It’s been two years since President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law and revamped the rules that govern private companies trying to raise money from all types of investors. The biotech crowd, usually hard pressed to find good things to say about federal regulation, couldn’t be more pleased with the results so far.
Some parts of the JOBS Act, such as the oft-discussed equity crowdfunding rules, aren’t yet in place or haven’t been in place long enough to judge their effect. But rules around IPOs—known as the “IPO on-ramp” portion of the bill—are well established. And two years on, the IPO on-ramp has been crowded, indeed, culminating in a record-setting first quarter of 2014, with 23 life science firms going out the door before markets pulled back in April.
One big rule change that many biotech execs and financiers praise is the ability to file for an IPO in stealth and have “testing the waters” conversations with potential investors—conversations that regulators previously might have considered illegal solicitation. The rule change applies to companies with annual revenues under $1 billion, which pretty much means every private life science company out there can pitch their stories to investors months before an IPO, not just days or weeks.
Law firm Latham & Watkins, whose partner Joel Trotter played a key role in writing the “IPO on-ramp” portion of the JOBS Act, has released a report showing that about 85 percent of IPOs in the JOBS era have been companies with revenues under $250 million. About 30 percent of those have been life science companies, the highest tally of any sector, according to Latham’s count.
There are other reasons biotech IPOs have taken off the past couple years, to be sure. Scientific discovery continues apace, and now the rebounding economy has capacity to fund it. The performance of big public biotechs—Celgene (NASDAQ: CELG), Biogen Idec (NASDAQ: BIIB), Regeneron (NASDAQ: REGN) and the like—has pulled attention back to biotech in general. New sources of funding are helping replace, at least in some small measure, the dwindling venture capital pool for early stage biotechs. And there’s a growing sophistication among public investors about the life sciences. (Although Jeff Abbey, CEO of Durham, NC-based immunotherapy developer Argos Therapeutics (NASDAQ: ARGS), recounts that on his recent road show before Argos’ February IPO, a generalist investor said to him, ‘So, tell me why I should be interested in what a T-cell is.’”)
But the JOBS Act has provided more space for conversation about companies with complicated stories, and biotech CEOs say those conversations have elicited valuable information.
“One of my first days of ‘testing the waters’ was the week Facebook went public [in May 2012],” said OncoMed Pharmaceuticals CEO Paul Hastings at the Allicense biopharma conference in San Francisco Wednesday. “One generalist looked at me and said, ‘Do you want to be the Mark Zuckerberg of biotech?’ At the time, that wasn’t a good thing.”
Redwood City, CA-based OncoMed (NASDAQ: OMED) waited six more months to gear up, and it went public in July 2013. There were other factors in the delay besides a cranky market. Hastings and the board also decided to wait for more clinical data from OncoMed’s considerable pipeline.
But without the JOBS Act that kind of feedback wouldn’t have been as forthcoming to Hastings, or to other biotech executives juggling eighteen things as their companies careen toward a potential market debut.
“They’re more accurately able to predict what they’ll see when they go on the road to price,” said Matthew Rossiter, a partner at law firm Fenwick & West. Biotech IPOs in 2013 generally priced within or above their target price range, according to ThomsonReuters data Rossiter presented at the Allicense conference.
Rossiter also noted that half of life science companies in 2013 were able to move from their first stealth filing to an IPO in less than 90 days, a much shorter time than their peers on the high tech side. Being able to move fast and with an accurate bead on what investors want is critical in biotech, where an unexpectedly good batch of data, for example, can suddenly create small windows of opportunity.
But “testing the waters” conversations can only help so much. Biotech veteran Katrine Bosley emphasizes that a private biotech should be building a rapport with public buyers well before IPO plans are in motion, going on what she calls “non-deal” roadshows and making presentations in the private-company tracks of investor conferences (even if, as once happened to Bosley, the only people present are the “audio-visual guy, the junior banker who introduced me, and the CEO waiting to give the next talk”).
Bosley, an Xconomist, was CEO of Avila Therapeutics, which was acquired by Celgene in January 2012. As chairman of Genocea Biosciences (NASDAQ: GNCA), she helped steer the company to an IPO in February, and she said a lot of pre-IPO companies are hungry for information on how best to test the waters.
The frenzy has abated for now; just three life science companies debuted in April (though in many other years that would be an avalanche). But four are getting close, according to Renaissance Capital, with more than a dozen in the public queue. And thanks to confidential filing, no doubt there are a lot more out there testing the waters that we don’t know about yet.