As Total U.S. IPOs Mount, Several Biotech Deals Stumble
With less than six weeks remaining in 2013, the number of U.S. IPOs continues to mount at a rate unseen since the financial meltdown of 2008.
Ten companies are set to go public on U.S. markets this week, according to Renaissance Capital, the IPO investment firm based in Greenwich, CT. That includes Vital Therapies, a San Diego biotech that plans to raise about $75 million to help fund development of artificial liver technology for patients suffering from acute liver failure. (Three other IPOs pending this week are U.S.-based companies, including Vince, the high-end New York apparel designer, while six are foreign-based companies that chose to go public on U.S. markets.)
Demand for new offerings remains strong, even though three life sciences companies (San Diego-based Celladon; Monrovia, CA-based Xencor; and Palo Alto, CA-based CardioDx) postponed their IPOs last week. Another California biotech, Relypsa, raised $75 million last week by offering 6.9 million shares at $11, below the company’s expected price. For some IPO watchers, that’s enough to wonder if investor enthusiasm for biotech IPOs is beginning to wane.
“The IPO market has opened up in 2013 because IPO investors have been making money,” Renaissance co-founder Kathleen Shelton Smith wrote in an e-mail yesterday. And “not just those [institutional investors] that get IPO shares, but for investors who own these stocks in post-IPO trading.”
Smith said the Renaissance IPO ETF (Exchange Traded Fund), which tracks an index of newly public companies (which turn over after two years) is up 46 percent so far this year.
As of yesterday, Renaissance Capital reports that 203 U.S. companies have completed their IPOs in 2013, raising total proceeds of more than $48.6 billion. “Based upon the backlog of deals in the pipeline [Renaissance Capital counts about 30 more companies are in the pipeline] our firm expects the market will finish the year with over 220 IPOs raising over $50 billion.” That would exceed the previous record for this century, set in 2004, when 217 companies went public, the firm says.
“We’ve got lots of good things happening,” says Jackie Kelley, an EY partner in Irvine, CA, who leads the firm’s IPO advisory services in the Americas. Kelley says a “huge buzz” during the annual EY Strategic Growth Forum, which ended Sunday in Palm Springs, was that “the IPO market is on fire.”
That might be overstating it. The historic peak for the IPO market occurred in 1996, when 808 companies raised almost $50 billion through initial public offerings, according to data that EY compiled from Dealogic and ThomsonOne. Of course, many of those IPOs were tech companies that collapsed when the bubble popped a few years later.
“Today, it’s a healthier, broader, IPO market,” says Jeremy Glaser, a San Diego lawyer and co-chair of venture capital & emerging companies practice at the Mintz Levin law firm. “It’s financials, energy, oil and gas, biotechnology. It’s a lot more diverse.”
EY’s Kelley agreed, saying the market is receptive to IPOs across all industries, and at a variety of sizes and stages of development. Relaxed rules for stock offered by “emerging companies” under the federal JOBS Act also encouraged some companies that might have held back on an IPO, Kelley said.
“Of all the sectors out there, life sciences probably has taken advantage of the relaxed filing requirements the most,” Kelley said. An “Emerging growth” company (typically companies making less than $1 billion in annual revenue) is not required to provide more than two years of audited financial statements in its IPO filing. An emerging growth company also can submit its IPO filing to the Securities and Exchange Commission confidentially, so the company can get feedback from regulators and make necessary revisions before the filing is made publicly available.
The change could be one reason why 50 life sciences companies have gone public so far this year, raising a total of $8.4 billion and making healthcare the busiest sector in terms of IPO activity, according to Renaissance Capital. The financial industry is the second most-active sector, with 43 IPOs raising a total of $9.9 billion; followed by technology, 41 IPOs and $7.4 billion; energy, with 19 IPOs and $9.2 billion; and consumer, with 16 IPOs and $5.4 billion.
However, the confidentially provision wasn’t much help for Celladon, Xencor, and CardioDx. All three of the California life sciences companies filed confidentially, and all three announced last week they were postponing their imminent IPOs “due to market conditions.”
It’s a perplexing explanation since the three major U.S. stock market indexes closed Friday at record, or near-record highs. “There are no market conditions that I’m aware of that would lead a company to pull back from an IPO like that,” Glaser told me.
To some market observers, it’s a sign that the IPO window might be closing to the biotech sector. But it’s also possible that something else—such as a buyout offer—led one or more of the biotechs to postpone their IPOs. Time will tell.
In any event, Renaissance Capital’s Kathleen Smith said she doesn’t think the Jobs Act has much to do with the bullish IPO market.
“While some may point to the JOBS Act that made it less costly for smaller companies to go public,” Smith said, “we believe that the health of the IPO market is entirely due to the strong returns the investors have received from these unseasoned equities in post-IPO trading.”