http://www.forbes.com/sites/arleneweintraub/2015/08/25/will-wall-street-volatility-dampen-the-sizzling-biotech-ipo-market/
Arlene Weintraub, 8/25/2015
On Monday, Mirna Therapeutics of Austin, TX, ignored the turmoil on Wall Street and filed to make its Wall Street debut in a planned $80.5 million initial public offering. It was the eighth biotech or specialty pharma company to file for an IPO since July 1, according to IPOMonitor.com—this after a sizzling first half when 50 biopharma companies went public in the U.S. or abroad, raising over $5.1 billion. So does Mirna’s move signal that the appetite for biotech IPOs is still strong? Or do the stock market vacillations portend a long-feared biotech crash?
To begin to answer those questions, it’s important to consider that cyclical swings in biotech don’t always track with what the broader market is doing. Booms and crashes are more closely related to scientific advances—and, more importantly, predictions and perceptions about whether those advances will translate to billion-dollar blockbusters. That’s why some experts are predicting that the wide-open door for biotech IPOs isn’t going to slam shut anytime soon.
One of the biggest factors driving the optimism in biotech’s future is the recent run of FDA approvals, says Sam Zucker, a partner at Sidley Austin in Palo Alto, CA, who manages corporate transactions in the biotech industry. This year so far, the FDA has approved 25 “new molecular entities” (NMEs) and rejected only three—an approval rate of 89%–according to BioMedTracker. In 2014, the agency approved 41 NMEs, which was the most it had approved since 1996. “That creates a perception that drug development is less risky than it was a few years ago,” Zucker says. “There used to be a perception that the FDA was making it harder to get new drugs approved by requesting additional trials that would be hugely expensive and risky for companies. There’s been a reversal.”
Even biotechs that are in the earliest stages of researching new drugs are getting enthusiastic receptions on Wall Street (Photographer: Freya Ingrid Morales/Bloomberg)
The record approvals have helped push biotech stocks to new highs, which no doubt is strong motivation to private companies and their venture capitalists, who are looking for rich exits via IPOs. The Nasdaq Biotechnology Index has risen 61% in the last year. Even on Friday, when the Nasdaq Composite Index lost nearly 4%, the biotech index was down only 1%.
Before examining the risk factors that could bring this party to an end, it’s worth looking at some of the trends behind the IPOs. Trend No. 1: Oncology is hot. Of the companies that went public during the first half, 30% are working on cancer drugs, according to an analysis by Evolution, a biotech analytics company in the U.K. (See chart below.) Half of the 10 companies that raised the most money on Nasdaq are working in oncology, including Cellectis ($226.2 million raised), Adaptimmune ($183.3 million) and Blueprint Medicines ($140.5 million).
Zucker notes that Wall Street’s optimism about cancer immunotherapy is step ahead of the actual advancements in that area. “At some point biotech is going to change the face of oncology and increase survival overall in a statistically meaningful way that’s going to benefit people—but it hasn’t happened yet,” he says. “The market seems to believe that many of the exciting immunotherapy companies will be the key to that revolution. But we don’t know. We won’t know for at least half a decade, potentially much longer.”
It isn’t just oncology that’s catching investors’ attention. Companies working on new therapies to treat central nervous disorders and autoimmune/metabolic diseases are also popular, representing 26% and 24% of the IPOs in the first half, according to Revolution. The top money-raiser on Nasdaq, Axovant Sciences, which brought home $308.8 million, is working on new therapies for Alzheimer’s disease.
Despite a high failure rate in diseases like Alzheimer’s, investors may be willing to take more chances on early-stage companies these days because the biotech industry has gotten better at navigating the regulatory process, Zucker surmises. “Just a few years ago, early-stage companies didn’t have regulatory strategies,” he says. “The sector has matured, and now companies think through their regulatory strategies much earlier and much more thoroughly.”
Even though that should be good for biotech companies, and by extension their investors, the industry is still facing risks that could ultimately cause the IPO window to close, Zucker warns. Many of the newly public companies are in early-stage testing of their NMEs, which means there might be very long stretches of time during which there’s no news that would indicate the probability that those compounds will ultimately succeed. “Investors tend to punish biotech for an absence of news—even when companies tell them in advance, ‘We’re not going to have news for two years,’” Zucker says. “Will the market be patient with these early-stage companies? The historical pattern is that their stock prices will drop. That should start to put the brakes on this ebullient market.”
That’s not likely to happen anytime soon, however. There’s still a lot of positive sentiment about drug development that’s driving investors’ love of biotech, Zucker notes. For one, investors are no longer worried that changes implemented under Obamacare might prompt companies to spend less on drug development, he says. Furthermore, the biotech IPO boom has left venture capitalists with plenty of capital to pour back into the sector. “Even if the public markets tank, venture money will continue to be spent,” he predicts.