Sector focus: An outbreak of biotech IPOs

In the US there have been almost 30 biotech IPOs since January this year, marking a 13-year high. Although concerns have been raised over whether this sudden burst of public listings is a bubble, IPOs in the sector are showing signs, on both sides of the Atlantic, of returning to their status as the favoured exit route for venture capital backers.

According to the National Venture Capital Association (NVCA), there was just one venture capital-backed biotech IPO in the US in the first quarter of this year, followed by a massive increase of 20 in Q2 (and a further six since July). In Europe, there has been a small uptick of venture capital-backed European biotech companies going public – just four, so far – but the lift appears to be influenced by activity in the US.

Listing on Nasdaq appears to be a safer option compared with plunging headfirst into the still uncertain European public markets. Netherlands-based biotech company Prosensa, backed by Gimv, Abingworth, Life Sciences Partners and Idinvest Partners, raised $78m in its IPO on the Nasdaq Global Select Market – awarding it with a hefty market cap of $408m.

Prosensa's price per share, which initially stood at $13, has hardly dipped below $22 since its listing at the end of June, generally hovering in the $25-29 region. At the beginning of August, the company's shares were trading at approximately $34, a substantial 161% increase on the initial price per unit.

It is unlikely that Prosensa's success could have been replicated had it listed on home turf. The only other VC-backed biotech IPO in the Netherlands over the last 12 years was Gimv-backed Amsterdam Molecular Therapeutics (AMT), which floated in June 2007 on the NYSE Euronext Amsterdam. However, AMT went into liquidation in November last year.

Sick men of Europe
Venture capital-backed biotech IPOs have been thinly spread across Europe since the financial crisis, and only appearing in select pockets of the continent. France has witnessed a trickle of biotech IPOs in the past six years – namely Erytech Pharma in April this year; Stentys in October 2010; Neovacs in April 2010; and Hybrigenics in December 2007. This was tempered with dry spells between 2008-2009 and 2011-2012, according to unquote" data.

Germany has remained silent despite having the second highest number of investments in the sector in the last five years, according to unquote" data. Trade sales appear to be the exit of choice for German players, although a fairly high number of companies going into administration has plagued the region's industry.

The UK has experienced the highest levels of European dealflow in this sector over the last five years, but public listings have almost completely dried up. There has not been a biotech flotation since November 2007 when e-Therapeutics, backed by Northstar Ventures, Novotech Investment and Octopus Investments, listed on AIM with a market cap of £37.33m. The flotation generated an IRR of 132% for Octopus.

The sudden surge in venture capital-backed biotech IPOs in the US has been accredited in part to the American Jumpstart Our Business Start-ups (Jobs) Act. And if the heightened activity continues, the life cycle of venture capital investments in the biotechnology sector could reach an equilibrium. Thanks to IPOs returning as a viable exit route, venture capital players may look more seriously at investing in the space. Furthermore, if the industry continues gaining momentum and generates enough public investor appetite, riskier investments would seem more plausible and could in turn pave the way for younger biotechs to pull in the funding they need.

Ulterior motives
Both parties have very different motives for a successful relationship. Venture capital players are looking for a company with a low-risk but advanced idea (but also a company that can be easily exited and will generate high returns). Biotechs are hoping to make themselves more attractive to pull in investors at a much earlier stage to combat the dreaded "valley of death" – the funding gap most biotechs experience between angel funding and a series-A round, when they are too new and deemed too risky to invest in but show signs of promise.

Due to the nature of the biotech industry – a company may take years to start pulling in substantial revenue because of pending patents, lengthy clinical trials and the need to seek regulatory approval – the valley of death stretches far further than for other start-ups; therefore, venture capital firms have to be prepared to be in it for the long haul. It is this uncertainty, coupled with low investor confidence and a barren exit landscape that has caused serious damage to the venture capital-biotech partnership throughout the tough post-crisis years.

Despite the lingering hesitancy of listing biotechs in Europe, the thriving scene in the US is certainly having an impact across the pond. What remains to be seen is if Europe's public investors will rediscover an appetite for the sector or if the continent's venture capital-backed biotechs will follow in the footsteps of Prosensa and make their public debut in the US.

Fortunately, the few that have braved the European waters in the past few years are faring reasonably well. Stentys, which floated with a market cap of approximately €90m, according to unquote" data, is now valued at almost €110m, while e-Therapeutics' market cap now sits at approximately £93m (from £37.33m at the time of listing in 2007).

Whatever the outcome of this sudden wave in biotech IPOs, there is no doubt that all eyes are on the US public market as its recently listed biotechs test the uncertain waters.

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• Topics
• Exits
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• Top story
• Gimv
• Abingworth Management
• Life Science Partners
• IDInvest Partners (AGF Private Equity)
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