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Investors pour big sums into US biotech
By Arash Massoudi in New York
One of Wall Street’s riskiest equity bets is back. In a quest to find the next big medical breakthrough, stock market investors have poured $725m into 10 biotechnology flotations that are attempting to create drugs for illnesses including multiple scelorsis and hepatitis C.
The resurgent mood in the US equity market has proved a boon for these companies, usually ranked among the most speculative investments, as they try to come up with the next medical miracle.
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The result has been that small biotechs, which struggle to generate interest from credit investors since they lack cash flow, are pursuing US initial public offerings at the fastest pace in nearly a decade.
Ten biotech companies have listed on the US market so far this year, accounting for 14 per cent of all US IPOs, and at least another seven are preparing a float in the coming months, according to data from Dealogic.
With industry data showing on average that just one in 10 biotech companies successfully launch a drug product, the risks are high. But the right investment in a company promising a breakthrough can lead to outsize returns for early investors.
The leap in listings comes as publicly traded biotechnology companies have outperformed. The Nasdaq Biotechnology Index has risen 32 per cent since the start of the year, eclipsing its previous record high set during the dotcom era and far outgaining the S&P 500’s 16 per cent rise.
“There is definitely an increase in risk-taking going on given the extent to which the industry has outperformed the market,” said Steven Silver, biotechnology analyst at S&P Capital IQ.
The interest in biotech stocks has come from a broad base of risk-seeking investors and has been fuelled by the knock-on effects of global monetary easing. Bankers said it had never been easier to bring a biotech company to market, with deals pricing at unusually strong levels.
Buy-side investors ranging from hedge funds to institutional investors were reviewing investment opportunities in the sector, bankers said. The deals have typically been the domain of niche, specialist firms.
This risk-taking has allowed companies in earlier stages of the drug development process, including some that have not had a clinical trial, to come to market.
“A general rule that a biotech company had to have hit a certain phase of progress is no longer true,” said Michael Zeidel, a capital markets attorney at Skadden, Arps, Slate, Meagher & Flom. “There’s certainly more deals getting done now from companies in the earlier stages of drug development.”
Mr Silver added that long-term industry records showed there was just a 10 per cent success rate for a biotech company bringing a drug to market.
The sector has also been one of the biggest beneficiaries of the Jumpstart Our Business Startups (Jobs) Act, which came into force last April and was designed to make it easier for start-ups to launch an IPO.
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