Since the first quarter of 2013, there has been continual talk and focus on the apparent “window of opportunity” for early stage biotechnology and pharmaceutical companies to go public. Through the end of the second half of 2014 this window still appears to be open (although how open has varied over the past 18 months). I thought this would be a good time to take a look at 18 months of IPOs, and using S-1s and other publicly-available information, provide a perspective on what types of companies have gone public (e.g., stage or disease focus), how venture capital firms and other early investors have benefitted, and how the market in general has received these companies.
For the purposes of this article, I looked specifically at U.S.-based companies that had an IPO between January 1, 2013 and June 30, 2014. In addition, the analysis is limited to pharmaceutical and biotechnology companies (biotechnology is broadly defined to include companies focused on biologics, diagnostics, and drug discovery/research tools). This produced a list of 80 companies for which data such as disease focus, clinical stage, average price per share pre-IPO, and pre-IPO investors was collected (for the full list of companies please see Supplemental Table 1). The majority of the data was pulled from each company’s S-1 filing. In some cases additional information was taken from other publicly available information including articles, the company’s website, and Bloomberg.
Market Trends: One of the first data-sets examined was the timing of IPOs over the past 18 months (see Figure 1-A and 1-B). While a number of articles have been written about the large number of companies that successfully had an IPO in Q3 of 2013 (a total of 15), the strongest quarter in terms of number of IPOs in this sector was the first quarter of 2014 with 23 companies going public. This quarter also had the strongest month for IPOs with a total of 9 in February of 2014. However, prior to January 2014, there was a steady monthly decline in the number of IPOs after a peak in September 2013, which likely raised many questions as to whether the IPO window was closing. There was also a decrease in IPOs in April and May 2014 likely due to a similar dip in biotech stocks after members of Congress questioned the pricing of Gilead’s new Hepatitis C treatment, Sovaldi, at the end of March. This rebounded in June with 8 IPOs closing Q2 of 2014 just ahead of Q3 of 2013. If you look at the window from a perspective of capital raised per quarter, the results are similar with Q1 2014 being the peak quarter with over $1.5BN in capital raised in IPOs, followed by almost $1.2BN in Q3 2013. However, the average amount raised in each IPO has decreased from a high of $76.4MM in Q3 2013 to $59.3MM in Q2 2014 (only Q1 2012 was lower, with an average raise of $55.8MM). In total over the past 18 months, almost $5.5BN in capital has flowed into the biotech/pharma sector through IPO financing (this doesn’t take into account the amount of capital that has been raised in secondary offerings over this period).
Clinical Success and Partnering: What do companies that have successfully reached the public market have in common? Are they platform/portfolio play companies or single asset? Do they have large collaborations or partnerships in place with mid- and large-cap biotech/pharma companies? Are they focused in particular disease areas? What stage in the clinic is their lead asset? Some of these questions have a diverse set of answers while others point to general trends.
One common trend is that 45% of the companies have received substantial non-dilutive capital prior to their IPO. In most cases this was the result of a strategic partnership or collaboration, however, in some cases, it was the result of large grant awards (i.e. Achaogen Inc. has been awarded a grant for up to $140MM from BARDA of which over $30MM has already been funded). All but 10 of the companies are developing therapeutics (both biologics and small molecules) and are pursuing FDA approval for one or more products.
Of the 70 companies developing therapeutics, I next examined if the story behind their public offering was development of a platform or portfolio of assets – or were most companies dependent on the success of a single asset. As a proxy to measure this, I broke out the number of assets that had entered the clinic or been approved at the time of the S-1 filing (see Figure 2-A). Of the companies that reached the clinic, 50% have a single asset and 30% have two assets. However, it is important to note that the number of molecules in the clinic is not a direct proxy for a platform/portfolio vs. single asset company. For example, both companies that went public prior to having a clinical stage program (Dicerna and Agios) are platform/portfolio plays which is likely why they were successful in going public despite the lack of a clinical stage asset. In total, the 70 therapeutic companies that have gone public in the past 18 months have successfully moved 137 molecules into the clinic.
The stage of the most advanced asset for each company is another factor to take into consideration, as it plays a large role in the future risk of the company. In most cases, the company is highly reliant on the success of their lead asset in the clinic in order to become a successful company in the long term and re-coup the capital (both public and private) that has been invested in the company. Clinical stage was determined from the S-1 of each company and the designation was based on the initiation of the trial at a particular stage. For example, an asset that had completed a Phase 2 trial and was Phase 3 ready, but the Phase 3 trial has not been initiated would be classified as a Phase 2 asset. Similarly, an asset that had just begun a Phase 2 trial and did not have any interim or primary endpoint data would also be classified as a Phase 2 asset (although the clinical risk between the two companies is very different). In total, 14% of the companies have only pre-clinical or Phase 1 assets, the vast majority (60%) have Phase 2 assets, and 19% have Phase 3 assets (Figure 2B). Interestingly, there are five companies - Adamas Pharmaceuticals, Eagle Pharmaceuticals, Corium International, Insys Therapeutics and Amphastar Pharmaceuticals – that have successfully achieved approval of at least one asset prior to its IPO, although most of the approvals were through the 505(b)(2) or ANDA pathway.
The disease focus of the companies is fairly diverse but has some clear differences from the general biotech/pharma industry*. Oncology indications represent a much larger portion of the therapeutics in development in the companies that have recently gone public compared to the industry in general, as do “Other” indications which include disease areas such as ophthalmology, gastroenterology, and dermatology (See Table 1). On the other hand, neurology and cardiovascular which represent the two most frequently pursued disease areas in the industry at large, are underweighted amongst the IPO class. The difference from industry averages is likely due in large part to the selection bias of VC investors for particular disease areas due to important factors such as trial costs (i.e., cardiovascular and neurology trials are typically much larger and longer than oncology trials and thus cost more), competition with large pharma, and exit pathways and return multiples. This also is likely the reason that 28% of the companies are pursuing therapies for rare disease and/or have been granted orphan or breakthrough therapy status by the FDA.
VCs and Returns: Prior to raising public capital, the vast majority of these companies raised private money from venture capital firms (over $6.35BN from the 65 companies for which pre-IPO equity could be determined which does not include non-dilutive capital sources). While over 150 firms have had at least one company in their portfolio successfully enter the public market, a much smaller number have had multiple portfolio companies IPO over the past 18 months. VC Firm ownership is based on a minimum of 5% pre-IPO ownership based on the S-1 filing. There were 17 venture firms that had five or more portfolio companies IPO (See Table 2), with the clear leader being Alta Partners with a staggering 12 companies that have entered the public markets. There were 12 companies that had a 5X or greater return (See Figure 3), based on the average price per share pre-IPO and the closing stock price on June 30, 2014 (four companies did not provide average price per share of existing investors in their S-1 and therefore are not in this analysis – these companies are INSY, XNCR, ITCI and EGRX). Interestingly, of those 12, three are not traditional therapeutics companies (FMI is a cancer diagnostics company while KIN and PETX are veterinary therapeutics companies). In addition, it is important to note that individual investors may have achieved a greater return than shown in Figure 3, based on their particular share class, preferences, and share price.
If you compare returns between the IPO and pre-IPO investors (Figure 4-A), it is clear that in general there is a correlation between the two with a few outliers, mainly the seven companies that have generated the largest fold increases in value to the average pre-IPO investors, and Dipexium, which while creating a strong return for the pre-IPO investors has traded down since its IPO price.
In general, share prices have held value for the venture investors with 63 of the companies trading at values equal to or higher than the average pre-IPO share price and 74% of the companies trading at or above their IPO price. The mean and median returns for the average pre-IPO investor are 3.01 and 2.31, respectively; For the IPO investor, it is 1.48 and 1.40. When comparing the capital invested pre-IPO to investor returns, there appears to be a slight increase in IPO investor returns as the total capital invested pre-IPO increases. However, pre-IPO investor returns are the highest for the companies that required the least capital and the companies that required $76-100MM in equity.
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