Plenty Of Biotech IPOs, But Few Winners

BY STEVE WATKINS

FOR INVESTOR'S BUSINESS DAILY

Posted 10/12/2007

The biotech sector has been one of the most active in the initial public offering market, but you wouldn't know it by looking at the returns.

Recent debuts of pharmaceuticals, therapeutics and other firms that make up biotech are falling well short of the rest of the IPO market.

In the first half of the year, the average biotech/pharmaceutical IPO stock fell 4%, says Phil Stiller, research analyst at Renaissance Capital, a Greenwich, Conn.-based IPO researcher.

That decline happened despite an overall 13% rise in Renaissance's IPO index. Biotech IPOs didn't fare much better in the third quarter.

"They have severely underperformed," Stiller said.

Even so, biotech and biomed companies are going public at a rapid rate. Nineteen had gone public this year through Oct. 3, Stiller says. That's on pace to top last year's 22 and about on target to match the 26 deals of 2004, the most active in biotech of the past half decade.

All Or Nothing

Biotech IPOs made up 12% of the IPO market this year, matching the biggest share of the past five years, Stiller says. But once public, the stocks have largely disappointed investors.

Part of the reason is tied to the types of companies that make up the sector. Many are drug firms that are still in the clinical trial stage. They haven't brought drugs to market yet, so they're banking a lot of their fortunes on moving a drug through the Food and Drug Administration approval process.

To even get to the point of going public, most biotech stocks have made it through stage one and two trials with the FDA. Most are working on the more rigorous, and costly, stage-three trials.

It's an all-or-nothing kind of game in the biotech IPO world. When results are positive, biotech stocks usually get a huge boost in value.

"The stock goes up 100%, 200% or 300% when the clinical trials come in," said Francis Gaskins, president of Los Angeles-based IPO research firm IPOdesktop.com.

But when the trials hit a roadblock, the stock often tanks. If a company has just one drug in trials and it gets bad news, the stock can get slammed by 80%, says Dan D'Agostino, managing director for biotech at investment banking firm ThinkEquity Partners.

Sector Sag

Another problem for biotech IPOs is that the whole sector has struggled, D'Agostino says. It has been a tough year for firms going in front of the FDA and there have been several blowups.

The market for biotechs has been so bad that even good trial results haven't been the cure-all they used to be.

Arena Pharmaceuticals (ARNA) last month posted positive data for an obesity drug candidate. But the stock still sold off 15% in three days when analysts cautioned that the drug still must pass more safety tests.

Meanwhile, biotech IPO investors continue to up the ante. They want firms that have moved pretty far through the trial stages or that have novel technologies. They won't stand for earlier-stage stocks.

"It's a case of investor fatigue," he said. "It's a much more sophisticated audience."

D'Agostino expects fewer biotech IPO deals in the future, but they should be of higher quality than in the past.

Q3 Slowdown

While deal flow has been as high as ever this year, it actually slowed in the third quarter for biotech firms, says Daniel Yamron, head of capital markets at Leerink Swann & Co.

Still, he sounds impressed that the deals that did get done held up well — especially given how the credit crunch sent most stocks tumbling.

"Despite horrific volatility, we've seen pricing remain pretty strong," Yamron said. "In a market that was pretty challenging, it's extremely significant that the market for IPOs did not disappear and the pricing environment did not collapse."

One problem in the aftermarket, Yamron says, is that big biotech stocks led the way for most of this year. Smaller firms did worse. And most IPOs involve smaller companies.

But two big biotechs, Talecris Therapeutics and Reliant Pharmaceutical, are planning IPOs, Yamron says. So the results could improve.

Once public, the stocks can swing wildly. Take Acorda Therapeutics (ACOR). It went public in February 2006 at 6, and later fell below 3.

But when Acorda posted some successful clinical trial results in September 2006, the stock nearly quadrupled to $8.50 in one day. It currently trades near 21. The stock has risen more than 250% from its debut price — the second-best IPO performance from the start of 2006 through Oct. 3, Stiller says.

Acorda raised $30 million in its IPO, which was half of what it originally planned, Chief Executive Ron Cohen says. It raised the rest months later, after it got back successful clinical trial results. But even that price was below the original IPO target.

"It illustrates the fact that investment banks and companies are pretty poor at gauging what the market reception will be at a given time," Cohen said.

Still, biotech firms will continue to go public.

"You reach a point where it's very difficult to raise money any other way," Cohen said. "If you can go public, it's probably the most solid option for companies like us."