Wall Street Bets On Biotech IPOs Amid 'Science Fiction' Frenzy


The first seven months of 2018 saw 38 biotech companies file initial public offerings — bullishly outpacing last year amid improved sentiment for the sector.


Medical advancements from these companies are starting to sound like something out of "Frankenstein." Life sciences firms, including biotech companies, are working on futuristic solutions to disease, like 3D printed organs and organs-on-a-chip.

There are biotech companies like Rubius Therapeutics (RUBY), which is looking to marry red blood cells and genetic engineering. Others like Neon Therapeutics (NTGN) and Forty Seven (FTSV) are jumping on the immuno-oncology boat popularized by Merck (MRK) and Bristol-Myers Squibb (BMY).

And Wall Street brokers are lining up to open their coffers, said Steve London, a partner in the health sciences department at law firm Pepper Hamilton. London helps life-science companies navigate various phases including startup through IPO and beyond.

"It's so exciting to see this," London told Investor's Business Daily. "It does sound like science fiction, but I am absolutely certain (the advancements) will happen. The only question is how long will it take? And that's where Wall Street starts making its bets."

Four Dozen IPOs

During the first days of August, several more biotech companies filed IPOs, bringing the 2018 total to nearly four dozen, said Matt Kennedy, a senior IPO market strategist for Renaissance Capital. Renaissance Capital manages exchange traded funds that focus on recent IPOs.

To compare, in the first seven months of 2017 there were 21 biotech companies that filed IPOs, he told IBD. So far, 2018 has outpaced the prior year by 81% in terms of IPOs from biotech companies.

"So biotech activity has increased faster than the overall IPO market," he said.

According to Capital Renaissance's second-quarter report, a third of all IPOs came from biotech companies. IPOs in the broader technology sector raised the most proceeds, averaging a "stellar" 61% return. That boosted the quarterly average gain to 29%.

Returns haven't been as robust from biotech companies, however. So far this year, they've had a 12% return from the offer price to the close on July 31, Kennedy told IBD. That compares with 59% returns for those that filed IPOs in 2017, and an even better 89% return in 2016.

"(Biotechs) have traded pretty well on their first day with a little over 14% on the first day and then an average of minus 3% after that," he said. "That makes sense. For some of these companies, they are perceived as being hotter, then sentiment changes and they become more sensitive."

Politics, Trump And Biotechs

Shares of biotech companies tend to be tricky and are particularly susceptible to political winds. Year to date, the overall sector's stocks are up north of 10%. The industry group is ranked No. 38 out of 197 groups IBD tracks. But that's down from the fifth-place slot just 26 weeks ago.

And now the midterm elections are looming. Further, President Donald Trump has reiterated his goal to bring down drug prices. Uncertainty about government policy can be "very damaging" to life-science companies' stocks, Pepper Hamilton's London said.

"Now we're looking out toward the midterm elections and what might happen," he said. "Will health care policy be revisited? Will there be some sort of push to address drug prices? Will there be a faster FDA review period or slower as a result of the elections?"

All said, it's better to get in now — while they can, said James Nolan, a partner at Velocity Fund Partners. Velocity is a private equity firm focused on life sciences and health care services.

Open Market For Biotech Companies

Right now, the market is open to IPOs, Nolan told IBD. That allows biotech companies to create full platforms for developing a multitude of drugs.

Maybe they'll be acquired in the future, but it's not necessary right off the bat. These companies have time to grow their valuations.

Biotech companies operating in a closed market don't have that option. They generally develop a single product before selling to Big Pharma. Under those circumstances, their valuations tend to be much lower — as are the returns for private investors.

"When you don't have an IPO market, you're forced to develop one thing," he said. "And that's when you flip it. So when you have this opening in the IPO market, you move and you move quickly because it fluctuates."

Scientific Advancements Abound

There's no telling when the cycle could shift, Nolan said. A tweet from Trump, poor clinical results or general market malaise could prevent biotech companies from filing IPOs. On the flip side, strong clinical results or easing legislative pressure could boost the sector.

Nolan noted news from Biogen (BIIB) and Japanese pharma Eisai recently on an Alzheimer's disease study. Biogen stock rocketed nearly 20% in a day on top-line results. But shares crashed 10% later in the month when the biotech offered a deeper look at the results.

But that doesn't change the fact that Biogen's news got "everyone looking" at biotech companies, Nolan said. "It was enormous. That gets people to recognize that new products that are innovative will have the best returns on the planet."

Sometimes the products are so interesting they've prompted "crossover investors," said Pepper Hamilton's London. So-called crossover investors take a position in the last private round before also jumping in during the IPO.

Acquisition: The End-All Goal?

That could be due to the publicity surrounding these biotech companies, he said. CRISPR gene editing is no longer theoretical. Three companies are soon to begin clinical studies in humans. Immuno-oncology drugs are getting robust responses in lung cancer and melanoma.

Investors definitely want a piece of the action, London said. The riskiest part is deciding which biotech companies deserve the attention. He suggested weeding out potential duds by focusing on those that have clinical study results. In biotechnology, not all companies do.

"If it's a drug, you have to look at where it is in the clinical trial process," he said. "What are the results of those trials? How close are they to getting their (investigational new drug application) approved?"

And, of course: Is this a takeover candidate?

"Investors in these kinds of biotech companies that have no drug or product on the market are betting one of the big players will come in and buy the company out before commercialization," he said. "That's the near-term horizon of what investors should be looking for."


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