A Blog by Jonathan Low

 

Sep 21, 2022

Why Venture Investors Believe Biotech IPOs Are Making A Comeback

After the pandemic-driven biotech IPO bubble, valuations fell along with those of other venture investments. 

Now that pricing has reached 'reasonable' levels, interest in the sector is reviving, especially as the dearth of tech-related opportunities continues to remain subdued. JL 

Brian Gormley reports in the Wall Street Journal:

Recent acquisitions of biotechs, and strong clinical-trial data from drugmakers are whetting investor appetite, which will lead to more IPOs. In 2020 and 2021, growing discoveries in biotech, on top of the Covid-19 pandemic, drew investors, loosing a flood of IPOs. (Many) publicly-held biotechs are trading at market capitalizations lower than the amount of cash on their balance sheet. Startups could acquire a public listing and cash by purchasing these companies. As IPOs slow, venture investors gain leverage. Startups this year have had to consider raising venture capital at lower valuations. Recent acquisitions signal that biotech share prices have fallen to reasonable levels, which generates investor interest.

After largely stalling this year, initial public offerings of biotechs are seeing glints of revived interest, some investors say.

The evidence is slight, but gathering: A solid stock-market debut by Third Harmonic Bio Inc. Thursday, recent acquisitions of biotechs, and strong clinical-trial data from several drugmakers are whetting investor appetite, which will likely lead to more IPOs, investors and analysts say.

As of Sept. 15, 18 biotechs had gone public in the U.S., a dismal showing after the 111 that debuted last year, according to figures from Nasdaq, the exchange that hosted nearly all of them.

Investors remain wary, but biotechs with strong management and drugs in clinical trials will have opportunities to go public in the coming months, some said.

“My sense is we’ll see the IPO market reopen in earnest in early 2023,” said Rahul Chaudhary, senior managing director and head of healthcare equity capital markets for investment bank SVB Securities.

 

In 2020 and 2021, growing discoveries and novel procedures in biotech, on top of the Covid-19 pandemic, drew investors to the sector, loosing a flood of IPOs.

“Biotech was one of the only places investors could seek refuge at a time when most other industries were likely to see hits,” said Albert Cha, a managing partner with biotech investor Frazier Healthcare Partners.

This year, however, biting inflation, poor performance at many small public biotechs and a market slide have all curtailed activity. The SPDR S&P Biotech ETF, a fund of biotech stocks, is off about 28% this year.

As IPOs slowed, venture investors gained leverage. Startups this year have had to consider raising venture capital at lower valuations, said Paul Hughes, co-chair of the emerging companies and venture-capital practice for law firm Wiggin and Dana LLP.

“Our advice is, you need to be open to tougher terms,” he said.

Other venture capitalists are considering alternatives to an IPO to finance their portfolio companies.

Numerous publicly-held biotechs are trading at market capitalizations lower than the amount of cash on their balance sheet, noted Todd Thomson, chief operating and financial officer of Kairos Ventures. Startups could acquire both a public listing and cash by purchasing these companies—without incurring many of the expenses of an IPO, he said.

“In today’s world, that to me is where the value play is in going public,” Mr. Thomson said.

But some see signs of a turnaround in the sector. Recently, large drugmakers have snapped up several biotech companies; in August, Bristol-Myers Squibb Co. said it would pay $4.1 billion for cancer-drug developer Turning Point Therapeutics Inc. Other publicly traded biotechs, such as Relay Therapeutics, have successfully sold more stock after unveiling promising clinical trials data.

The recent acquisitions signal that biotech share prices have fallen to reasonable levels, which generates investor interest and could encourage IPOs once again, said David Nierengarten, managing director, equity research for Wedbush Securities.

Cambridge, Mass.-based Third Harmonic, for instance, fits the profile investors will be seeking in biotech IPOs this year and in early 2023, analysts say: an experienced management team, a strong group of venture backers, a drug in clinical trials and the ability to reach near-term milestones that could increase the company’s value.

Third Harmonic, whose lead drug could treat conditions such as urticaria, or hives, upsized its stock offering to 10.9 million shares from an earlier plan of 9 million, and went public at $17 a share, raising $185 million. The stock closed at $18 on Friday. Prior to the IPO, the company had raised about $155 million in venture capital from investors including Atlas Venture.

A Third Harmonic spokeswoman declined to comment, saying the company is in a post-IPO quiet period.

Some biotechs with a similar profile are still choosing to raise venture capital rather than go public. Last week, Acelyrin Inc. raised $300 million to finance late-stage clinical trials of its lead drug for two types of arthritis.

A venture round represented the most expedient route to raising the money Acelyrin needed to accelerate development of the drug, said Co-founder and Chief Executive Shao-Lee Lin. She is also on the board of Third Harmonic, but declined to discuss the company.

More dominoes will have to fall for the biotech IPO market to open more widely, said Mike Perrone, a biotech healthcare specialist with investment bank Robert W. Baird & Co. Private biotech valuations, which have held up better than public ones, will have to move closer to the expectations of public investors, he said.

“There’s a disconnect between public and private valuations,” Mr. Perrone said.

1 comments:

fnf said...

At the start of the last decade, the IPO markets weren’t receptive to biotech companies. But now everything has changed

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