Market watchers wonder if biotech IPO boom can continue
Is the air coming out of the biotech IPO market?
That’s the question being debated by investors and entrepreneurs from Wall Street to Cambridge’s Kendall Square two months into a year that may be shaping up as a tougher slog for life sciences start-ups queuing up to go public.
Eight biotech companies have completed initial public offerings so far in 2015, half as many as went public in the first two months of last year, according to Renaissance Capital, a Greenwich, Conn., firm that manages IPO-focused exchange-traded funds.
As for investor appetite, this year’s early IPOs are trading up an average of 21 percent from their offering price. Last year’s crop were up an average of more than 25 percent at the end of last February and are now trading up more than 51 percent.
But those numbers do not tell the whole story. Much of the bump for this year’s IPOs has gone to a single company, Spark Therapeutics Inc., a Philadelphia drug developer specializing in gene therapy. Its shares are trading up 158 percent from their offering price. The other seven newly public biotechs collectively have an average gain of only 2 percent.
“The markets are a little bit more discerning,” said Jeff Leerink, chief executive of Leerink Partners, a Boston health care investment bank that has managed 32 life sciences IPOs since the start of 2013. “There’s high promise for companies that are coming up with new therapies and new methods for developing drugs that will shape the future of health care. I believe the market will do well [in 2015]. I’m not sure it will do as well as last year.”
A record 71 biotech companies went public in 2014, raising more than $5.2 billion in a financing and investment boom period during which drug, medical device, and diagnostic companies outperformed broader markets that were also hot.
Among the drivers were partnerships with pharmaceutical companies eager to expand drug pipelines and the expectation that new breakthrough drugs could command high prices.
This year figures to be different. Commercial and government health insurers have begun to push back on high-priced treatments. And while drug giants remain on the prowl for new medicines, based on some recent transactions they are just as likely to snap up venture-backed private companies with promising compounds at lower premiums.
“We’re not off to the races yet this year,” said Kathleen Smith, founding principal of Renaissance Capital. “We’re seeing some companies with less mature products trying to jump on to the IPO bandwagon of the last few years, but the risks are building.”
A worrying sign is that seven companies have postponed IPOs for which they had registered after receiving a lukewarm reception from investors compared with just one postponement at this time last year, according to the Renaissance data.
The changing market dynamics are illustrated by the experiences of four Massachusetts life sciences start-ups that filed documents disclosing plans to go public early this year.
One company, Infraredx Inc., a Burlington maker of optical catheters, last week delayed its $56 million IPO.
A second, Eyegate Pharmaceuticals Inc., of Waltham, which is developing drugs to treat eye diseases, raised only $4.1 million and opted to trade over the counter rather than on the Nasdaq exchange, where most biotechs are listed.
A third, Waltham glaucoma treatment maker Inotek Pharmaceuticals Inc., slashed its planned sales price by more than half to $6 a share, raising $40 million. Its shares closed Thursday at $6.05.
The fourth, Flex Pharma Inc. in Boston, which is developing treatments for muscle cramps, raised $86.4 million by selling its stock at $16 a share. It lost 6.5 percent in its opening day of trading but has recovered and closed Thursday at $17.53 a share, making it by default the top performer in the Massachusetts class this year.
None of the biotechs would discuss their IPOs, citing a quiet period mandated by the Securities and Exchange Commission before and after companies go public.
Chris Fay, a portfolio manager for BNP Paribas Investment Partners in Boston who invests in biotech stocks, has remained on the sidelines in 2015. Fay said that while there continues to be interest in innovative companies, some biotechs are getting too expensive.
“You have to be more selective,” Fay said.
Companies typically go public to tap the capital markets when investors are flush with cash. IPOs can allow biotechs to finance costly undertakings, ranging from clinical trials to hiring commercial teams to market newly approved drugs. They can also allow venture capital firms and other early investors to partly or fully cash out.
But a strong IPO market is also a sign of health for the biotech sector.
“It gives people confidence, and that’s an important factor,” said Lexington life sciences consultant Harry Glorikian, citing deals that enable cash to flow into company coffers. “When you close down IPOs, the industry doesn’t stop but it becomes a lot harder to do the things that need to be done.”
Despite the slower start for biotech offerings this year, few believe the IPO market is a bubble waiting to burst. Market watchers say companies with breakthrough therapies for hard-to-treat conditions or new approaches such as gene editing or cancer immunotherapy will keep attracting investors. But companies marketing “me-too” drugs or devices that compete with products already on the market will have a tougher time, they said.
“The average quality of the companies going public is declining,” said Donald Dion, principal at DRD Investments, a private investment firm in Naples, Fla. “In every cycle, the companies with the best science and alliances always go up. But we’re getting near the end of this cycle where most of the life sciences companies that come out go up dramatically.”