How Biotechs Got Hot; Sizzling IPO Market Reflects Upswing in Drug Approvals Amid R&D Successes

July 1, 2013, 6:01 p.m. ET

How Biotechs Got Hot

Sizzling IPO Market Reflects Upswing in Drug Approvals Amid R&D Successes



Biotechnology companies are enjoying their best run with initial public offerings in a decade, amid an upswing in new drug approvals, strong performance by some already public biotech firms and legal changes last year that make it easier for companies to gauge investor interest in a potential IPO.

Through the first half of 2013 there have been 16 U.S.-listed biotech IPOs, raising $1.1 billion in proceeds, according to Renaissance Capital LLC, a Greenwich, Conn.-based provider of IPO research and investment products, making this year, at the midpoint, already the best for biotech IPO fundraising since 2004.For biotechs, “the IPO market is as robust as it’s been in quite a while,” said Evan McCulloch, portfolio manager at San Mateo, Calif.-based Franklin Templeton Investments. “There’s just been so much [research and development] success, and that’s driven returns.” Mr. McCulloch is lead manager of the $731 million Franklin Biotechnology Discovery Fund, which has purchased recent biotech IPOs.

Biotechnology firms make medicines out of living cells, rather than from chemicals found in nature. The companies traditionally are an important source of new medicines, especially as large pharmaceutical firms have cut back on their own drug discovery efforts. Fundraising through public offerings can help companies raise money to keep researching or to invest in the commercialization of their drugs.

Investors sometimes avoid biotechs as too risky, as many don’t have drugs that are approved and generating revenues. Many experimental drugs never make it to market.

But lately, investors have been charged up by research success. Last year, the Food and Drug Administration approved 39 new drugs, according to the agency, a figure not reached since 1997. This year, the agency has approved 13 new drugs.

In recent years, a better understanding of the roles that genes play in cancer and other diseases has paved the way for startups to develop a new generation of drugs targeting the molecular anomalies in specific patients—what’s sometimes called “precision medicine.” It has also brought along drugs that are useful against rare but deadly genetic diseases.

These research successes have led investors to bid up the price of publicly traded biotechnology companies, such as Gilead Sciences Inc., GILD +0.75% up 101% over the past year, and Celgene Corp., CELG +1.65% up 85% in the past year. Meanwhile, demand for biotechs has been seen in deals. Pearl Therapeutics Inc., a privately held developer of respiratory medicines, agreed in June to be bought by British drug giantAstraZeneca AZN.LN +1.16% PLC for up to $1.15 billion. On Sunday, Onyx Pharmaceuticals Inc., ONXX +51.27% which makes cancer drugs including multiple myeloma treatment Kyprolis, said it had rejected a $120-a-share offer from AmgenInc. AMGN -1.19% and was seeking potential buyers. Onyx’s shares closed Monday at $131.33, up 51% from Friday’s close.

Some investors who have seen their biotech holdings rise in value are now looking to smaller companies for the next wave of growth.

Enthusiasm for biotech IPOs “is at an all-time high in the last decade,” said Kevin Starr, a partner at Third Rock Ventures, a Boston-based health-care venture capital fund. His fund is behind Bluebird Bio Inc., BLUE +5.17% which went public in June, and Agios Pharmaceuticals Inc., which has filed plans with regulators to raise around $86 million in an IPO. He declined to comment on the specific companies.

The strong performance for biotechs has come amid an overall robust U.S. listings market. At the same time, last week saw some hiccups in the IPO market along with stocks generally on fears that a changing posture by the Federal Reserve could lead to rising interest rates.

Some biotech IPOs still did well last week. Biotech drug makers Esperion Therapeutics Inc., which makes heart-disease drugs and raised $70 million, and Prosensa Holding BV, which is developing rare-disease drugs and raised $78 million, both increased the size of their IPOs and traded higher after their debuts. Prosensa shares rose 48% in their first day of trading, while Esperion shares rose 4%.

But Aratana Therapeutics Inc., PETX -0.79% which went public last week and develops drugs for cats and dogs based on human biotech discoveries, cut its IPO price sharply, to $6 from an initial range of $11 to $13, and delayed its deal a week. Shares rose 38% in first-day trading. An Aratana spokesman declined to comment.

Like other stock offerings, biotech deals could be vulnerable if the friendly market turns, and cash-hungry biotechs are sensitive to rising interest rates. A biotech boom accompanying the euphoria around 1999 and 2000 also fizzled. But investors say industry fundamentals are a key driver behind the current trend. If the pace keeps up, 2013 would be the best year since at least 2000 in terms of both the number of IPOs and dollars raised, according to Renaissance Capital.

A legal change in the IPO process last year has also given some companies more confidence to come to market. The Jumpstart Our Business Startups Act, or JOBS Act, which became law in April 2012, allows companies to confidentially file preliminary IPO papers with the Securities and Exchange Commission. They can then meet privately with some investors, a process known as “testing the waters,” before they publicly launch their IPO process. If they don’t receive the reception they want, they can privately withdraw from the market.

For example, Cambridge, Mass.-based Epizyme Inc., EPZM +6.47% founded in 2007, began discussing its IPO with investors in March, after filing the confidential paperwork with regulators. A positive response “encouraged us to move forward,” said Chief Executive Robert Gould. The meetings “affirmed in us it was the right time.”

Shares of Epizyme, which makes personalized cancer drugs, jumped 53% in their first day of trading in May, and are up a further 30% from that point.

Some investors worry that the broad momentum could draw weaker deals to the market, which could cause some of the new biotech IPO enthusiasts to withdraw.

“If too many companies, especially those with less potential, start going public, the amount of capital could swing downward,” said John Diekman, founder and managing partner of 5AM Ventures, which specializes in early-stage life-sciences companies.

And interest rates are another concern. Researching a potential medicine can require hundreds of millions of dollars, making biotechs sensitive to the cost of capital, which is affected by interest rates.

“If interest rates climb, it becomes more difficult for investors to finance these kinds of programs,” said William Slattery, a partner at Deerfield Management, a New York-based health-care investment management firm. Mr. Slattery, who has invested in biotechs since 1990, said the last time the public markets were this robust for biotechs was 2000. That year, a two-year boom in biotech IPOs collapsed amid rapidly falling share prices for some startups.

Deerfield, which manages more than $3.5 billion in funds, has bought stock in offerings for Bluebird Bio and Epizyme, among others, he said. In general, he said investors can have more confidence in the potential of biotechnology today than around 2000, in light of the improved understanding since then of the molecular underpinnings of disease.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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