Returns hint at gradual decline in quality of biotech floats

This year might have witnessed a notable slowdown in biotech flotations, but in terms of returns to investors the class of 2016 is holding up. The same cannot be said of 2015, which looks to have been a poor year for those braving new issues.

Of course 2015 saw the biotech rally come to an end, a factor that would have hit fledgling stocks hard, while those newly listed this year have had less time to reach important events. But an analysis of US IPO returns over the past four years seems to suggest a gradual decline in quality – a warning sign perhaps for those investors tempted to jump back into biotech in the new year (see analysis below).

This analysis calculates the share price change from flotation to November 14, for all drug development companies coming to the Nasdaq market since 2013. The analysis has been restricted to those involved in human therapeutics, excluding medtech companies and CROs, for example. It also excludes those no longer listed, whatever the reason; these are detailed later.

The box below shows the performance range of the middle two quartiles of companies. Over the past three years both the upper and lower limit has dropped, a worrying trend if this suggests a gradual decline in the average return from these IPOs.

It was 2013 that really saw the start of the biotech boom, and the IPO window finally opened. After years of very minimal support from public investors for anything of risk, companies with stock market ambitions were able to float.

It is not unreasonable to assume that those that got away first were more established, and had long been ready to pull the trigger. This might explain the relatively better performance of the middle quartiles in 2013.

As the cycle progressed, and riskier propositions were able to get away, this performance worsened – the prospects of the 2015 cohort were perhaps poorer to begin with.

Of course there will also be outliers, and in a sector where one-product companies live and die by clinical success, there will always be stocks that decline to nothing. Examples of these disasters include Tetralogic, which floated in 2013, Tokai from 2014 and Pronai Therapeutics from 2015, all of which remain publically listed but have registered declines in the 90%-plus range.

From this year’s cohort Phaserx has the dubious accolade of the worst performer, having so far lost shareholders a mere 77% of their original investment.

At the other end of the scale, by far the best performing biotech IPO stock in this analysis has been Radius Health, a 2014 IPO that has rewarded investors richly. The rise probably has as much to do with takeout speculation as it does with hopes for its lead osteoporosis asset (Event – Radius hopes for big break with abaloparatide, September 13, 2016).

The sorts of returns above are more normally seen in takeout situations, and the table below shows how M&A targets performed for their IPO investors. It also reveals those that are no longer listed for less auspicious reasons.

It is interesting to note that 2015, seemingly the worst-performing year for returns to date, has also yet to yield any takeover targets.

Of course this analysis is always a moveable feast – only last week the 2014 floater Juno demonstrated the fragility of these valuations, with news of further deaths in its clinical programme. From registering a 37% advance on its IPO price the high-profile CAR-T player is now trading 6% below.

But, for those considering whether to brave these investments in 2017, the performances laid out here highlight the importance of careful stock selection. 

To contact the writers of this story email Amy Brown or Edwin Elmhurst in London at [email protected] or follow @AmyEPVantage on Twitter