The Biotech IPO Boom Will Continue Nasdaq Execs Predict

Amid a healthy M&A outlook for life sciences, more and more biotech companies are planning IPOs. (AP Photo/Mark Lennihan)

Yesterday early-stage biotech companies Apellis and InflaRX both went public, raising $150 million and $100 million respectively. Today we should see the Wall Street debut of Erytech Pharma, which is expected to raise $100 million.

That will bring the biotech IPO tally for 2017 to 30 so far—handily outpacing the final tally for 2016 of 26. The amount of money raised in biotech IPOs this year is more than $1.9 billion, again surpassing last year, when biotechs raised $1.7 billion.

The environment is ripe for more biotech companies to go public in the coming months, predicted Nelson Griggs, president of Nasdaq Stock Exchange, and Jordan Saxe, senior managing director and head of healthcare capital markets at the exchange, in an interview. Here are edited excerpts from our conversation.

Arlene Weintraub: Biotech IPOs slowed down a bit earlier this year but seem to be experiencing a resurgence following a few notable acquisitions, including Gilead’s $11.9 billion purchase of CAR-T company Kite Pharma. How important has M&A been to fueling biotech IPOs?

Jordan Saxe: Kite Pharma really reinvigorated the investor appetite in biotech, because it shows that we’re seeing great exits. All of these biotechs want to have a great outcome and really cure disease, but they’re also looking for strategic financing. So the hope is to go public, and then once their clinical data is proven, they can get acquired.

We’re starting to see that path be proven, and that’s given a lot of these companies in the IPO pipeline more ambition and hope for M&A.

Weintraub: At the same time, the obstacles to going public can be steep, particularly for small companies. What can be done to alleviate these challenges?

Nelson Griggs: When you look at the regulations that are put on companies, we say the pendulum has swung a bit too far. It has become fairly costly for companies, especially ones that are smaller in size, to really keep up with the pace of the regulatory demands.

One of my main jobs is to speak to companies throughout the entire country, and definitely the proxy process has come up quite a bit over say the last four or five years as something that is ripe for some reform.

The other big issue that impacts a smaller sized company is transparency around their trading. So today there’s a long disclosure but no short disclosure.

Those are two areas I highlight. But if you look at the overall blueprint, I’d say there’s about 20 items or so that we need to chip away at so it’s not so burdensome to be a public company. That would certainly help the biotech community.

Weintraub: What about the constant pressure to deliver quarterly results?

Griggs: This is a key consideration, and one that can cause biotech stocks to be quite volatile. Investors have to buy into the long-term potential. Biotech is much more driven off of testing data than the types of financials that affect technology or consumer companies. So it does come down to the communication about how they’re progressing through trials, how they are working towards different metrics and goals they set on the road show. They really do have to have investors who appreciate the long-term potential.

Weintraub: What are some of the other factors driving biotech IPOs this year?

Saxe: I look more at the overall performance. There have been fewer biotech deals than there were in the last few years, but the quality of these deals is higher. It’s not so much one deal. It’s the overall trend that we’re seeing and the types of investors considering biotech companies to be great assets.

Griggs: The Nasdaq Biotech Index is up almost 22% year-to-date. The S&P is up 14%. That’s a pretty big spread there. That’s going to get the attention of the generalist investors—not just the biotech specialists.

Weintraub: How will the political climate play into this trend going forward?

Saxe: One of the things that we’ve been looking at is the amount of cash on the balance sheets of large pharma companies. Currently there’s $83 billion in cash on balance sheets. If you look at cash and short term investments, which could be deployed as needed, you’re looking at almost a trillion dollars. And that’s capital that could be deployed to acquire biotech assets.

What’s interesting politically is if that if they are allowed to repatriate some of the tax money that’s offshore, that’s almost $98 billion. When you combine that with cash on balance sheets, it could create a really interesting cycle for M&A activity. You could see some of these companies get acquired. That’s one thing that we’re watching for 2018.

Griggs: Drug pricing also comes up, and that does tend to whipsaw the sector a bit, but it has reached a point where it’s not in the headlines as much as it was in the first part of the year.

Then the third political issue is how quickly drugs move through the regulatory process. That started to improve in ’15 and ’16 and it has carried through. There’s really been an improvement in how the FDA works with companies to deliver drug approvals.

Weintraub: What are your predictions for biotech IPOs in 2018?

Saxe: It comes back to the performance of the Nasdaq biotech index overall. Look at the growth of that index—it’s really incredible. I think there’s a real story there. We see a lot of passive long-term investors looking at the biotech index for their overall portfolio strategy.

We do expect to see another IPO cycle come through by the end of the year. Depending on road shows that get launched it could be another three to five biotech IPOs before the end of the year.

Amid a healthy M&A outlook for life sciences, more and more biotech companies are planning IPOs. (AP Photo/Mark Lennihan)

Jordan Saxe: Kite Pharma really reinvigorated the investor appetite in biotech, because it shows that we’re seeing great exits. All of these biotechs want to have a great outcome and really cure disease, but they’re also looking for strategic financing. So the hope is to go public, and then once their clinical data is proven, they can get acquired.