More And Better Biotech IPOs, But Step-Ups Still Lag ... · Printed by Stacy Lawrence, Elsevier Business Intelligence More And Better Biotech IPOs, But Step-Ups Still Lag ... Jan

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Printed by Stacy Lawrence, Elsevier Business Intelligence

More And Better Biotech IPOs, ButStep-Ups Still Lag

By Stacy Lawrence / Email the Author / “The Pink Sheet” Oct. 1, 2012,Vol. 74, No. 40Business & Finance / Word Count: 2045 / Article # 00120924007

Executive Summary

Higher valuations, better quality companies, improved aftermarket performanceand a broadening investor pool are all conspiring to advance the state ofbiotech IPOs. But VCs continue to see little step-up at IPO.

The biotech initial public offering (IPO) market has been improving marginallyafter an abysmal few years. But that doesn’t mean most venture capitalists arelikely to see any real appreciation of their investments at IPO anytime soon.

Bankers expect there could be more U.S. biotech IPOs this year than in anysince 2007. There have been eight IPOs thus far in 2012. Through year-end,another roughly half-dozen IPOs could price, bringing the total to 14.

In addition to the potential for more biotech IPOs, the valuation of companies atIPO also has been climbing. VCs and bankers see this as a signal that thequality of companies that go public, rather than already having been acquired, isstarting to improve. That’s because public market investors are more willing toascribe higher values to some of these companies than those that the industryhas seen over the past few years.

Once biotechs reach the public market via IPO, their performance isn’t quite aspoor as it has been for IPO classes in each of the last few years. That meanspublic investors are a bit more in sync with bankers, VCs and companies onhow IPOs are pricing.

Just prior to an IPO, companies and their underwriters typically propose a filingrange. Over the last few years, public investors have executed IPOs at a deep

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discount to that proposed range. But that discount to the filing range has shrunksomewhat this year.

Perhaps most importantly, bankers also say they’re seeing a larger group ofinvestors willing to buy into a biotech IPO. Investors have seen biotech marketindices outperform broader market indices for almost a year now, and some arelooking to participate in new ways. As the number of buyers expands, that helpsloosen the grip of the so-called “biotech mafia,” a small group of public investorswho largely have dictated the terms of biotech IPOs in recent years.

But although some indications are incrementally positive – IPO valuationscreeping up, after-market performance improving and the IPO investor poolbroadening – venture capital investors likely will continue to see little or no step-ups in valuation at IPO. Indeed, VCs aren’t likely to see their investmentsincrease in value much, if at all, at IPO or even in the late-stage venture roundsleading up to an IPO, according to recent data.

Significant valuation step-ups this year for biotechs have come instead at earlyventure rounds. Also, VCs continue to expect that once companies reach thepublic markets hitting milestones will provide a significant share-price boost. Butthat rarely has been the case for IPO companies from the last few years.

Stumbling On The Steps

Since 2010, no biotech IPO has at least doubled the share price at the mostrecent venture round. Four IPOs accomplished that in 2010. In the last fewyears, cancer company Tesaro Inc. came the closest with a 77% step-up fromthe prior venture financing.

Otherwise, IPO valuation step-ups have been 35% or less, with a handful in thenegative range, for the last few years. That seems likely to continue to be thecase for biotechs with IPOs currently on road shows: cancer and infectiousdisease play GlobeImmune Inc. and microRNA company RegulusTherapeutics Inc.[See Deal]and [See Deal] But that’s not the only potential issuefor GlobeImmune. Rather than price its IPO last week as expected, the biotechreportedly has postponed its offering.

These IPO step-up calculations are based on share price at final venture roundas compared to IPO share price. This includes any adjustments such as theubiquitous reverse stock splits at IPO. Our sister publication Start-Upregularly does an analysis of total venture capital invested versusvaluation at IPO or acquisition, a slightly different calculation that it alsodubs step-up ("New Biopharma IPOs Show Modest Step Up In Step-Ups" —START-UP,May 2012).

“With respect to the deals that have priced so far and the ones likely to come inthe next 12-18 months, the step-up multiples are very specific to the deals thatare going out,” noted Rahul Chaudhary of Leerink Swann & Co. He said it’s thefundamental appeal of the drug, the prior success of the management team andthe amount of capital supporting the company that largely set the valuation.

At its last venture round, GlobeImmune’s share price was $11.26, already in themiddle of its IPO filing range of $11-$13. For Regulus, its prior venture roundwas at $8, while its filing range is $10-$12.

With an average discount this year of 25% below the middle of that proposedrange, neither seems likely to get much, if any, step-up at IPO. Still, that

nets $42mm throughinitial public offering

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SubjectsDeals & DealmakingStrategiesFinancial Strategies

IndustriesFinancialVenture CapitalPrivate EquityInvestment Banks

RegionsNorth AmericaUnited States

CompaniesTesaro Inc.GlobeImmune Inc.Regulus TherapeuticsInc.Leerink Swann & Co.Sofinnova VenturesDurata Therapeutics Inc.Hyperion TherapeuticsInc.SupernusPharmaceuticals Inc.Vivus Inc.Pacira PharmaceuticalsInc.NewLink Genetics Corp.MerrimackPharmaceuticals Inc.ChemoCentryx Inc.Sagent PharmaceuticalsInc.OncomedPharmaceuticals Inc.Verastem Inc.GlaxoSmithKline PLCSirtris PharmaceuticalsInc.Aisling Capital























































discount actually is an improvement on the almost 40% average discount forlast year’s class of IPOs, according to an analysis of data from BMO CapitalMarkets.

“There was a period where the step-ups were much higher. Around 2000, theywere impressive. But in the last few years the step-ups were very modest,”noted a banker who asked to remain anonymous. “VCs can’t sell not onlybecause they’re in a lock-up period and there’s no liquidity, but also becausethey haven’t made their target returns yet.”

Not only are life sciences VCs not seeing a step-up at most IPOs, they usuallyaren’t during later venture rounds either.

Close-Up: Step-Ups OnPrivate Rounds

Later venture rounds for lifesciences companies haveprovided little valuationincrease, while earlier roundshave offered much moresignificant step-ups.

See sidebar at end of article

Insider support from venture capital investors of the IPO, now typically in the20%-40% range for life sciences IPOs, is not only often necessary to get thefinancing done – but VCs also are hoping for greater gains down the road ("In2012, Biotech IPOs Continue Their Inside Story" — START-UP,February 2012).

“As the round-to-round step-ups in private financings have decreased over time,venture funds increased their participation in public financings to maintain orgain ownership when subsequent milestones will drive a reasonable portion oftheir returns,” James Healy of Sofinnova Ventures said.

Healy said an undisclosed life sciences Sofinnova portfolio company plans tofile for an IPO shortly. The firm was a VC in two 2012 IPO companies: infectiousdisease company Durata Therapeutics Inc. and orphan disease and hepatologyplay Hyperion Therapeutics Inc. Sofinnova also came into the Tesaro IPO as anew investor.

Pricing an IPO too high can have a long-term negative effect, Healy suggested.Part of Sofinnova’s strategy is to plan to hold IPO shares at least until acompany can reach a major inflection point on the public markets.

"It requires balance and perspective as a private investor in order to both retainownership and maximize overall returns during an IPO. As a result, one mustshare the upside with new public investors. One needs to maintain a high-quality book so a stock trades well after pricing. If the price is too high it mayhave a negative impact on demand and trading. In the long term, higher initialstock prices are not always better."























Step-ups are simply no longer automatically a part of the equation, assophisticated public investors build their valuation models from the bottom up.James Boylan of Leerink noted that as late as 2007 “one of the valuationmetrics was step-up to the last private round, as long as it had priced more thanthree months earlier. But now the buyside is much less focused on anyvaluation implicit in the prior financing. We’re living in a world where it’s lessabout step-ups and more about fundamental analysis and valuation.”

How IPOs Get A Leg Up

After-market performance for the U.S. biotech IPO class of 2012 hasn’t beenquite as poor as in prior years; 38% were underwater from their IPO offer priceat Aug. 31. For the 2011 IPOs, that share is 44% and for the 2010 IPOs, it’s61%.

Still, the high-fliers remain few and far between. Since 2007, there have beenonly three IPOs that had more than doubled their offer prices by Aug. 31. Onewas an IPO this year for specialty CNS play Supernus Pharmaceuticals Inc.,which was up 146% after receiving a tentative FDA approval for TrokendiXR(extended-release topiramate) to treat epilepsy. Speculation around thiscompany heated up because Trokendi XR is similar to a component in recentlyapproved weight-loss drug Qsymia (phentermine/topiramate) from Vivus Inc.

The other two were 2011 IPOs: pain play Pacira Pharmaceuticals Inc. andimmunotherapy company NewLink Genetics Corp. NewLink presented positivePhase II overall survival data for its product HyperAcute Pancreas in pancreaticcancer at the American Society of Clinical Oncology conference in June. Paciragained on a health economics analysis of opioid-related adverse drug eventsthat made the case for its Exparel (liposomal bupivacaine), which was approvedlate last year for postsurgical anesthesia, and on positive second quarterearnings.

All three of these IPOs priced well below their proposed ranges with single-digitshare prices and valuations below $150 million, giving them plenty of room torun on good news.

IPO valuations have been edging up as well, as more companies go public thatare perceived to be of higher quality. This year, three of the eight IPOs havehad valuations exceeding $300 million. All of them were clinical-stage cancerplays: Merrimack Pharmaceuticals Inc.,ChemoCentryx Inc. and Tesaro. Lastyear, only one IPO worth more than $300 million made it out – specialty pharmacompany Sagent Pharmaceuticals Inc.,which already had substantial revenues.

In the IPO queue, another clinical-stage cancer company OncoMedPharmaceuticals Inc. seems likely to have a valuation over $300 milliononce it goes public ("The Hype And Hope Of Cancer Stem Cell Therapeutics" —START-UP,May 2012).

Gauging Investor Interest

“The performance we are seeing in the sector as measured by the NasdaqBiotech Index (NBI) and Amex Biotech Index (BTK) is adding to the breadth anddiversity of IPO investors and the quantity of assets being invested in theseIPOs. That’s helping out both the viability and valuations of IPOs this year,” saidLeerink’s Chaudhary.

The NBI is up more than 55% since mid-December, while the BTK has added

































The NBI is up more than 55% since mid-December, while the BTK has addedmore than 45%. By comparison, the Dow Jones Index has gained only about20% and the S&P 500 Index has increased by around 15%.

Chaudhary also noted that the 2012 IPO for Verastem Inc. was the first IPO fora preclinical company since it’s founder Chris Westphal’s earlier company SirtrisPharmaceuticals Inc. in 2007("Verastem Joins The Public Markets With AStrong IPO" — "The Pink Sheet" DAILY,Jan. 27, 2012).

“The window is open and continues to get better as higher quality companiescome to market,” he added.

He said the number of public biotech investors willing to invest in a biotech IPOhas grown to 50 or 60, from only about 30 as recently as early 2011.

He noted that the current group of investors still includes the core of Boston andNew York-based investors from a few years ago, but it’s also added in investorsfrom other geographies that had been dormant since 2007. The number of VCsthat are willing to put a lot of money into IPO companies, like Aisling Capital andSofinnova Ventures, also has grown. “They are adapting their model andlooking to deploy assets in a purely public manner. That gives us a better abilityto add price tension into the book,” he concluded.

On the IPO side, Chaudhary expects about five to seven biotech IPOs will pricein the remainder of 2012, which he sees as a pretty healthy clip. He noted it’sdifficult to quantify possible IPOs now that issuers have started takingadvantage of confidential S-1 filings for an IPO with the Securities andExchange Commission after the Jumpstart Our Business Startups (JOBS) Actwas signed into law in April.

A confidential S-1 is useful for a company that’s in the middle of a strategicdialogue that might be weakened by knowledge of an IPO or that can be morepatient and can then wait for optimal market conditions without an offering beingperceived as a stale IPO, he said.

Chaudhary said none of the IPOs Leerink has completed this year wereoriginally off confidential S-1 filings.

Leerink has led most of the health care IPOs during the three years since theteam moved to the health care boutique bank from bulge bracket bank MerrillLynch, Leerink’s Boylan noted. He said Leerink has been the lead underwriteron a dozen therapeutics IPOs during that time, five of which were this year.


or call +1 (908) 547-2159.


Copyright (c) 2012 Elsevier Inc. All rights reserved. Elsevier Business Intelligence, www.ElsevierBI.com. No part of this articlemay be reproduced in any form or incorporated into any information retrieval system without the written permission of the copyright owner.

Online/print subscriptions, reprints, and web posting and distribution licenses are available.Contact us at (800) 332-2181, +1 (908) 547-2159, or [email protected].

more than 45%. By comparison, the Dow Jones Index has gained only about20% and the S&P 500 Index has increased by around 15%.

Chaudhary also noted that the 2012 IPO for Verastem Inc. was the first IPO fora preclinical company since it’s founder Chris Westphal’s earlier company SirtrisPharmaceuticals Inc. in 2007("Verastem Joins The Public Markets With AStrong IPO" — "The Pink Sheet" DAILY,Jan. 27, 2012).

“The window is open and continues to get better as higher quality companiescome to market,” he added.

He said the number of public biotech investors willing to invest in a biotech IPOhas grown to 50 or 60, from only about 30 as recently as early 2011.

He noted that the current group of investors still includes the core of Boston andNew York-based investors from a few years ago, but it’s also added in investorsfrom other geographies that had been dormant since 2007. The number of VCsthat are willing to put a lot of money into IPO companies, like Aisling Capital andSofinnova Ventures, also has grown. “They are adapting their model andlooking to deploy assets in a purely public manner. That gives us a better abilityto add price tension into the book,” he concluded.

On the IPO side, Chaudhary expects about five to seven biotech IPOs will pricein the remainder of 2012, which he sees as a pretty healthy clip. He noted it’sdifficult to quantify possible IPOs now that issuers have started takingadvantage of confidential S-1 filings for an IPO with the Securities andExchange Commission after the Jumpstart Our Business Startups (JOBS) Actwas signed into law in April.

A confidential S-1 is useful for a company that’s in the middle of a strategicdialogue that might be weakened by knowledge of an IPO or that can be morepatient and can then wait for optimal market conditions without an offering beingperceived as a stale IPO, he said.

Chaudhary said none of the IPOs Leerink has completed this year wereoriginally off confidential S-1 filings.

Leerink has led most of the health care IPOs during the three years since theteam moved to the health care boutique bank from bulge bracket bank MerrillLynch, Leerink’s Boylan noted. He said Leerink has been the lead underwriteron a dozen therapeutics IPOs during that time, five of which were this year.


or call +1 (908) 547-2159.


Copyright (c) 2012 Elsevier Inc. All rights reserved. Elsevier Business Intelligence, www.ElsevierBI.com. No part of this articlemay be reproduced in any form or incorporated into any information retrieval system without the written permission of the copyright owner.

Online/print subscriptions, reprints, and web posting and distribution licenses are available.Contact us at (800) 332-2181, +1 (908) 547-2159, or [email protected].

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More And Better Biotech IPOs, But Step-Ups Still Lag ... · Printed by Stacy Lawrence, Elsevier Business Intelligence More And Better Biotech IPOs, But Step-Ups Still Lag ... Jan