Biotech IPOs are on track for a near-record year, with a crop of offerings that are younger, more highly valued—and some say riskier—than any in recent memory.
Driven by swift advances in medical science, and an accommodative Food and Drug Administration that is increasingly willing to accelerate approval of innovative drugs, biotechs are tapping the public markets at very early stages of development—some even before they have a drug in a clinical trial.
founded last year, has no product revenue and is years away from getting a drug approved. Yet it raised $373 million earlier this month in one of the largest-ever initial public offerings of a biotechnology company.
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based in Cambridge, Mass., raised about $277 million in its July IPO, the second most of any biotech this year according to Dealogic, despite having not yet tested a drug in humans.
whose lead gene-therapy product won’t start clinical trials until next year, raised $166 million in its March IPO—three years after its founding—and now has a market value of more than $700 million.
Overall, through mid-October, some 52 drug developers have raised $5.75 billion in gross proceeds from U.S.-listed IPOs this year, third most after the $8.19 billion raised in all of 2014 and the $7.06 billion raised in all of 2000, according to inflation-adjusted data from Dealogic.
Another database that some analysts point to shows that 55 biotechs have raised $5.56 billion so far this year, trailing the $8.34 billion, adjusted for inflation, raised in 2000, $5.97 billion in 2014 and $5.74 billion in 2015. The database is maintained by Stelios Papadopoulos, chairman of Biogen Inc.
The trend punctuates one of the strongest IPO markets of the past decade. Some 209 companies have gone public on U.S. exchanges so far this year, raising a total of $56.6 billion, second most since 2008 on a year-to-date basis after the $88.92 billion, adjusted for inflation, raised by 249 companies in 2014, according to Dealogic.
At least eight more biotechs are on deck to go public before the year is out, including NGM Biopharmaceuticals Inc., whose lead drug is in midstage studies to treat a type of fatty liver disease.
Early-stage biotechs—with products not yet tested in human clinical trials or tested only in early Phase 1 studies—represented 37% of biotech IPOs through the third quarter of this year and had an average market value of $535 million, according to Ravi Mehrotra, partner at investment bank MTS Health Partners. That is up from 35% of companies with an average market value of $471 million in 2015.
Phase 1 studies typically look only at safety, while midstage Phase 2 trials look at efficacy. Much larger and longer Phase 3 trials are traditionally necessary for FDA approval, but the agency has been speeding some approvals. The FDA issued 20 new drug approvals last year, including first-time approvals and approvals for new disease indications, under its accelerated approval program, up from an average of about seven annually over the previous 10 years, according to a Journal analysis of FDA data. The accelerated approval program allows drugs to come on the market before they have been definitively proven to provide a clinical benefit to patients and often before late-stage studies are completed.
Traditional drugs in later-stage development can actually take longer to gain FDA approval than some early-stage medicines, said Alexis Borisy, partner at Third Rock Ventures, a venture-capital firm based in Boston. “The notion that a company that is preclinical is inferior is not correct,” he says.
Still, investors typically have sought more evidence that a drug was likely to work. And the added security of more clinical research is still valued.
of South San Francisco had completed a late-stage study at the time of its IPO, which raised $256 million in June. Chief Executive Officer Gerrit Klaerner discovered the company’s only drug, a treatment for a metabolic condition linked to kidney disease. Tricida aims to file for approval next year.
At investor meetings before Tricida’s IPO, “the reception we got was, ’Oh my God, there aren’t many companies out there with Phase 3 data,” Dr. Klaerner said. Since going public at $19 per share, Tricida shares are up 42.7%.
Some industry observers caution that the quality of very early-stage entrants can be hard to judge. “You better have your eyes wide open, as this industry is as risky as it’s ever been,” said Geoff Porges, a Leerink Partners LLC analyst.
Biotech companies have raised $5.56 billion in initial public offerings so far this year, placing 2018 on track to be one of the industry's best-ever for IPOs.
Total amount raised
Number of companies
Note: 2018 data as of October 14, 2018
Source: Stelios Papadopoulos, Ph.D.
Indeed, many of this year’s newly public biotechs have struggled to sustain momentum past their IPOs. About 60% of the year’s new issues are trading below their offer prices, according to Dealogic and FactSet data. Of the top 20 biotechs by gross IPO proceeds this year, seven were in the red through Monday and down 31% on median from their deal price; shares in the other 13 companies were up 43% on median.
Rubius Therapeutics, which plans to begin clinical trials next year for its genetically engineered red blood cell treatments, was down 27.3% Monday since going public at $23 a share.
CEO Pablo Cagnoni said advances in science enable companies to use technologies that can tackle multiple diseases over a short span, which is attracting investors to the most promising companies regardless of their development stage.
“Is the risk a little higher [in preclinical companies]? Perhaps,” Mr. Cagnoni said. “But some of those companies are going to be great success stories.”
Allogene is up 27.8% from its $18-a-share offer price. Co-founders Arie Belldegrun and David Chang previously ran Kite Pharma Inc., whose genetically engineered cell therapies had been tested only in small clinical trials when the company went public in 2014. Kite was acquired by
for $11.9 billion in October 2017.
Six months later, the former Kite executives raised $300 million to start Allogene and develop a different type of cell therapy that, if successful, could be easier to manufacture and administer to patients than the treatments they developed at Kite.
Allogene’s lead product candidate has been tested only in early-stage clinical trials so far, but Allogene could start the studies needed for FDA approval as soon as the second half of next year, the company said.
Deals like Allogene’s are “a bet on management, reputation and the board [of directors],” said Mr. Porges, the analyst. “It’s not a validation of the product or technology—that’s going to take many quarters, if not years.”
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