Coelacanths And Other IPO Thoughts Before The Autumn Markets Return
Ah, the final week of summer. Would that it could go on forever. And thanks for reading this on your mobile device with your toes in the sand. Just don’t forget to take a dip or toss a Frisbee when you’re done.
No doubt many would like the current biotech IPO climate to stretch on and on, too. There’s been the typical August lull, but after Labor Day the markets should get right back to business. There are 40 healthcare IPOs in the pipeline, according to IPO Scoop, and most are probably biotech if recent IPO history is a guide. One biotech VC, who asked not to be quoted by name, has already seen his firm score three IPOs since the beginning of 2013, and said of the fall season, “It’s time to go to market.”
So how about that recent history? In the last 12 months, healthcare IPOs haven’t just thrived, they’ve dominated. According to IPO Scoop, 33 percent of the 288 market debuts have been healthcare companies. Looking to the fall and winter, can the pace continue? Let’s consider a few things.
One characteristic of this window has been resiliency. The first quarter of 2014 was record-breaking with about 30 life science IPOs, but criticism of the price of Gilead Sciences’ (NASDAQ: GILD) sofosbuvir (Sovaldi) helped drive a market sell-off in late March. The biotech IPO flow fell off for a couple months. Then in July, even though Federal Reserve chair Janet Yellen called biotech and social media valuations “substantially overstretched,” briefly knocking a few points off the stock indices, the blistering pace resumed and 16 more biotechs went public.
Another thing to note is that, these days, the IPO pipeline is more like an iceberg: We’re not sure how much is hidden under the water line. The Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama in 2012, has transformed the IPO process in the U.S., as I explained at the two-year anniversary. It has allowed small companies—biotechs and otherwise—to test the waters by holding conversations with bankers, investors, and others for a while before declaring their intentions to the world. So there are certainly more than 40 healthcare companies warming up their IPO engines.
The ability to tell a company story and get feedback earlier helps move companies into position in more timely fashion if and when unexpected news—say, a release of much-better-than-hoped-for data—can create a new window of opportunity.
Yet another factor to consider for the fall and winter is what public investors consider viable IPO candidates. Conventional wisdom says they want to put their money into companies farther along in development: generally speaking, Phase 2 or later, if their top product is a biopharmaceutical product. And the big venture dollars flowing these days into private biotechs have in no small part come from so-called “crossover” investors looking for footholds in soon-to-be public companies. (If you want to play the parlor game of “who’s next to file an S-1?,” find the biotechs that have recently raised rounds from hedge funds and mutual funds such as RA Capital, Deerfield, T. Rowe Price, Fidelity, Baupost Group, and Adage Capital Partners.)
According to a recent EvaluatePharma report, 24 percent of the $3.2 billion put into private biopharmas in the first half of 2014 was concentrated in the ten biggest venture rounds, nearly twice as large a percentage as in awash-with-cash 2007. “The money is beginning to migrate to later, bigger rounds and away from early-stage funding,” the report reads. (See page 9.)
But since the IPO window flew wide open in 2013, public investors haven’t been shy about making earlier-stage bets, either.
An Xconomy analysis of life science IPOs in 2013 and 2014 shows that the appetite for less mature companies, while not overwhelming, has remained steady. Stripping out medical device, diagnostics, and other nonbiopharma companies, I found that 24 percent of biopharmas that went public in 2013 began their run with a lead program in Phase 1 or earlier. So far in 2014, the tally is 21 percent.
(As for device and diagnostics companies, it is practically impossible for them to go public without a commercial product.)
In other words, more than one-fifth of the 83 biopharma companies that have gone public since the start of 2013 were early-stage companies at the time, double the rate of the last big biotech window. Of the 50 biopharmas that went public from the years 2005 to 2007, six were in Phase 1 or earlier with their lead product in the run-up to their IPOs. (Remember Cambridge, MA-based Sirtris Pharmaceuticals? Its investors certainly do. It went public then was bought by GlaxoSmithKline (NYSE: GSK) in 2008 for $720 million. GSK might not look back so fondly; it shut down the Sirtris research group and moved its work to Pennsylvania in 2013.)
The more public-side appetite for earlier, riskier biotech companies, the better for the industry—and for society. That’s an odd leap to make, perhaps, but those early-stage IPOs will hopefully encourage VCs, in turn, to back the cutting-edge science that leads to those IPOs. A few VCs need no persuasion. Atlas Venture, Third Rock Ventures, ARCH Venture Partners, Polaris Partners, Flagship Ventures, Avalon Ventures, and a handful of others are committed to early-stage bets and have the cash to make a difference.
Will VCs that have migrated to later-stage, less risky assets rejoin the early-stage battle? Might new funds dedicated to taking big biotech risks start from scratch? An acquisition appetite among big drug companies would help. But privately backed biotechs aren’t a big M&A target these days. (There have been only nine deals over $75 million upfront this year, and 13 deals last year, according to Silicon Valley Bank.) Of course, another reason to take more early-stage risks would be to go public in short order to reap returns and satisfy limited partners. The shining example of the recent class has to be Agios Pharmaceuticals (NASDAQ: AGIO), one of only three since the start of 2013 to start its IPO process as a preclinical company. It went from Series A to IPO in five years and is now officially what the tech investment crowd calls a “unicorn”—a venture-backed company with a billion-dollar market valuation.
Come to think of it, let’s leave that term to the tech people. Unicorns aren’t rare; they’re non-existent. Biotechs, being the home of disciplined scientists (we hope), should have a more reality-based buzzword. From here on out, billion-dollar biotechs are snow leopards, and the preclinical ones that manage an IPO are coelacanths—so rare that people once thought they only existed millions of years ago. Including Agios, there have been three since 2013; if we see a few more in the next few months, perhaps it’s a sign that the window won’t close anytime soon. (Or a sign that “coelacanth” isn’t the right term.)
If you have other ideas, tweet them to me with your bare toes. Just don’t get sand in your iPhone.