US Biotech IPO fever stokes bubble fears

Last updated: February 9, 2014 1:35 pm

US Biotech IPO fever stokes bubble fears

By Arash Massoudi in New York and Andrew Ward in London

The fastest start to a year for US biotechinitial public offerings is stoking fears of a bubble amid concerns investors are taking risks on companies at the earliest stage of medical research.

Another eight biotech companies raised a combined $502m in US listings last week, setting a weekly record for the sector and continuing a boom that has seen the Nasdaq biotech index rise more than two-thirds in the past year.


US Biotech IPO fever stokes bubble fears

However, fears of overheating are growing as companies come to market at an early stage of drug development when failures are high – and in one case without the usual restrictions that bar existing owners from making a quick profit on IPOs.

The recent listing of Dicerna Pharmaceuticals, which raised $90m in late January and saw its shares surge 207 per cent on its first day of trading, is becoming a focal point for concerns.

The Massachusetts-based company has yet to enter clinical trials for the liver disease and cancers it seeks to treat, which typically means it has a less than 5 per cent chance of one day getting a drug to market, according to industry analysts.

In its prospectus, the company said that it would not make majority shareholders agree to long-term restrictions on their entire holdings. But in most IPOs, these so-called “lock-ups” are a common feature, designed to align the interests of existing and newinvestors.

“I’ve never seen an IPO in my career where the existing [majority] shareholders . . . were not subject to a lock-up,” said one senior capital markets expert, who added that other companies planning IPOs have since inquired about following Dicerna’s example.

Michael Zeidel, a partner at Skadden Arps, said: “A 180-day lock-up is one of those check-the-box provisions for investors.”

Shares in Dicerna have dropped 30 per cent from its first-day closing price though it is not clear if its main investors, including the venture capital arm of GlaxoSmithKline, have sold eligible portions of their holdings.

The prospectus warned that about 7 per cent of existing shares could be immediately sold and 93 per cent within 90 days. “The sale of a significant number of our shares may cause the market price of our common stock to drop significantly,” it said.

A person close to the transaction, which was underwritten by Jefferies, Baird and Stifel, defended the arrangement: “What makes this situation unique is that insiders ended up buying about 50 per cent of the offering, so there was a real shortage of stock to go around and we figured not having a lock-up would facilitate after-market liquidity.”

Investors have been attracted to the biotech sector by a fresh wave of scientific innovation and hopes that some of the latest market entrants can emulate the success of companies such as Biogen Idec

Gilead and Amgen, which have grown into multibillion-dollar drugmakers.

But while new IPOs have kept coming at a ferocious pace, there are signs that investor appetite may be weakening. Of the 14 companies to list this year, six are currently trading below their issue price. “I think the IPOs are a little stretched,” said Brian Skorney, an analyst at Baird.

John Carroll, editor of industry newsletter FierceBiotech, said: “The investment community still has enough appetite for risk to send a select group of these new IPOs over the range, but . . . they’re getting choosy.

“Inevitably, you’ll see more high-risk IPOs without a good story to tell come along to see if they can make it through this window, and it will get harder. When the inevitable crunch comes, it will be painful.”

The boom has so far been concentrated in the US, with several European companies, including Oxford Immunotec and GW Pharmaceuticals of the UK, crossing the Atlantic to join Nasdaq. UniQure, a Dutch gene therapy specialist, was among last week’s crop of US IPOs, raising $81.9m.

However, European markets could be about to catch the biotech bug. Circassia, a UK company developing allergy cures, last week announced London’s biggest IPO in the sector for years.



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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