Stock Market Lures Biotechs

Small biotechnology companies are jumping on the opportunity to launch initial public offerings (IPOs) this year. After a few lean years for finding investors, these offerings are raising the cash they need for product development.

The stock market debut of eight life sciences companies in May was the most seen in a single month since 16 went public in August 2000, according to the San Francisco-based merchant bank Burrill & Co. U.S. offerings are more than double the number this time last year.

As of May 31, 17 life sciences firms have held IPOs this year, raising a total of more than $1.5 billion. A dozen of the IPOs have been by small biotech firms focused on multiple therapeutic areas, with the rest in drug delivery, diagnostics, and clinical trial services. Another 18 firms have registered for IPOs.

“This is the best environment we’ve seen for biotech IPOs in a long time, but it remains a demanding market for companies seeking access to the public markets,” says G. Steven Burrill, CEO of Burrill. “We are still in an environment where companies often need to price deals below their target to get them done.”

Life sciences firms are capitalizing on a good year overall for stocks and a receptive market for biotech in particular. The NASDAQ stock market, on which most small technology companies trade, has risen about 12% since Jan. 1. The NASDAQ biotech stock index is up about 28%, putting the sector ahead of most other industries.

Many biotech companies are taking advantage of the Jumpstart Our Business Startups Act, a law passed last year that removed certain barriers to raising capital. The act allows small companies to court investors and to avoid disclosing some financial information for five years after going public. This provision is good for still-unprofitable biotech firms focused on a limited number of product candidates.

Investors now are watching to see what comes next. Share prices of the newly public life sciences companies have climbed an average of about 20% after their IPOs, according to the investment analysis firm Renaissance Capital. The first biotech to go public in 2013, Stemline Therapeutics, has even conducted a $69 million follow-on offering. And six weeks after its IPO, Omthera Pharmaceuticals struck a deal to be acquired by AstraZeneca for an 88% premium over its stock price.

Some analysts and investors are concerned that the recent gains in biotech stocks are reminiscent of the hype and subsequent crash in prices seen in 1999–2000. But Credit Suisse stock analyst Ravi Mehrotra told clients in a mid-May report that “this is not a biotech bubble.” In fact, “the sector has further room to run,” he said.