fidelity Investments and its related entities are among the top shareholders in four of the newly public biotechs, putting it at the top of the list along with MPM Capital and its related entities. New Enterprise Associates is a major shareholder in three members of the new biotech IPO class, and a handful of venture firms have bet on a pair of winners. TVM, Delphi Ventures, Arch Venture Partners, Flagship Ventures, Brookside Capital Partners, Alta Partners, Pappas Ventures, and Celgene all have investments in two members of this year’s IPO class. Arch, Flagship and Celgene will each move up the list with three if Agios Pharmaceuticals goes ahead with its IPO, and Fidelity will be able to claim its fifth win.
A diverse cast of underwriters is getting in on the action: There was concern in the wake of the financial crisis that many of the traditional investment banking houses were simply giving up on biotech. But this year it looks like there has been a number of investment firms competing to underwrite biotech IPOs. After reviewing all the IPO prospectuses, I count Leerink Swann as the most active underwriter of biotech IPOs this year with a total of 9 deals. JMP Securities and Cowen & Co. are next with six, followed by JP Morgan, Citigroup, Credit Suisse, and Wedbush PacGrow Life Sciences with five IPO underwriting deals each. Some of these firms tend to take the lead (JP Morgan and Morgan Stanley) while others play supporting roles (Wedbush), but there’s good diversity of firms in the mix.
Cancer, autoimmunity, and rare diseases are where investors want to play: Six of the new companies are aspiring to make cancer drugs, four emphasize their work on inflammatory/autoimmune diseases, and at least four could be classified as rare disease drugmakers. The cancer companies are Epizyme, Ambit Biosciences, Insys Therapeutics, Stemline Therapeutics, OncoMed Pharmaceuticals, and KaloBios. Portola, Kamada, Ambit, and Receptos are in the autoimmune space. And Epizyme, Bluebird Bio, PTC Therapeutics, and Prosensa can all be classified as rare disease drugmakers. There are a couple of antiviral drugmakers—Chimerix and Enanta Pharmaceuticals—and one antibiotic developer, Tetraphase Pharmaceuticals. And as you’d expect, there are all some one-off companies in there, like Esperion Therapeutics for cardiovascular disease, and Aratana Therapeutics, which is looking to in-license human drugs and re-purpose them for use in pets.
For a quick rundown of stats on the biotech IPO class of 2013, see the following chart. If you have noticed any other trends or storylines in this group, or anything else I may have overlooked, please shoot me an email at firstname.lastname@example.org or leave a comment in the space below.
|Company||Ticker||Location||IPO Price||Friday’s close|
|Kamada||KMDA||Ness Ziona, Israel||$9.25||$13.05|
|Portola Pharmaceuticals||PTLA||South SF||$14.50||$22.95|
|Ambit Biosciences||AMBI||San Diego||$8||$12|
|Insys Therapeutics||INSY||Phoenix, AZ||$8||$17.14|
|Omthera Pharmaceuticals||OMTH||Princeton, NJ||$8||acquired at $12.70|
|KaloBios Pharmaceuticals||KBIO||South SF||$8||$5.83|
|Enanta Pharmaceuticals||ENTA||Watertown, MA||$14||$17.65|
|Tetraphase Pharmaceuticals||TTPH||Watertown, MA||$7||$7.79|
|Stemline Therapeutics||STML||New York||$10||$28.03|
|Cancer Genetics||CGIX||Rutherford, NJ||$10||$10.87|
|Bluebird Bio||BLUE||Cambridge, MA||$17||$33.99|
|PTC Therapeutics||PTCT||Princeton, NJ||$15||$17.75|
|Prosensa||RNA||Leiden, The Netherlands||$13||$25.65|
|Aratana Therapeutics||PETX||Kansas City, KS||$6||$10.12|
|Esperion Therapeutics||ESPR||Plymouth, MI||$14||$16.90|
|OncoMed Pharmaceuticals||OMED||Redwood City, CA||$17||$26.70|
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