Q3 saw $1.5bn in biotech IPOs, and no slowdown in sight

The biotech sector saw the largest capital investment over the past quarter and life sciences’ momentum has far from peaked, says accounting firm CohnReznick.

In the past financial quarter, life sciences and biotech initial public offerings (IPOs) pulled in $1.5 billion (€1.3 billion) in capital investment. According to national professional services and accounting firm CohnReznick, the sector was the number one industry for IPOs, with 20 deals taking place in the quarter, representing 30-35% of all deals.

“There has been an increase in pre-IPO funding for biotech companies resulting from a number of factors including the FDA prioritizing a faster track for drug development and approval as well as advances in science and technology that have improved the success of programs and improved manufacturing capabilities,” Alex Castelli, CohnReznick managing partner, Emerging Markets, told BioProcess Insider.

Biotechs and life sciences firms represented the largest sector for IPO investment in Q3. Image: iStock/AtnoYdur

“Overall, life sciences companies have consistently been a significant portion of all IPO activity since 2013.”

Castelli said the IPO window for biotech IPOs has been open since 2013 and has generally followed the 80/20 rule, where 20% of the biotech stocks contributes over 80% of the positive returns. “Only a few of these investments need to succeed in order to recoup your overall investment and generate positive returns.”

Top biotech IPOs

Since the start of Q2, biotech has seen an increased upward momentum, consistent with broader markets, and according to CohnReznick, the promise of significant returns means there is no reason to believe that this trend has peaked.

Some of the largest biotech IPOs of the third quarter 2018 include Arvinas, which raised $100 million in September, Rubius Therapeutics, which raised $241 million in July, and antibody developer Allakos which raised $100 million.

So far in the fourth quarter (since October), the industry has seen announced IPOs including: Orchard Therapeutics, a commercial-stage ex vivo gene therapy firm looking to raise $200 million, and Allogene Therapeutics, an allogeneic T cell firm launched by former Kite Pharma executives, which raised close to $300 million.

Early vs late stage biotech IPO

“Investment is consistent in both later stage and early stage IPOs,” said Ravi Raghunathan, a partner at CohnReznick, who serves as the Firm’s Life Sciences Industry Leader.

“However, not all early stage life sciences companies are attracting investor money. Instead, money in this sector is being invested in selective early stage indications,” he told us.

“Early stage companies that demonstrate science and technology innovation are attracting investor attention and the market is receptive to these companies as investors want to get in earlier on these promising companies.”

Biotechs and life science firms don’t seem to be overpriced “given the risk profile of these companies, market demand, and the potential return for investors,” Raghunathan added.

“Investors in this sector understand that follow-on funding may be required and that significant returns will require a longer-term investment outlook. The opportunity for greater returns as companies move toward commercialization is a factor that keeps investors enthusiastic about this sector. The public markets tend to be very efficient in identifying companies that may be overpriced and not performing to investor expectations.”

Big pharma M&A

“In addition to IPOs, there is a significant amount of M&A activity that involves an exchange of cash consideration which indirectly validates the valuation of the companies,” Raghunathan continued.

“Big drug makers desperate to boost growth are willing to pay up for relatively scarce quality biotechs. This helps keep M&A activity strong and, in turn, gives biotech stocks a strong bid throughout the sector. Capital remains accessible.”

However, he warned that any change in the macro or global economy could have an impact on this sector. “Any government measures to regulate the drug pricing would also have an adverse effect on this sector.”