Does amount matter when it comes to a biotech IPO?

With the IPO window still open for small drug developers, companies are making the most of the opportunity while it lasts. Biontech and ADC Therapeutics stand out among a number of sizeable flotations heading towards Nasdaq, seeking to raise around $250m and $200m respectively; IGM Biosciences raised $200m last week, after upsizing its offering.

Early-stage biotechs have been able to raise increasingly larger pots of money over the past couple of years – from public and private investors – and such sums are no longer considered out of the ordinary. Presumably investors have decided that loading up these start-ups with cash improves their chances of success; however, the track record of recent biotech IPOs provides very little support for this notion.

The chart below looks at all new issues from 2014 to 2018, mapping their performance from float price to close on September 18, against the amount of money raised. Flotations from 2019 have been excluded to allow for a good stretch of share price performance to be recorded. And the analysis only includes developers of human therapeutics, excluding medtech and diagnostics companies, for example.

A total of 243 groups were in the original list of biotech IPOs for this period; 16 companies that no longer exist owing to reverse merger or bankruptcy have been cut out. Those that have been acquired in a straight takeout are included, to show the per-share return on the float price; takeouts are described as such in the individual dialogue boxes on the graph below. 

(This graph is interactive – highlight smaller areas by clicking and dragging to zoom in for a closer look.)

As can be expected from a sector where winners are notoriously hard to pick, both big and small IPOs have had their share of triumphs and blow-ups. To the extent that a trend can be seen, IPOs raising between $50m and $150m seem to have performed the best in terms of share price gains.

A caveat here is that the very largest IPOs, those out past $200m, might not be expected to put on huge share price escalations, as these outfits tend to start with larger valuations. Also, this analysis only looks at amount raised; other factors, such as the strength of the investor syndicate or stage of the company, can be important in determining success – as well, of course, as the actual science. It should also be remembered that these large IPOs require a huge contribution from existing shareholders to gain new investor support. 

One fairly strong signal seems to be that the very smallest IPOs have the worst outcomes, with no sub-$20m float currently above water. Only 10 in the sub-$50m cohort, a group that amounts to 61 companies, have delivered a respectable return. Perhaps a high fail rate in this size bracket should be expected, as a small IPO presumably signals little investor support. 

There are always exceptions, of course. The table below, which lists the most successful IPOs of this cohort, includes Krystal Biotech, a gene therapy company that raised a mere $46m back in 2017. The best performer, Sage Therapeutics, also pulled in a sum that would barely raise eyebrows anymore.

Of course it is just as important for investors to be able to avoid losers. The table above also lists the biggest disappointments; however, there are even more blow-ups to choose from across five years of IPOs. While some are still trading for pennies, those that were the subject of a reverse merger can be assumed to have lost their shareholders pretty much everything.

Remember that this analysis only looks at share price performance: the relatively modest 23% drop in Moderna's shares since float is equivalent to the loss of $1.6bn in value. Most companies in this analysis will never come close to being associated with such a vast sum.

The gold-plated outcome for investors is always a straight takeout, of course, and even among these targets there is a good spread of those that raised modest amounts at IPO and those that boasted hefty sums – Ignyta versus Juno, for example. It is also worth noting that the average amount raised across all the IPOs in this analysis was $87m, and it is around this figure that the biggest returns gather in the chart above. At the end of the day, perhaps picking winners is just a numbers game.  

Whether a small drug developer succeeds or not comes down to a lot more than how much money it raises. But this analysis shows that big sums do not necessarily correlate with big successes, though of course for many of these companies the story is far from over.