Markets draw life science start-ups
More than two dozen life sciences companies, including at least nine in Massachusetts, could go public this year, the biggest coming-out class since at least 2007 and a sign investors are excited about the prospects for new life-extending drugs and medical devices.
Initial public offerings have been rare in the sector since the economic collapse of 2008, but industry insiders say soaring financial markets have helped make it feasible for cash-starved start-ups to consider raising large amounts of money through the sale of stock.
That’s what Guy Macdonald, chief executive of TetraPhase Pharmaceuticals, was counting on when he took the Watertown company public in March. To bankroll clinical trials of an experimental antibiotic, Macdonald could have followed the funding path most young biotech firms have taken in recent years: seek fresh venture capital or strike a deal with a pharmaceutical giant. But his gamble on an IPO paid off, generating nearly $75 million and assuring that seven-year-old TetraPhase will maintain its independence.
“We’re in control of our destiny,” Macdonald said. “We can operate from a position of strength.”
TetraPhase will hardly be the last life sciences IPO this year as more start-ups seek to replicate its success and the showing of Enanta Pharmaceuticals Inc., another Watertown company whose IPO in March raised $56 million to fund a hepatitis C treatment.
“We expect a very full slate of IPOs this year,” said Dan Dubin, vice chairman of Leerink Swann, the Boston health care investment bank that has become one of the largest underwriters of life sciences stock offerings. “The mentality of the market has changed. The public investors are receptive to paying higher prices for companies that are driving innovation.”
IPO preparations are underway in other life sciences hubs, notably the San Francisco Bay Area and southern California. But professionals involved in preparing such deals say one of the largest concentrations of IPOs is likely to be in Massachusetts, which has emerged over the past decade as the nation’s most important life sciences cluster. It’s become a magnet for global drug makers and other companies eager to partner with academic researchers and venture-backed start-ups.
“Boston has become the center of the universe in life sciences,” said Doug MacDougall, president of MacDougall Biomedical Communications of Wellesley, which consults with start-ups. “These IPOs will not only give us another crop of public companies, they will allow investors to put money in new businesses knowing there’s an exit out there. It fuels the entire pipeline.”
About 25 companies contemplating going public have confidentially registered for stock offerings or are preparing documents to do so, according to Boston-area lawyers, accountants, and investment bankers working with the firms.
Glen Giovannetti, the Boston-based global life sciences leader at accounting and consulting firm Ernst & Young, pointed to a new “market psychology” in the sector as shares of companies like Vertex Pharmaceuticals and Biogen Idec surge. “Investors who hadn’t been in biotech are asking themselves, ‘Am I missing something?’ ” he said.
While a few companies have openly declared their intentions to go public, including leukemia drug start-up Epizyme Inc. of Cambridge, most are taking advantage of a new federal law that allows them to temporarily withhold disclosure that they have filed IPO registration statements with the Securities and Exchange Commission.
Under the law, firms can protect their financial data while gauging the interest of deep-pocketed investors. They must publicly issue a prospectus only before embarking on a “road show” before larger groups of investors.
For fledgling companies with big ambitions and small bank accounts, going public generates a source of cash as they push their products toward the marketplace. It also provides access to capital markets to secure future financing. And if they can keep their stock price high enough to discourage takeover bids, it can allow them to build businesses large enough to employ thousands of workers, following the playbooks of Weston-based Biogen Idec or Thermo Fisher Scientific of Waltham.
Almost as important, an IPO calls more attention to a company’s drug discovery efforts. When it was private, Enanta operated largely in the shadow of much bigger publicly traded rivals in the same field, such as Vertex of Cambridge or Merck & Co. of Whitehouse Station, N.J. “As a private company in the hep C space, it’s easy to kind of get lost,” conceded Jay Luly, the Enanta chief executive.
But going public can also increase risks. A high-profile drug recall or negative Food and Drug Administration action can trigger a financial slide, sending shares tumbling as investors flee.
Last week, the stock of Cambridge-based Aveo Pharmaceuticals lost nearly half its value after an FDA advisory panel recommended rejection of its experimental kidney cancer drug.
Nonetheless, public offerings are emerging as the financing event of choice for start-ups wary of giving up too much control to private investors or larger industry players.
“When it comes to drugs, the cost of getting anything to market has become inordinate,” said Gabor Garai, chairman of the private equity and venture capital practice at Boston law firm Foley & Lardner. “Right now, there’s more money in the public markets chasing deals than in the venture capital markets. We’re seeing the first signs of spring after a cold winter for IPOs.”
Nationally, over the past decade, the number of life sciences IPOs peaked at 45 and dipped to 35 in 2007 before falling off a cliff when the financial markets imploded the following year, according to data compiled by Ernst & Young. In both 2008 and 2009, only four life sciences companies went public, and just 14 tapped the public markets last year.
One factor driving this year’s renewed IPO interest is a growing sense companies are making significant advances — such as Biogen Idec’s multiple sclerosis pill and a Vertex drug for cystic fibrosis — after a number of years when fewer drugs were being approved.
“The quality of drugs in the pipeline from industry is shockingly good,” said John Maraganore, chief executive of Alnylam Pharmaceuticals, a Cambridge company developing treatments for rare diseases.
At the same time, the broad stock market rally of the past two years, and especially the performance of publicly traded biotechs, has created the conditions for a new wave of IPOs.
“This sector has meaningfully outperformed the market,” said David Redlick, who cochairs the life sciences group at law firm WilmerHale in Boston.
While many companies that went public during the past few years found their shares trading below their initial offering prices, stocks of biomedical firms that have gone public more recently, such as TetraPhase and Enanta, are trading higher.
“There’s a bit of a gold rush mentality,” said Mitch Bloom, head of the Boston health care practice at the Goodwin
Procter law firm. “I’m telling my clients there is a window. If you’re considering an IPO, you want to be prepared. That’s the talk around the board table, even at companies that aren’t ready.”
Still, professionals advising life sciences companies caution that an IPO boom this year isn’t a sure thing.
A significant drop in financial markets — known as a “correction” — could derail offerings in the works. Also, if well-capitalized public companies were to lose market value, it could scare off newcomers.
For now, though, the IPO engine is revving.
“Bankers are telling boards that there’s good investor enthusiasm for these offerings,” said Giovannetti at Ernst & Young. “You’re seeing a pickup in activity.”