February 1, 2011 (Vol. 31, No. 3)
Strong Fourth Quarter Caps Year of Financing Gains
With the tumultuous 2010 behind us, this article will take a look at how publicly traded biotech companies fared in terms of being able to secure public market financing, given the volatile market environment. Specifically, we will discuss both IPO and follow-on biotech financings that took place in the fourth quarter of the year.
The fourth quarter of 2010 was a strong one for biotech IPOs and helped make 2010 the better year of the last three for biotech IPOs, despite the fact that a lot of these financings took place at much lower prices than what their investors, the issuers, and underwriters had hoped, with deep discounts seen in many cases.
Still, we view this increased activity in IPOs (and other financings) toward year-end as an encouraging sign for the biotech sector overall. According to data published in January 2011 by Biocentury, there were twice as many biotech IPOs in 2010 (31) as in the previous two years combined, with 10 in 2009 and 6 in 2008, which also resulted in significantly more money being raised in these initial public offerings in 2010 ($1.6B) versus 2009 ($928M) and 2008 ($133.5M).
The one area where biotech IPOs did not fare as well was in the average amount raised per IPO, where there was a significant decline in 2010 from the prior year. Specifically, the average biotech IPO raised $52M in 2010, which was 44% lower than the average amount raised per IPO in 2009 ($93), albeit higher than the average of $22M per IPO in the weak 2008 season.
This decrease in the average biotech IPO size was mainly due to the weakness experienced in the middle of the year (2Q and 3Q) by the overall market, which obviously affected new offerings, with the biotech sector being among the ones impacted.
Looking at 4Q in terms of biotech IPOs, we see it as the best one of the year according to a number of metrics: first of all, there was significantly more money raised through biotech IPOs in 4Q ($644M) versus the first three quarters of the year, $395M, $343M, and $240M in 1Q, 2Q, and 3Q, respectively.
Furthermore, during 4Q we saw a reversal of a negative trend that was developing during the first three quarters, and that was the declining amount of capital raised from 1Q through 3Q, as seen from the numbers just mentioned.
Finally, there was more money raised in 4Q ($644M) than the previous two quarters combined ($574M), and this is significant since it seems to be signaling a recovery of the biotech IPO along with the rest of the market, following the slump experienced by the markets during the middle of the year.
In contrast to how biotech IPOs did for the year, compared to 2009, the average capital raise in 4Q was higher ($64M) versus the prior two quarters ($46 in 3Q and $34 in 2Q) and similar to what happened in the first quarter of the year, where the average IPO size was $66M. This increase in the size of the offerings in 4Q 2010 happened despite the fact that, as we mentioned earlier, a number of these IPOs happened at much lower price levels than was originally planned.
We believe that given the difficulties facing the venture capital industry, especially in healthcare and even more in biotech, a lot of companies and their boards opted for access to public capital, even if that comes at less than ideal valuations.
Finally, in addition to being a strong quarter for underwriting of biotech IPOs, 4Q 2010 was a good quarter in terms of the performance of these new stocks in the market, in relative terms. Specifically, according to the same January 2011 Biocentury data, the stocks of the biotech companies that came public in 4Q 2010 were up 1% at the end of the year.
This may not seem like a good outcome for investors that bought into these new issues, but it is indeed better than how biotech stocks that went public in 1Q and 2Q 2010 fared, which were down 20% and 29% at year-end, respectively, while 3Q 2010 was the best one in terms of biotech IPO stock performance, with a 2% return at the end of the year. The combined performance of the stocks of the 31 biotech companies that came public in 2010 was -9%.
4Q 2010 was a good quarter for follow-on biotech offerings, as well. Similar to the trend that we discussed earlier for IPOs of biotech companies, 4Q 2010 was also a strong one in terms of follow-on offerings of publicly traded biotech companies, relative to the first three quarters of the year.
According to the same Biocentury data, there was more money raised in 4Q 2010 ($1.3B) versus 1Q, 2Q and 3Q ($1.27B, $624M and $270M, respectively). Again, similar to what happened in 4Q in the biotech IPO space, we had a reversal of the trend of declining amounts of money being raised every quarter, as shown by the numbers just mentioned, in the follow-on arena.
Finally, and as was the case for biotech IPOs, we saw more money raised in 4Q ($1.3B) than in the prior two quarters of the year combined ($894M) and more deals happening in 4Q (26) than in 2Q and 3Q combined (23).
In terms of total capital raised for the year in biotech follow-on offerings, we had $3.5B raised in 2010, which is a steep decline to the 2009 total of $6.2B, but almost a doubling from the $1.8M raised in the very difficult 2008 market.
In contrast to the positives of increases in number of follow-on raises and amount of capital raised, the performance of the stocks that did follow-on offerings during the fourth quarter lagged the performance of the stocks that had their follow-ons completed earlier in the year. Stocks of biotech companies that completed follow-on offerings in the fourth quarter were up 11% after the offering until the end of year, while stocks of companies that had financings completed in 2Q and 3Q ended the year up 33% and 24% since the completion of the financing, respectively, while the return for 1Q financings was 4%.
Even though the returns of each stock depend, of course, on the fundamentals and specifics of each company, it is worth remembering that the markets improved as the year progressed and thus one possible contributing factor to the strong returns seen in the stocks that did offerings in 2Q and 3Q may have been the improving overall market environment.
What about 2011? The last quarter of the year was a strong one for biotech financing, as seen by the number of transactions and amounts of capital raised. We believe this positive trend will continue into the new year, with the IPO window remaining open (albeit selectively) and with biotech investors continuing to put money into the sector (again, selectively) as excitement remains high due to, among other factors, important medicines in lupus, hepatitis C , and diabetes being in front of the FDA with decisions expected soon.
Simos Simeonidis, Ph.D. ([email protected]), is director and senior biotechnology analyst at Rodman & Renshaw.
