Analyst: Current Crop of Biotech IPOs a Mixed Bag of Low Market Caps, Little Data

Published: Dec 03, 2014

Analyst: Current Crop of Biotech IPOs a Mixed Bag of Low Market Caps, Little Data

December 3, 2014

By Riley McDermid, Breaking News Sr. Editor

The current rate of biotech companies going public is beginning to be felt by the industry to be the “new normal” despite the increasing number of IPOs that debuted in 2014, said Geoffrey Porges, senior biotech analyst at Sanford Bernstein, on Wednesday.

In a note titled “Biotech: Revisiting the IPO Class of 2012-14,” Porges said that the unprecedented flow of capital to the industry during this period has contributed to the number of biotechs going public, with over 100 IPOs completed between the first quarter of 2012 and the third quarter of 2014. Those offerings saw nearly $7 billion in IPO capital raised, a historical high for the industry.

“In fact many investors and industry executives have come to regard the present state of liberal capital flows to the industry as the ‘new normal,’ rather than a temporary ‘window’ as in the past,” wrote Porges. “The 2012-14 biotech financing window has reached records in duration, volume and number of deals, producing over 100 new biotech companies.”

It might not all be good news, however—Porges stressed that while IPO volume is still high, there are signs that performance of “new issues” is deteriorating.

“The number of companies seeing positive returns from S-1 [filing] to first opening price declined from 90 percent in the earlier part of the window to 75 percent and 57 percent for the second quarter 2014 and third quarter 2014 cohorts,” said Porges. “Two thirds of third quarter 2014 IPOs underperformed S-1 price one month after IPO.”

Perhaps more importantly, companies are coming to market with “little or no clinical data,” and the size of issues and issuers is decreasing. “This suggests that the quality of new issuers is falling, or investor interest is waning, or both, but January could offer a rebound,” said Porges in his note.

Size also remains an issue. Most of the new public biotechs are still “relatively small” companies with market capitalizations below $500 million. Of those, roughly 94 percent of the IPO class had a market cap lower than $500 million at the time of IPO, with nearly two thirds worth less than $500 million.

Certain areas remain bright spots for all investors and venture capitalists, however. Oncology remains the biggest therapeutic area for “this wave of biotech companies, but more recent issues” are somewhat more diversified.

“The largest number (28 of 102, or 27 percent) of new biotech companies are focused on oncology indications. The second most common therapeutic area addressed by the IPO class of [cited] was metabolic diseases, followed by infectious disease and orphan indications,” wrote Porges.

“From a technology perspective, most companies are developing small molecule (54 percent) and antibody or protein-based therapeutics (19 percent), but a substantial portion (17 percent) are focused on technologies such as gene therapy, oligo/antisense nucleotides, and therapeutic vaccines,” he said.

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