Biotech IPOs Are Booming … but for How Long?
According to BioPharmCatalyst, there have been (or soon will be) 58 biopharma initial public offerings (IPOs) in 2018, and there’s still more than three months to go. The first listed on the BioPharmCatalyst database was Menlo Therapeutics on January 25, 2018. The most recent listing was Elanco Animal Health, whose offer date is September 21, 2018.
A recent Bloomberg article described 38 new U.S. stock listings by biotech companies, noting they had raised almost $3.9 billion, the highest marked since 2000. The 2000 boom was related to genetic therapies. In July, Crunchbase noted that in the second quarter of 2018, there were at least 16 U.S. venture-backed biotech and healthcare IPOs, compared to only 11 tech IPOs in the same period this year.
Bloomberg writes, “This time around, amid the recent approvals of the world’s first gene therapy and Alnylam Pharmaceuticals, Inc.’s RNA-interference drug, investor enthusiasm isn’t confined to any one area. Companies that sold stock for the first time in 2018 include Translate Bio Inc., which is using messenger RNA to develop drugs for rare diseases such as cystic fibrosis, and Neon Therapeutics Inc., which describes itself as a platform for developing cancer immunotherapy treatments.”
The upcoming Elanco Animal Health IPO isn’t typical of biotech public launches. Most tend to be relatively recent biotech startups that have raised venture capital and brought a compound or therapy through proof-of-concept, or sometimes even into Phase I clinical trials. They are looking for more funding to pay for the larger and more expensive Phase II and III clinical trials.
Elanco is part of Eli Lilly, and it expects to raise up to $1.45 billion in its IPO. Elanco has been part of Lilly for 65 years and is being spun off. The Indianapolis Business Journal reported, “But Elanco has been struggling, ringing up losses of more than a half-billion dollars in the past three years, much of it connected to restructuring and other special changes. The new management’s first challenge will be to stabilize the company, launch new products and win back market share it has been losing to competitors.”
Compare that to one of this year’s most successful biotech IPOs, Cambridge, Massachusetts’ Rubius Therapeutics, which raised $240 million in its July IPO. Rubius Therapeutics’ focus is on genetically engineered long-circulating Red-Cell Therapeutics (RCT) products. They are genetically engineered, enucleated red blood cells that have broad therapeutic applications for cancer, enzyme replacement therapy, and autoimmune diseases.
Bloomberg suggests that even though many companies are rushing to the stock market, others are waiting. “One reason is that thanks to low interest rates and a hunt for higher returns by institutional investors, biotech startups have access to more capital than ever. Founders of several startups told Bloomberg News in recent weeks that they are raising more money earlier than expected.”
Which isn’t without its drawbacks. One of the primary business models for biotech startups is getting to Phase I or Phase II and either partnering with a large pharmaceutical company or be acquired by one. But Bloomberg observes that larger drugmakers have been complaining recently about the high valuations some of these biotech companies have.
For investors who pick the right biotech at the right time, it can be a big win. For example, in 2014, Juno Therapeutics raked in $176 million in its first large financing round. A few months later its IPO gave it a valuation of $1.9 billion. And where some biotechs drop quickly, Juno took off, jumping 46 percent on the first day of trading to give the company a valuation of $2.7 billion. Then in January 2018, Celgene acquired the company for $9 billion.
An example from this year would be Tilray, which is something of an outlier. Tilray focuses on medical cannabis research, cultivation, processing and distribution. Shares launched at $17 per share in July 2018, and have since risen over 463 percent, trading on September 12, 2018 for $104.36.
But others may not be so wonderful. Eyenovia, which launched in January 2018 at $10 per share, has dropped more than 51 percent. This New York City-based company is focused on changing the delivery of drugs for eye diseases, such as glaucoma, dry eye, allergic eye disease and others, using a piezo-dispersion and microdosing technology. Shares are trading on September 12 for $4.80. On the other hand, at least two analysts cited by Zacks Investment Research give it a “strong buy” rating, suggesting they believe it’s ready to pop.
All this is probably good news for biotech companies, who indicate that the ready supply of investment capital allows them to focus on research. For example, Kaleido Biosciences raised $101 million, which the company’s executive chairman, Michael Bonney, said should carry them through at least 2020. “The general understanding of human biology and what’s driving various diseases is improving, and that creates a broader audience to go to and try to find the funding that we need,” Bonney told Bloomberg.
However, investors should know what they’re getting into when it comes to biotech stocks. Notoriously volatile, investments don’t always pay off with actual commercial products—ever—or for many years. Investing in biotech companies is a gamble on many things, including good science, market needs, competition and government regulation.
And Bloomberg points out that previous booms have corrected quickly, noting drops of more than 10 percent in the Nasdaq Biotechnology Index after run-ups in 2000 and 2014. And some analysts are wondering if this year’s boom is close to an end.
Hartaj Singh, an analyst with Oppenheimer & Co., told Bloomberg, “We’ve already had a really good 12- month period. They don’t tend to be much longer than that.”