IPO Surge Increasing Private Investor Competition

25 Jul

By Michael Quigley, Research Analyst, LSN

mike-2With the number of Biotech IPOs in 2013 having already doubled the number in 2012, this year is shaping up to be the biggest for biotech in the last decade. These kinds of numbers are leaving many investors and companies alike wondering what exactly is fueling this wildfire. General investor confidence across the market paired with low interest rates could be one answer. However, other industries are not experiencing the same growth that biotech has been seeing as of late. Over the past three years, the NASDAQ biotech index is up 128%, which is leagues above the S&P 500’s return of 52%. (1) These returns are one result of the FDA’s recent increased willingness to approve drugs, paired with an improved understanding of the molecular substructure of diseases, which contributed to drug approvals in reaching their highest levels in over a decade in 2012.

These numbers – however promising – do not tell the whole story on this IPO eruption that we are seeing as of late. The JOBS act of 2012, for instance, plays a part in this development. Included in the act was a clause that allows for companies looking to IPO to speak with investors months before making a public declaration of an IPO, a strategy known as “testing the waters”. This lets investment firms effectively premarket an offering before any SEC filing, which allows them to address the interest of the fund’s own investors in a biotech company’s equity. This streamlining of deal structuring in the space is what has delivered the vast number of successful Biotech IPOs this year –  companies have seen as many as two-thirds of investors participating in their IPOs coming straight from their one-on-one meetings. (2)

A continuation of this IPO trend will push big pharma to invest in earlier stage companies to keep pipelines robust, unless they wish to compete with the prices offered by public markets for mergers and acquisitions. This additional exit option will also put increased pressure on investment firms, as they will no longer be able to offer deals with less-than-favorable terms to companies they look to invest in (for fear of losing them to the public markets). Just as with pharma, this could push these investment firms to look to develop relationships with earlier stage companies in the space long before thoughts of IPO are on the table. The bottom line is, this surge of IPOs is adding a new supply of investment in the biotech space that will increase competitiveness among current investors, causing them to offer better terms – and look to earlier stage companies – for their newest investments.

1. “Strong Biotech Market Fuels IPO Surge.” NVCA Today. William Blair & Company, n.d. Web. 25 July 2013.

2. Herper, Matthew. “Why The JOBS Act Is A Lifesaver For Life Sciences Companies.” Forbes. Forbes Magazine, 19 July 2013. Web. 25 July 2013.

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