With the New Year upon us, I thought it would be interesting to dive into the past and look at the class of 2010 Biotech IPOs. With stocks well off their 2009 lows, and renewed interest in the biotech space, it appeared that finally the IPO “window” was opening for Biotechs (albeit with the dirty little secret of significant insider participation), and many firms were able to go public. Widely followed life science venture capitalist Bruce Booth wrote an article back in May, 2011 addressing the performance of the 2010 biotech IPOs. At the time, the class was performing well. Fast forward 7 months, and as shown from the chart below, a basket of these stocks has not done well as of Jan 3rd, 2011. Now, all of these companies have been public for at least a year, and many of these companies have gone through major “catalyst” events and inflection points and have even raised additional capital through stock sales. While some of these companies may have suffered due to macroeconomic uncertainties, (or for sector specific reasons such as the “Dendreon Flu”), the painful fact remains a portfolio of these companies would not have done well.
Outperformers and Middle of the Road (Black) – Trius, Aveo, Aegerion, Anacor, and Ventrus have all rewarded their shareholders with respectable gains over their public lives. Aveo and Trius recently announced positive phase 3 trial results, and Anacor has recently begun dosing in two phase 3 trials. Despite what appears to be a great drug (met all of its primary and secondary endpoints in trials with high statistical significance), IRWD shares are right at their IPO price. Ventrus investors await phase 3 results, and Aegerion hopes to submit an NDA soon.
Underperformers (Red) - Tengion’s regenerative medicine has simply not panned out yet (anyone remember 60 minutes?) and investors have clearly paid as the stock has slowly bled into penny stock territory. Cormedix has suffered a similar fate (refocusing and rebranding itself), and now appears relegated to penny stock territory as well with a tiny market capitalization. Alimera was hanging tough for over a year until the company received a CRL for its treatment, Iluvien, (for the 2nd time) and suffered a 73% collapse in its share price. NuPathe, a specialty pharma, also received a CRL for its sumatriptan delivery patch, designed for patients with debilitating nausea that precludes them from taking conventional oral sumatriptans. Similar to NuPathe, Zogenix is a specialty pharma and currently is ramping up sales of its injectable sumatriptan and preparing an acetaminophen free hydrocodone product. However its stock has suffered significantly. While not traditional biotechs (developing a drug through clinical trials and ultimately to market), diagnostic-type biotech firms Pacific Biosciences and Complete Genomics have not lived up to expectations.
Even though it’s tempting to look into the data and draw conclusions about who succeeds and who doesn’t, I’m not convinced any hard and fast conclusions can be derived from the data. If anything, it would appear everything needs to go right just to earn a modest risk-adjusted return (AVEO, TSRX, AEGR, ANAC, VTUS). If something goes wrong, gets delayed, or simply doesn’t work, the results are catastrophic.
So then, why does a biotech company go public? It is no secret most life science oriented companies are formed with the intent of being acquired, and while only a minority of these companies are ultimately acquired, these high IRR investments (hopefully) offset the failures. Possibly the best assets have already been purchased by Big Pharma. However, as demonstrated by HCV-targeting companies Pharmasset and Anadys, excellent returns can be obtained in the public markets and valuations are still compelling for Big Pharma looking to bolster their pipelines. Perhaps these companies are entering the public markets too early, with revenues years away at a minimum. With some of these earlier pre-revenue firms, any positive news is followed by a secondary and investors eventually run out of patience and throw in the towel. Perhaps there is a shortage of private capital out there, and these companies need a new source of capital. It may be all of these, a mixture, or in fact none of these reasons. Life Science VC Bruce Booth adds his opinion on the matter here.
Summary and Conclusions – Clearly investors have not profited from a buy and hold strategy with the 2010 biotech IPOs, even now at the beginning of 2012. Ultimately, in order for people to get excited about the next hot biotech IPO, investors will need to make money or see others make money in biotech IPOs, a point which I think is often overlooked. Typically, the comments I’ve heard about biotech IPOs are, “why buy now when I can buy it cheaper later?” For the class of 2010 this has been true, but hopefully this will not be the case going forward.