Biotech flotations slow but window remains open

The red-hot biotech IPO market cooled significantly in the second quarter, as half the number of drug makers made it on to stock exchanges compared with the previous three months. The new issues managed to bring in less than half the total amount of cash raised in Q1, EP Vantage data reveal (see tables below).

The huge $2.1bn first quarter was always going to be a tough comparator, and the result of the last three months is only slightly below the second and third quarters of 2013. However, a number of companies had to take severe “haircuts” to get away, so it is hard not to conclude that investor appetite has tempered.

A look at the Nasdaq Biotechnology Index (NBI) paints a similar picture – after peaking at 2,854 in February, the index has retracted 6%. This is a long way from a market correction, and the clamour that prompted talk of a bubble has far from quietened.

But a certain amount of caution has returned – the Index touched a low for the year in April at 2,251, a 21% drop on the February peak – largely prompted by concerns about drug pricing. This issue remains a key focus point for investors, and could easily trigger further bouts of nervousness.

The outcome of the first quarter prompted important questions about the sustainability of investor interest on display (Biotech’s record-breaking quarter shines spotlight on sustainability, April 1, 2014).

This question seemed to be answered in March and April when the stock market went into reverse and the queue of companies looking to float shortened.

However, the volume of companies coming to market was always likely to fall back – the surge at the beginning of the year partly reflected the release of pent-up demand after a long period of investor risk aversion. And many firms moved quickly last year to take advantage of the frothy optimism driving valuations and demand.

Companies still hoping to climb through the IPO window need to figure out the extent to which the retrenchment reflects investors becoming more selective in their support.

The analysis below, showing the average price cut companies have had to take to get away on Nasdaq, suggests that this has indeed been diminishing. In the last quarter drug developers on average accepted an 18% haircut to their proposed stock price, a much deeper average discount to the previous period’s 9%. Looking further back suggests that this level of discounting is far more normal, and that the first quarter was in fact the outlier.

Average haircuts taken by Nasdaq biotech floats
Period Average 
Q1 2012  (26%)
Q2 2012  (31%)
Q3 2012  (21%)
Q4 2012  (17%)
FY 2012  (24%)
Q1 2013  (23%)
Q2 2013  (12%)
Q3 2013  (6%)
Q4 2013  (31%)
FY 2013  (15%)
Q1 2014  (9%)
Q2 2014  (18%)
YTD 2014  (11%)

Fears that the bubble had burst peaked in April and May, so it is not surprising to see that the companies that floated in this period were forced to take the biggest haircuts (see table below).

Agile Therapeutics and Radius Health had to accept around half of what they wanted, although the recent rally in the NBI has sent their shares back up towards intended float prices. In fact, despite the seeming retrenchment, only five of last quarter’s new issues are trading below their flotation prices – two are European – testament to the recovery in stock prices over the past month.

For companies like Kite Pharma, which is working in the closely watched field of immuno-oncology, investors still have an unsated appetite. The stock is trading at almost double its float price already.

But others are struggling, and there have been several reports in the past week or so of companies failing to get away – Syndax and Ambrx postponed their offerings, while Minerva substantially scaled back its hopes.

Further evidence of a more cautious investor base can be seen by looking at new issues’ first day of trading. Last quarter they climbed 8% on average on their first day of trading. Over the first quarter, this figure was 21%.

Of course investor appetite is not the whole picture here. The quality of companies seeking life in the public eye is an important factor. And the longer the window remains open, the more high-risk companies will be tempted to have a go; more will fail or have to curtail their expectations.

Whatever the reasons, it seems highly unlikely that the first quarter’s spectacular IPO glut will be matched in the current bull run. But the IPO window is undoubtedly still open. It might be marginally harder to climb through, but for now there are no sign of it shutting.

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

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