Biotech IPOs more than double in Q2
"What goes up, must come down." It’s a phrase frequently used in reference to physics, yet just as easily — if not more accurately — characterizes the pharmaceutical industry. A year filled with big deals and groundbreaking drug approvals can precede one with lackluster M&A and clinical trial blowups. And in the world of biopharma, it often doesn't even take a full trip around the sun for tides to change.
Case in point: initial public offerings. The IPO market for drugmakers looked optimistic at the onset of 2017, but turned pretty drab by the end of the first quarter. Just a handful of biotechs, such as Jounce Therapeutics, AnaptysBio and BeyondSprings Therapeutics, had grabbed their own stock tickers before March ended.
Now, however, the rollercoaster has click-clicked up and out of that valley, toward a new peak. More than a dozen medicines developers went public between April 1 and June 30. The list includes Tocagen, Verona Pharma, Zymeworks, UroGen Pharma, Biohaven Pharmaceuticals, Ovid Therapeutics, G1 Therapeutics, Argenx, Athenex, Avenue Therapeutics, Mersana Therapeutics, Dova Pharmaceuticals and Aileron Therapeutics.
But with so many companies through the pipeline, the focus has turned to whether markets will remain hospitable enough for new players to file and keep the IPOs rolling.
A strong quarter
Healthcare companies accounted for more stateside IPOs in the second quarter than any other sector, according to data compiled by Renaissance Capital, an investment management firm specializing in IPO research. A total of 14 made the private-to-public switch in the April to June period, raising a collective $1 billion of the $10.6 billion raised by total IPOs across all sectors.
Notably, it was a bit of a turnaround for the biotech sector, which only claimed four exits and $300 million in total proceeds during the January through March period of this year.
So what changed?
Though insider buying is common for biotechs aiming to go public, most of the 13 drugmakers that conducted offerings in the second quarter had "heavy" amounts of it, Renaissance said in its most recent U.S. IPO quarterly review. While IPOs were previously considered an exit for many biotech investors, in recent years there has been a shift, with many initial investors seeing an IPO as just another funding round. Most biotech investors now consider a buyout of the company or successful commercialization of a product as real exits.
Existing investors of Ovid Therapeutics, for instance, offered to purchase $20 million worth of the neurology-focused company's common stock before it hit the NASDAQ. Ovid ended up pricing its shares at $15 a pop, and reaped $75 million from its IPO in early May.
Similarly, Eli Lilly, Celgene Alpine Investment Co. and other Zymeworks stakeholders expressed interest in $42 million worth of the Canadian biotech's common shares. Zymeworks raised nearly $60 million through going public in the U.S. in April.
Additionally, private equity and venture capital activity has increased across all sectors. PE-backed and VC-backed companies were responsible for 15 and 16, respectively, of the IPOs seen during the second quarter versus 12 and eight in the first quarter, according to Renaissance. Financial data firm Pitchbook also found PE-backed IPOs are higher thus far into 2017 than they were last year, though 37.5% of those exits are trading below their target pricing ranges.
Fueling the IPO fire is the fact that U.S. stocks are doing well overall, which has abetted some fears over the uncertainty surrounding the Trump Presidency's stance on the pharma industry among life science investors. Year-to-date, the S&P 500 Index and the Dow Jones Industrial Average are up roughly 8%, and some of the best performing IPOs of the quarter were biotechs. Biohaven, Athenex and UroGen saw 47%, 46% and 39% returns from their offerings as of June 30.
"An extended period of strong IPO returns and low market volatility has created a receptive environment for a wide variety of companies to come public," Renaissance said in its review.
When's the next fall?
Peaks offer good vantage points of the surrounding landscape, and therefore public and private investors are surely using the U.S. IPO market's second quarter performance to gauge potential sources of trouble ahead.
Fortunately, the third quarter looks promising, according to Kathy Smith, principal at Renaissance. "We're expecting some continuation of the activity we saw in the second quarter and maybe somewhat of a pickup," she told BioPharma Dive of the whole U.S. IPO market.
Several biotechs have already filed their S-1 forms, including Clementia Pharma, which plans to earn $115 million, and Zealand Pharma and Kala Pharma, both of which are shooting for $86 million.
And while biotech IPO returns can be very hit or miss, they've been a good bet on average.
"The first quarter was a slow start ... but the returns on the biotechs as a whole have been positive and that's important," Smith said. "You've got a very modest first day return and the overall return from the IPO price is on average positive, 7.2%. They're good, not great. The issue is to try and avoid the ones that perform poorly."
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