New Crop of Boom-Time Prospectors Discover Biotech IPOs

By Wayne Koberstein, Executive Editor, Life Science Leader
Follow Me On Twitter @WayneKoberstein

Making Sense of the Surge in Fundings with Linda Killian of Renaissance

They come over the mountains and across the sea. They enter unfamiliar country unencumbered by map or compass. They know little about where they’re going — only what they want to find there — and that’s the way they like it. How long will they stay?

Until the next boom time arrives in another unknown territory.

To get my own bearings in this heady new world, the great biotech IPO boom of 2013, I could only turn to someone who knows the terrain first hand. No one has a more experienced and strategic view of the surge of IPOs, which started in the second quarter and looks to continue for some months to come, than Linda Killian, Principal of Renaissance Capital. Linda’s views balance nicely with the optimistic take of another venture capitalist in an upcoming feature I’ve just completed for Life Science Leader (to be announced). And her perspective is tempered by years of witnessing booms and busts cycling irregularly but predictably, like rogue comets, through the firmament of the life science sector.

BIOTECH IPOs BEGAN TO SPIKE IN THE SECOND QUARTER — AND SO DID VC INVESTMENT — BEYOND RECENT LEVELS. WHAT IS DRIVING THIS RELATIVE BOOM?

KILLIAN: What started the renewed interest in the biotechs was the acceleration of new drug approvals by the FDA, thanks to the new head of the FDA, and the passage of legislation that allows the agency to fast-track orphan drugs and drugs for critical diseases like cancer and cardiovascular diseases for which there are significant unmet needs. There’s been a tremendous amount of interest in stem cells, rightly or wrongly, and there is great interest in drugs that are close to getting approved for hepatitis and liver disease. So you can interpret the performance of biotech as just an ordinary cyclical uptick in new drug development. Also, the lack of new drugs in the pipeline of the major big pharmas is propelling some M&A activity as well as some high profile collaborations with the smaller biotechs. Lastly, a number of young companies have been forced to do capital raises because of the lack of funding from the government, university sources, and until recently, from the VC community.

BUT THIS BOOM SEEMS TO HAVE SOME EXTRA JUICE — NOT ONLY HAS THE NUMBER OF IPOs RISEN, SO HAS THE SUCCESS OF THEIR OFFERINGS IN SHARE PRICES.

Starting off earlier in the year, some of the biotechs had to be heavily discounted to sell their IPOs. Now almost anything associated with oncology, stem cells or molecular pathways does very well. The performance of this group has helped not only biotechs in general, but also the performance of the biotech IPOs. I don’t think they would be doing as well on the IPO market if the larger, more established companies weren’t also doing so well. This has brought a lot of new money into the biotech IPOs, but unfortunately it’s not necessarily smart money from people who really study and know the industry, the people, and the companies. Much of it comes from investors who are as willing to buy into an IPO of a preclinical company still designing Phase 1 as they are a company going into Phase 3, simply because the preclinical company is involved in a hot area of drug development. There’s some differentiation and discrimination among what investors  buy, but it’s not that high.

THEY’LL PROBABLY BE LEARNING MORE OVER THE COMING MONTHS OR WHILE THE SO-CALLED BOOM CONTINUES. HOW LONG DO YOU THINK THIS LEVEL OF IPO ACTIVITY WILL LAST?

If the fundamental underpinning of this is in fact strong — for example, if we start seeing the companies going through their trials and coming out with good top-line results and then starting to report it at all the various medical societies, people will continue to get excited about it. And as long as the FDA continues with its current policy, and I don’t see any signs of that abating, the market’s willingness to invest in early-stage biotech IPOs  should continue for several more months. But what could easily destroy it, at least for new companies, is if any of the companies start to misstep, or if there are delays in the clinical trials, or if there are drug developments put on hold due to adverse reactions.

IT SOUNDS LIKE YOUR OPINION OF THE GROUP OF IPO COMPANIES, AT THIS POINT, IS KIND OF MIXED.

It is mixed. On one hand, there’s a company that recently went public, Conatus, developing a drug for liver failure, emricasan. The executives of Conatus came out of Idun Pharmaceuticals, which had been purchased by Pfizer back in 2005, basically, to obtain the drug. But then Pfizer discovered some mouse results that indicated the drug might encourage tumor formation, so the FDA put it on hold until January of this year. Meanwhile, the executives who formed Conatus after leaving Pfizer managed to convince the FDA to lift the hold on emricasan. Conatus had a mixed reception, because there may have been questions about possible long-term adverse reactions to the drug. There were also competitive concerns about the number of potential drugs coming on the market next year and the year after that for hepatitis 3 indications, that also may have broader use in liver failure. Conatus’s drug is going into Phase 2b and 3, so its timeframe is longer to NDA submission. The IPO priced at $11 and is now below its IPO price.

On the other hand, there are the companies funded by Third Rock Ventures up in Boston that are all preclinical — they were able to mount IPOs that did very well based on mouse results. You have to really scratch your head as to whether that’s an appropriate public investment, but I guess I leave that to the people who buy these IPOs.

IT ALMOST SOUNDS PURELY FINANCIAL RATHER THAN A SCIENCE OR TECHNOLOGY DRIVEN STRATEGY BY THE IPO COMPANIES.

I think at this stage for some of them it is. Clearly, for some biotech IPOs, the public market is a last-ditch attempt to raise money and keep the company afloat. Companies that are well-financed prior to going public, particularly when the funding is from credible sources, are generally well-received. One company that is being well received is Agios Pharmaceuticals. It got $260 million from Celgene, Fidelity, and other venture firms. It is about ready to start clinical trials with a new approach to cancer, misregulated cellular metabolism, but it has not even identified what cancers it is going to target in its Phase 1 trial. Agios is up nearly 80 percent off its IPO price. Some of the people who are investing in these companies are not necessarily people who are knowledgeable or thoughtful about drug development.

THAT MAKES IT LOOK LIKE A TRANSITORY AND SOMEWHAT MISINFORMED BOOM. SO, WHAT KIND OF IMPLICATIONS, IF ANY, CAN THIS SURGE OF NEW MONEY HAVE FOR THE LIFE SCIENCE BUSINESS?

The surge of new money is great for the life science business. Right now, the public market is willing to look at very early stage preclinical companies when historically it’s not done that, because there are certain changes in the fundamental underpinnings. This makes it easier for startups to raise money because the VCs see that the time horizon to their own exit via an IPO is shorter. Longer term, fundamentals will always determine success. Companies developing drugs and tools for drug development that address unmet needs, prolong life and offer better predictive ability for clinical trials will do well over the long term. But in the short term, the performance of biotech IPOs is being driven by momentum.

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