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Jun 22, 2011

What Does It Take to Swing the IPO Window Open for Biotechs?

Suggestions include selling at a discount at a time when there is a rising investor fan-base for social media.

What Does It Take to Swing the IPO Window Open for Biotechs?

Analysts expect trends to be mixed for new biotech stocks for the remainder of this year. [© Lane Erickson - Fotolia.com]

  • On June 10, a day after withdrawing an $86 million IPO filed in November 2010, Ambit Biosciences reported securing $30 million in Series D-2 equity financing. “The terms currently obtainable in the public marketplace are not sufficiently attractive to the registrant to warrant proceeding with the public offering,” Ambit CFO Alan Fuhrman said in an SEC filing.

    The company’s about-face caps about a year of decidedly mixed news on the biotech IPO front. In interviews earlier this month, four market watchers said they expect trends to stay mixed for new biotech stocks through the rest of the year. They note that the roller-coaster market is in the throes of another downslide.

    The fact is that biotech companies continue to face rising costs for developing treatments and diagnostics and then bringing them to market. As a result, the analysts agreed, investors are much more apt to judge biotech stocks based on individual results, rather than flocking to life science stocks in general, the way many have embraced sexier social media IPOs in recent months.

    On the bright side among biotech IPOs, Sagent Pharmaceuticals has risen from its initial $16 per share on April 20 to $26.13 per share as of June 10, a 63% gain in about eight weeks and $1 per share above the price at which it filed back in December. Investors have apparently warmed to the developer of generic injectable drugs. Sagent raised $95.5 million on its first day of trading.

  • Biotech's Performance

    Biotech IPOs are scrambling to compete for investors who are more smitten with other technologies, especially social media, William T. Whelan, a partner in the Boston office of law firm Mintz Levin Cohn Ferris Glovsky and Popeo, and Kyle Guse, a partner in the Silicon Valley office of law firm McDermott Will & Emery, both told GEN.

    LinkedIn more than doubled its IPO share price of $45 on May 19, its first day of trading, when it netted $351 million. As of June 13, company shares closed at $75.22; they have risen as high as $122.90. Earlier that day, CNBC reported that Facebook was planning its own initial stock sale of more than $100 billion as early as October or November. The company declined comment, though, last month its COO called an IPO inevitable.

    “There’s so much hype and interest in that area that investors are channeling their money in those directions,” Guse said. “I think it’s more a sign of other opportunities out there for the limited number of dollars, more so than the quality of the biotechnology IPOs that are coming out.

    “Quality-wise, they’re much better than they were, say, 10 years ago. We’re seeing companies with revenues, and multiple streams of revenues at that, and lengthy operating histories.” It helps, Guse added, that the average age of a company going through a biotech IPO is more than 10 years.

    IPO market tracker IPOX Schuster looked at 22 U.S. biotechs that had IPOs from the start of 2010. The average equally weighted IPO enjoyed a 26.56% gain over its initial price during the past year, while the median equally weighted IPO saw a 15.61% increase over last year. Twelve companies have gained in price since their IPOs, while another nine have fallen since going public, and one was unchanged.

    When adjusted for the broad measure of U.S. IPO performance, Schuster found that the performance is mixed: While the average biotech IPO has outperformed FPX by 11.92%, the median has underperformed FPX by -2.86%.

    Josef Schuster, Ph.D., founder of IPOX Schuster, told GEN that the relatively solid performance versus FPX resulted from big gains for three companies:

    • Pacira Pharmaceuticals, developer of DepoFoam® drug delivery technology, has seen its stock price climb to $12.70 per share from the first-day price of $7 during its $42 million IPO yet below its initial filing price of $15 per share.
    • Aveo Pharma, a developer of targeted cancer therapeutics, closed June 13 at $18.92 per share, more than double its original price of $9 at its $81 million IPO on March 11. Aveo sold its shares at below its original IPO price range ($13–$15 per share).
    • Ventrus Biosciences’ offering price of $6 in its $17.4 million IPO was the lower end of a per-share price range stretching to $7. Ventrus’ price had since doubled to $14.61 per share as of June 13. The company concentrates on gastrointestinal disorders, specifically hemorrhoids, anal fissures, and fecal incontinence.

    “It is also typical for biotech IPOs to see their price range slashed up to 30% before trading starts, which has to do with the underlying risks (also liquidity risk) for the respective deals. This has obviously helped the performance,” Dr. Schuster said.

  • Offer Discount Valuations

    “What will continue to be important for biotech IPOs to come to market is their willingness to sell the respective deal at a discount of up to 30% from their initial offering ranges to compensate investors for the risk—stock-specific and liquidity risk—for the respective deal,” Dr. Schuster added.

    Among big winners so far in 2011 is Endocyte, a developer of small molecule drug conjugates and companion diagnostics for cancer and inflammatory diseases. Shares of Endocyte finished trading June 10 at $11.61 per share, nearly double its $6 per share price its first trading day, though still 17% below the planned share price when the company filed to go public in August 2010.

    Two other biotechs that hit the market this year at prices far lower than what their companies envisioned when they filed to go public varied in performance in the few weeks following their offerings.

    • Tranzyme Pharma, which focuses on small molecule treatments for gastrointestinal motility disorders, climbed from its $4 share price during its $48 million IPO to $4.51 per share. The company initially sought $12 a share when it filed in November.
    • AcelRx Pharmaceuticals, developer of therapies for acute and breakthrough pain, finished trading at $4.50, down from $5 per share its first day of trading when it raised $40 million. The firm originally sought $13 per share in its IPO filing.

    “The IPO market is open for biotech firms if the company is prepared to offer discount valuations to the buy side IPO investors,” John Steuart, managing director of Claremont Creek Ventures in Oakland, CA, pointed out to GEN. “Aftermarket performance is respectable, meaning the access to capital on a secondary offering at better prices down the road makes the discount more palatable.”

  • Consider Other Options Simultaneously

    As for Ambit’s withdrawal, Steuart said he doesn’t see it as harbinger of another biotech retreat from the IPO market. Because of the uncertainty and long time lines of an IPO process, he said, companies often run a dual process seeking a private equity or strategic deal at the same time that the S-1 filing is in process. Sometimes an acquisition offer looks more tempting, Steuart added.

    The most recent example of that is Advanced BioHealing, maker of skin substitute dermagraft, which formally withdrew its IPO on June 14. The decision followed an announcement on May 17 that Shire would buy Advanced BioHealing for $750 million.

    Another example is Rules-Based Medicine (RBM), which was bought by Myriad Genetics for roughly $80 million in cash. RBM filed plans for a $90 million IPO in December 2009, only to shelve that strategy in November 2010, citing market conditions. Myriad announced the takeover in April and completed it June 1.

    RBM provides protein biomarker products and services based on its Multi-Analyte Profiling (MAP) technology. The acquisition expands Myriad’s research portfolio into new disease states including psychiatric disorders, infectious diseases, and inflammatory diseases, and adds eight new molecular diagnostic product candidates to its pipeline.

  • The Year Ahead

    Guse said he was cautiously optimistic about IPO prospects for biotech for the rest of this year. “We’ve had a good couple of months for the IPO market in general, and hopefully it will continue through the rest of the year so we can exceed what happened in 2010. I think we’re on pace to surpass 2010 levels, and hopefully that trend will continue, and we’ll have a good 2011.”

    Surpassing 2010 shouldn’t be that hard as long as there isn’t another 2008-style economic cratering, since IPO activity in ’09 was so scant. But how much better this year will be for initial biotech stock sales may well hinge on whether the social media bandwagon becomes a juggernaut—specifically, whether Facebook tries to “friend” Wall Street by raising $100+ billion as reported.

    That would likely force several publicly minded companies, in and outside of biotech, to hold off on their IPOs. This in turn will likely spur more M&A activity, if Myriad and Rules-Based Medicine are any indication. More deals like that and even dug-in IPO investors in biotech companies would find something to like about Facebook’s plans to go public as biotechs may try to cash out via an M&A, which is a better outcome for biotech investors anyway.


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