PALO ALTO — The capital markets have long been challenging for young biotech companies, with revenues still years off and innovations that play out in laboratories and operating rooms—not in the palm of one’s hand.
But as the end of the year looms, the biotech IPO market is booming, reviving the life sciences ecosystem and auguring unprecedented options for companies taking root there.
“This year has really been the year of the IPO,” said Charles Kim, a partner in Cooley’s San Diego office.
More than 40 biotech outfits have gone public so far this year, and attorneys with eyes on the pipeline say there’s still a healthy number in the offing, thanks to improved investor receptivity and mitigated risk ensured by the JOBS Act.
“The strength of the IPO market this summer caught a lot of people by surprise,” says Ryan Murr, managing partner of Ropes & Gray’s San Francisco office. A lot of IPO candidates hadn’t yet started the process, but embarked on it soon after observing the success of their peers. Many of those companies won’t come to market until spring. “It’s still building,” Murr continued. “We’ve seen the first wave of the tsunami.”
Companies that have made their debuts are, by and large, faring well. Solid returns from the industry—the Nasdaq biotechnology index is outpacing the broader market, and is up more than 50 percent year-to-date—have piqued the interest of more generalist investors.
They’ve also been drawn by the fact that many companies considering a public offering today have balanced risk profiles, with exciting therapies in development, experienced management teams and clear regulatory pathways.
Many companies that might have gone out years ago, when prospects were gloomier, shelved their IPO hopes but kept plowing ahead, creating a backlog of strong IPO candidates.
“The companies that were able to find a way to navigate that period and find a way to survive emerged strengthened,” said Mark Roeder, co-chair of the life sciences industry group at Latham & Watkins.
The market dynamics also created a crop of prime M&A targets, some of which have been scooped up by Big Pharma over the past year. That’s helped bring more positive attention to the sector.
Attorneys now find themselves able to counsel clients on a range of options including partnership agreements, acquisitions and equity offerings, attorneys said.
The M&A and IPO exits have also helped reinforce each other—more evidence that each stage of the life cycle needs to be active for biotech companies to thrive.
“It does feel like the IPO environment has injected some energy into the space,” Roeder said. “The ecosystem wasn’t as healthy three or four years ago.”
The VC community is reaping the rewards of the improved capital markets environment: VCs had 14 biotech IPO exits in the third quarter, marking the second consecutive quarter for double-digit offerings in the sector since 2000, according to the National Venture Capital Association.
But the gains aren’t driving VCs to throw money at the sector. According to a Fenwick & West analysis of data for the first half of 2013, total dollar investment was on par with five-year historical averages, but the number of deals was down by more than 10 percent.
Fenwick’s research indicated that the portion of venture funds allocable to life sciences declined from 27 percent of funds raised in 2008 to 11 percent of funds raised in the first half of 2013. Time will tell whether healthy returns today will improve prospects for future funds—especially if the rebound doesn’t last.
Fenwick & West partner Matthew Rossiter, who co-authored the VC study, says there are a couple of ways this current IPO spree can end: Either there will be a dramatic reversal of fortune, turning investors off completely—though even weak debuts haven’t done that—or demand will be satisfied and allocations will be readjusted accordingly.
“But [the latter] would just be a tapering, not a popping of a bubble or falling off a cliff,” Rossiter said. “That would be a good new scenario: a viable new market for life sciences.”
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