are we seeing the return of ipos?

The big story for the fi rst half of the year has been the opening of an IPO window for the biotech industry.

After a dry spell of nearly fi ve years, more money was raised in the fi rst half of this year than in any one year since 2007. For the fi rst half of the year, nearly $1.4 billion was raised by 14 companies. If the second half of the year is anything like the fi rst, we’re looking at the best market for IPOs in over a decade! (see Figure 1).

So, of course we have to ask: a) what factors are driving this? b) who is investing? c) what type of companies are getting funded? and d) what if anything does this mean for the industry overall?

The answer to the fi rst question is multifaceted. The fi rst part is simply pent up demand. There have been a great number of really good companies formed during the past six years (funded mainly by VCs), that have not yet achieved liquidity via acquisition (for the most part by design) and that until recently had not been able to access the public markets. Secondly, on the buyer side there has been a lot of good news to support increased participation in the sector. On the regulatory front there were 39 new drugs approved in the U.S. in 2012, the most in over 16 years. The public biotech sector along with the IPOs that have priced over the past several years have performed well for investors with the sector up 27 per cent this past year. The biotech sector has outperformed the broader NASDAQ by a whopping 11 per cent (27 per cent vs. 16 per cent) and since 2011 the NASDAQ biotechnology index has increased 88 per cent vs. a paltry 29 per cent for the S&P. Finally, many earlystage public companies have proven to be good acquisition targets for large pharma and biotech, providing investors with outsized returns. Examples include the recent acquisitions of Optimer and Trius by Cubist (both north of $800 million), AstraZeneca acquiring Omthera Pharmaceuticals for up to $443 million just three months after going public, and larger deals over the past couple of years including Gilead’s purchase of Pharmasset for $11 billion.

Responding to this performance we have seen the mix of investors change substantially. A few years ago, the IPO call list was pretty short and really only populated with a few highly focused healthcare specifi c investors (in the high single digits). Today, there are many more investors participating in IPOs that are getting completed and included in this group, a far greater number of generalists as they look to catch the biotech wave.

As to who is getting funded, it is pretty clear that overall, the industry has learned from the early 2000s how to be much more selective. Of those companies that have successfully passed through the IPO window, the most common characteristic seems to be that they have signifi cant partnerships with corporate partners. Virtually

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Figure 1: IPO Proceeds. U.S. Venture Backed Life Science Companies

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all of the recent IPO candidates had at least one meaningful partnership and many had multiple high value partnerships (one of the characteristics that probably made them better IPO candidates than acquisition targets at the current time). These partners are important as they provide investors not only with the comfort that these industry partners who fully understand the risk are willing to ante up, they also signal to investors that these companies are not “desperate” and that the IPO is not a last stand for survival cash. In fact, many of the companies that have completed IPOs this year have come to the market with surprisingly strong balance sheets. These corporate partnerships have been especially important for earlier stage companies such as Epizyme which had previously closed a deal with Celgene receiving $65 million upfront to develop its early stage pipeline.

What does this activity mean for the industry? Well thankfully it appears that the days when companies with poor products or platforms could be funded are gone. It also appears the recent changes in the rules for marketing companies to investors as a result of the JOBS act is having the desired effect. Companies are now able to pre-file in the U.S. allowing additional time for companies to meet and build deeper relationships with investors over multiple meetings while at the same time allowing investors to complete more thorough and thoughtful due-diligence processes. Our sense is that this window is likely to remain open until at least the end of the year with many high quality companies still in the queue. Having said that, the window will eventually close at some point. The only question is whether it will be a function of investors’ appetite simply becoming satiated, too many second tier offerings beginning to enter the process or some other unforeseen trigger arising. In the meantime we believe that the recent activity will place some pressure on pricing for pharma looking to partner or outright acquire biotech companies. This in turn will benefit investors and entrepreneurs.

From the Canadian perspective, all this activity is still mainly south of the border and as such means little to the life sciences ecosystem here. The majority of companies we see in the Canadian ecosystem are at a stage where they are still focusing on establishing relationships with industry partners and attempting to attract capital from investors with deep domain knowledge. Having said that, there are probably a couple dozen companies that will be able to benefit from this re-emergence of biotech investing. We suspect that the majority of these companies will not be private companies looking to transition to the public markets, but rather a handful of public companies that have gone through the process of getting their houses in order. This includes strengthening management teams, cleaning up capital structures, consolidating intellectual property portfolios, having reasonable valuations and articulating clean value milestones for the capital they are seeking to raise from new investors. If these companies are successful, then hopefully the next generation of private Canadian companies will enjoy the same access to the public markets as their peers south of the border at some point in the future.

These corporate partnerships have been especially important for earlier stage companies such as Epizyme which had previously closed a deal with Celgene receiving $65 million upfront to develop its early stage pipeline.

Jacki Jenuth is a principal and key member of the senior management team with Lumira Capital.

Peter van der Velden is the Managing General Partner at Lumira Capital and President of Canada’s Venture Capital and Private Equity Association.

To see this story online visit http://biotechnologyfocus. ca/?p=8676