May 22 The tide may have started to turn for initial public offerings from U.S. biotechnology companies, as a rising stock market, low interest rates and a lack of market volatility entice investors to take on the high risk inherent in the sector.
After years of being shunned, small biotechs are getting a closer look as equity investments even though many of them come to market before turning profit or delivering product to market.
Indeed, 14 biotechs have gone public in 2013, marking the sector's best start since 2007, according to market data firm Ipreo. What's more, biotech IPOs have turned in a strong performance, delivering an average return of about 20 percent this year, compared with an average of 16 percent across all sectors.
"The market for biotech isn't screaming hot, and it's not like everyone can get deals done, but we're seeing attractive returns being generated," said Bob Carey, a managing director at JMP Securities who works with biotech companies. "It's a rational market."
The fortunes of most clinical-stage biotechs are riding on a single drug, making them particularly risky investments.
The release of important data on a treatment under development is an event that can either destroy the company's prospects, or attract new investors or major pharmaceutical companies seeking to license a promising drug.
On Tuesday night, Portola Pharmaceuticals, a biotech developing drugs to prevent stroke-causing blood clots, raised around $123 million in its IPO. The deal, which attracted sufficient demand to price a day early and to offer more shares than expected, values the company at $469 million.
Biotech IPOs have, on average, raised proceeds of around $70 million, according to data from Ipreo and Thomson Reuters, with a mean valuation of around $200 million. The relatively large size of Portola's IPO and the company's implied valuation may show the biotech market is hitting a new stage, bankers say.
Unlike in most other sectors, biotechs use IPOs to raise financing to fund the next stage in the drug development cycle, not as exit opportunities for early investors in the company.
That may help explain why more biotechs are launching IPOs in recent years, a time when access to private capital is drying up. It also shows why the amounts involved are often relatively modest.
Regulus Therapeutics Inc, a biotech that develops drugs for several diseases, priced its October IPO at the low end of range, but its shares have risen 75 percent since then even though its treatments have yet to begin clinical testing.
Fundraising by life-science venture capitalists has decreased steadily since 2008, according to Fenwick & West, a law firm that works with life sciences companies. The percentage of venture funding allocated to life sciences fell to 12.5 percent last year, from 19 percent in 2009.
Just getting the IPO priced and closed, and gaining access to capital markets, is a success for biotechs, said Lia Der Marderosian, a partner at WilmerHale, who works with life sciences companies.
"This is opposed to tech companies who you'll frequently see price above the range and then trade up significantly. That just doesn't typically happen for biotech companies."
U.S. legislation passed last year to make it easier to go public, known as the Jobs Act, has helped the biotech sector by allowing companies to court potential investors before a formal roadshow. Companies can spend more time educating investors about their products and technology. That's particularly helpful in biotech, where the timing of an IPO often depends on a drug's chances of gaining regulatory approval.
To be sure, investors are still being selective about the biotech sector and not every company will make the cut if they lack sufficient funding and a large potential market to tap.
Shares of Omthera Pharmaceuticals Inc, a later-stage biotech developing therapies to lower the blood fat triglycerides in high-risk heart patients, have dropped 13 percent since when the company went public in April.
Omthera priced shares at $8, well below the expected range of $13 to $14, as investors proved skeptical that the biotech's drug, Epanova, could compete with existing products.
"Investors aren't just focused on what phase a drug is in the development cycle," said Steven Tuch, a managing director in equity capital markets at BMO Capital Markets. "It's about an addressable market, being well-capitalized and having near-term and multiple milestones."
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