The definitive proof of any stock market boom lies in a surge in new company flotations, and on this score – as if there had been any doubt – the biotech bull market has truly arrived.
Life science companies raised an incredible $2.14bn on Western exchanges in the first three months of 2014, easily making this the best quarter since EP Vantage started compiling IPO data five years ago. After the Nasdaq biotech index’s wobble last week it might be wise to ask how long this can last, and indeed whether the amazing window of opportunity is about to slam shut (see graph and table below).
Biotech’s current bull run can be traced back to the November 2011 purchase of Pharmasset by Gilead Sciences, so it might come as a surprise that it is only recently that the enthusiasm has spread to new listings.
To some extent this indicates a normal market cycle, says Sander Slootweg, managing partner with the Netherlands-based venture fund Forbion Capital Partners. “The IPO market usually picks up once listed companies’ prices have already risen,” he tells EP Vantage.
“Better-quality companies ... lead the way, and the window extends. Then companies are able to get out that are, I wouldn’t necessarily say worse-quality, but higher-risk.”
But at some point people realise that the environment has become too risky, and the window shuts. Thus an important question is whether all the good businesses have made it out, and we are now scraping the bottom of the barrel.
Different this time?
This time around, of course, there is added pressure caused by the Congressional challenge to the price tag of Gilead’s hepatitis C pill Sovaldi, which prompted a sharp pullback in the broader market and saw many early-stage biotechs sell off (Gilead price challenge tests the coolest of heads, March 24, 2014).
Still, Mr Slootweg thinks good companies can still get out, and rather it is a case of investors becoming selective. One reason for optimism is that several decent businesses were apparently advised to wait before floating to avoid the worst of the rush when there were multiple other prospectuses to compete with.
Bruce Booth, a partner in the Atlas Venture life sciences group, agrees. “While overall biotech market volatility remains high, the IPO market continues to generate real interest and there’s a healthy set of companies in the queue for Q2,” he says.
The $2.14bn raised in Q1 was pulled in by 31 companies, EP Vantage data show, 28 of which listed on Nasdaq, with the remainder floating in London. Ultragenyx Pharmaceutical, Versartis and Akebia Therapeutics each raised more than $100m, not to mention Circassia’s $332m – by far the largest IPO of the record-breaking first quarter.
Followers of the sorry tale of UK biotech will take pride in pointing out that it was the London-listed Circassia, and not a US company, that raised the largest amount. Not only that, but Circassia is an R&D business – a promising sign of growing risk appetite.
“European sentiment typically lags the US by nine months to a year,” Mr Slootweg explains, with some US investors looking across the Atlantic only once their home market overheats. Conversely, some European companies still see the US as a logical place to list, as demonstrated by Uniqure’s Nasdaq float in February.
Still, it is worth asking whether too much European cash has been put on a single horse – Circassia – to the exclusion of others. Judging by money that has flowed into other UK businesses, including the medtech IPO Horizon Discovery and yesterday’s $112m equity raise by SkyePharma, the answer appears to be a resounding no.
But the trouble is that Europe still has a relative lack of sophisticated biotech investors, and those companies that attract a broad generalist or retail base risk suffering what Mr Slootweg likens to a “downward spiral” of selling on negative news.
And however much talent remains waiting in the wings, there is no guarantee that the appetite will still be there when these companies come to test the IPO waters. “I think discipline is setting in, and weaker stories without compelling data will likely see real challenges,” says Mr Booth.
This hints at an ideal scenario, where sufficient funds still exist for genuine businesses with true potential, while the chancers are frozen out. The history of market cycles, however, suggests that such a utopia is an unattainable dream.