The end of the biotech IPO boom?
January 2016 | FEATURE | CAPITAL MARKETS
Financier Worldwide Magazine
Since early 2013, companies in the biotechnology space have filed for their public market debut in record numbers, raising billions of dollars in funding in the process. 2013 was a true renaissance for biotechnology IPOs. Across 50 biopharmaceutical IPOs, a record $7.1bn was raised, ending the almost decade long biotech IPO drought. This strong performance continued into 2014, during which 81 IPOs raised around $6bn.
However, as quickly as the momentum surrounding the biotech IPO boom gathered, it dissipated last year, slowing to a mere trickle in the second half of 2015. According to Bloomberg, since CytomX Therapeutics priced its IPO in late October there was a not a single biomedical, drug or therapeutics company IPO slated for the following 30 days. Though that figure may not sound remarkable, it represents the slowest month for IPOs in those segments since February 2013.
Those biotech companies that did go public in September and October endured a difficult period. NovoCure Ltd, a biotech company which utilises a revolutionary approach to treating cancer, saw its price drop nearly 17 percent below its IPO price following the first day of trading. Sadly for the wider biotech space, Novocure is not an exception. According to Dealogic, six pharmaceutical or biotech companies went public between September and early October, and five of those priced below expectations. The only biotech firm to exceed its IPO price was Regenxbio. The gene therapy company initially marketed 5.56 million shares at a range of $17 to $19 per share, which later increased to $22 per share.
In October, biotech start-up MyoKardia launched on the Nasdaq, pricing its IPO at $10 per share – a considerable discount from its earlier, higher price range of around $15 to $17. MyoKardia’s struggles at launch are analogous of the wider struggles in the biotech space. Via its IPO the firm raised $54.4m, selling more than 5.4 million shares, but this was way below expectations. Also in October, Dimension Therapeutics Inc was forced to price its IPO at $13, down from the expected $14 to $16. Shares in the company plummeted 17 percent following its launch.
The decline in the sector’s IPO market has come as shares in biotech firms have fallen. Following an all time high recorded in July 2015, the Nasdaq Biotechnology Index has dropped around 24 percent. Some analysts suggest that heightened scrutiny around drug pricing has played a major role in the sector’s decline. H2 2015 was a tricky period for the life sciences industry, which came in for criticism from both politicians and analysts in light of the alleged ‘price-gouging’ by Turing Pharmaceuticals AG. The company’s announcement of a 5000 percent price hike for its 62 year old drug Daraprim sparked public anger. Since the storm emerged, the NASDAQ Biotech Index has fallen 14 percent. Democratic presidential candidate Hillary Clinton led calls for reforms in the pharmaceutical space in light of the scandal. Questions about drug pricing have continued to swirl around the space and industry giants such as Valeant Pharmaceuticals have seen their share price plummet 40 percent in recent months as investors have become increasingly concerned with pricing strategies.
High profile issues around drug testing and drug pricing are having a detrimental effect on perceptions of the industry. The late stage failure of Tetraphase Pharmaceutical Inc’s trial of an antibiotic sent the company’s shares plummeting 79 percent in a day in September, wiping $1.3bn off its market value.
In addition, the impending 2016 presidential campaigns in the US may be having some bearing on the performance of biotech IPOs. Several candidates, including Ms Clinton, have discussed during their campaigns the possibility of reining in drug prices. Undoubtedly, investors have been eyeing these discussions with some concern. Struggles in the US economy will also have had a bearing.
There is still some hope, however, that this cooling off phase does not mean the window for biotech IPOs has closed completely. Often booms and crashes in the biotech space do not follow the usual patterns associated with other industries. Instead, they are linked more closely with scientific advances in the sector, and given that innovative products are still in the pipelines of many companies, there is a hope within the industry that IPOs may yet rebound. Companies with proven drug and therapy products are, of course, more likely to attract investors in the IPO market.
A number of biotech firms have been able to raise money in private funding rounds, however the dwindling nature of the IPO market could be problematic for such transactions. Additionally, when IPO markets cool off, a strong secondaries market tends to allow transactions to get done. Ultimately, there is still hope within the biotech and pharma spaces that firms will be able to go public and succeed.
Though the IPO outlook appears bleak, the downturn will not be permanent. The biotech sector has experienced similar periods of decline in the past and emerged stronger for it. Unfortunately for many firms operating in the space, the heady days of soaring valuations appear to be at an end, for the time being at least. Yet all is not lost; the boom may be over, but a bust seems unlikely.
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