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Biotech Stock Offerings Boom

Finance: A rash of small firms go public after strong 2013, but the investment bubble could burst

by Ann M. Thayer
February 17, 2014 | A version of this story appeared in Volume 92, Issue 7

A table containing bar graphs showing the date of initial public offerings by biotech companies and the amount of money either raised or expected to be raised from said offering (bar charts). The listing contains IPOs offered so far in 2014.
Sixteen biotech firms have made initial public stock offerings so far in 2014. Blue = small-molecule therapies, Orange = biologics, Green = both. a Estimate; offering in progress. SOURCE: Companies

Starting 2014 with a bang, biotech companies have moved quickly to raise capital. Just six weeks into the year, 16 small drug firms have launched initial public offerings (IPOs) that together should raise more than $1 billion. Although the pace is well ahead of what was seen in 2012 and 2013, it may be hard to maintain.

The roughly dozen offerings that debuted between late January and early February this year are more than twice the number for any two-week period since 2000, according to the investment bank Burrill & Co. The surge was unexpected because it follows a record 2013, when 65 life sciences IPOs brought in $7.5 billion. Moreover, by the end of 2013 investors seemed to have had their fill because the offerings had tapered off.

The strong start in 2014 reflects the fact that investors still see promise among biotech firms, says Stephen M. Sammut, a senior fellow at the Wharton School and a venture partner at Burrill. “Many of the companies have reached a point of critical mass in their product pipelines as well as crossed some hurdles in clinical development.”

Biotech stocks also are in the limelight because they outperformed the overall market in 2013 and remain relatively stable this year, Sammut adds. Other encouraging factors are a positive regulatory outlook and recent clinical successes in high-risk areas, such as gene therapy, rare diseases, and RNA-based drugs, according to Burrill.

Two of the bigger IPOs so far in 2014 were by firms that fit this mold. Novato, Calif.-based Ultragenyx Pharmaceutical raised $126 million to put toward developing biologic and small-molecule drugs to treat rare genetic diseases. Dicerna Pharmaceuticals , a Watertown, Mass.-based firm focused on RNA-based treatments for rare liver diseases and cancers, brought in $93 million.

The performance of such newly public companies will help determine whether the IPO boom continues. Although shares in Dicerna and Ultragenyx soared on their first day of trading, up 207% and 101%, respectively, prices have since fallen from those highs. According to the investment analysis firm Renaissance Capital, stocks in about one-third of recent biotech IPOs are trading near or below their initial price range.

Kathleen S. Smith, a principal at Renaissance, explains that most of the IPOs were priced low to get the deals done. In addition, insiders or venture backers purchased shares. “As a result of this discounting and insider purchasing, the biotech IPOs have shown large first-day gains averaging 29.8%; however, the post-IPO returns have been weak,” she says.

Although performance has been inconsistent, the returns from biotech IPOs on average are still better than from nonbiotech IPOs, according to Renaissance. “The returns of Ultragenyx and Dicerna show that interest in differentiated, well-run biotechs remains high,” the firm says. “In contrast, several of the worst-performing biotech IPOs this year have focused on large, hotly contested markets for pain and heart failure.”

Another 10 or so biotech IPO filings are thought to be waiting in the wings, but it’s uncertain whether investors will buy into them. Forecasting beyond a week is difficult, and the remainder of February and into March will be an acid test of whether the momentum continues, according to Sammut. All it might take to “chill the market,” he says, would be stalled progress or bad news from just one or two of these companies.


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