Biotech floats hint at a narrowing gap between perception and reality

In the battle for investors’ hearts and minds, an IPO price range tends to reflect a subtle balance between what a company thinks it can realistically get away with on one hand, and what it needs to do to generate near-term gains on the other.

As such it is worth noting that first-quarter biotech flotations suggest that this gap might be narrowing. As EP Vantage data reveal, companies are able to take less severe haircuts to their IPO price ranges than normal – something perhaps driven by growing evidence of strong post-float price performances (see tables below).

That said, it is impossible to ignore the recent biotech market correction, and most of the companies that floated in March posted healthy initial gains but now stand in negative territory. Since the natural tendency is for perception to run ahead of reality, it is likely that larger price haircuts might soon become the norm again.

Nasdaq premium/(discount) to IPO price range
Period Average 
Q1 2012  (26%)
Q2 2012  (31%)
Q3 2012  (21%)
Q4 2012  (17%)
Full year 2012  (24%)
Q1 2013  (23%)
Q2 2013  (12%)
Q3 2013  (6%)
Q4 2013  (31%)
Full year 2013  (15%)
Q1 2014  (8%)

Looking solely at Nasdaq IPOs, the first quarter’s 8% average discount to price ranges is below the corresponding quarters in 2013 and 2012, and below the average for the whole of last year. That, in turn, is under the 24% haircut that companies had to take on average in 2012.

Clearly bankers seek to maximise IPO gains, and discounts to the proposed offering range are a natural consequence. The first-quarter narrowing of the discount gap thus reflects the speed with which reality is catching up with perception.

The obvious caveat is that the numbers here are relatively small – there were 28 Nasdaq IPOs in the quarter just ended, and just four a year earlier – so it would be foolish to read too much into them. But the surge in investor enthusiasm for biotech flotations is undeniable, and strong post-IPO performances have in turn stoked demand for more flotations.

Of the last quarter’s new entrants alone, the aesthetic dermatology company Revance Therapeutics is up 101% relative to its IPO price, the carbohydrate specialist Glycomimetics has put on 105%, and Auspex Pharmaceuticals, which has a CNS focus, has climbed 150%.

The best performer of the lot is Ultragenyx Pharmaceuticals, a company targeting rare and ultra-rare diseases – a particularly hot area for biotech investors. Since debuting at the end of January Ultragenyx stock has climbed 153%; the group floated at $21.00 per share, and on its first day of trading its stock closed at $42.25.

The worst-performing IPO, meanwhile, is Nephrogenex, a one-project company developing pyridoxamine for kidney diseases, whose stock closed yesterday 39% off its February offer price.

Also notable is Dicerna Pharmaceuticals, which floated above its price range and surged initially, but has lost 22% in the past week. As an RNA interference player, Dicerna is subject to the drastic swings in investor perception that have seen a recent selloff in other RNAi stocks including Arrowhead Research, Tekmira and Alnylam.

This pullback in high-risk, early-stage stocks is largely the result of the recent Congressional challenge to the price of Gilead’s hepatitis C pill Sovaldi, which has prompted broader concerns about drug pricing (Biotech’s record-breaking quarter shines spotlight on sustainability, April 1, 2014).

Sander Slootweg, managing partner with the Netherlands-based venture fund Forbion Capital Partners, reckons this is largely a hepatitis C-specific issue, given that many patients here are uninsured, putting direct pressure on government to foot a potentially huge bill. But he says investors are becoming much more selective generally, and admits that there is a risk that the IPO window “may completely close”.

Among the March IPO entrants, for instance, Dipexium Pharmaceuticals, Galmed, Recro Pharma and Ignyta saw healthy first-day gains but now stand in the red. The sustainability of IPO sentiment is one of the great unknowns of the current biotech market, and a sharp reassessment of the reality/perception equation might be needed to get further floats away.

This story has been amended to correct the share price movement of Concert Pharmaceuticals.

To contact the writers of this story email Jacob Plieth or Joanne Fagg in London at news@epvantage.com or follow @JacobEPVantage and @JoEPVantage on Twitter

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