As biotech leaders head to the annual JP Morgan Healthcare Conference in San Francisco next week, the question on many people’s minds is whether the strong 2013 IPO market will be sustained in the new year. EY’s annual biotechnology reports — through which we have been collecting and analyzing data since the industry’s earliest days — provide useful historical context to understand past IPO cycles and the possible outlook for 2014.
Since the inception of the modern biotech industry, public equity markets have seen numerous boom-and-bust cycles — IPO “windows” that have opened and closed driven by both industry-specific and broader market factors. As shown in the accompanying chart, there were many such cycles in the 1990s, a period in which investor sentiment toward biotech waxed and waned. However, the US$3.6 billion raised through IPOs in 2013 surpasses the totals raised in any of the bullish windows of the 1990s — in fact, it is the second-highest annual total in the US industry’s history (second only to the “genomics bubble” of 2000).
Of course, the history of biotech is one in which IPO booms have typically been followed by busts. Since the early 1990s, the industry has seen five other four-quarter periods in which more than 30 IPO transactions closed. The four quarters after each of these periods saw a marked decline in public offerings, with an average of 55% fewer deals (even after excluding the 93% decline following the genomics bubble of 2000-01).
The swings of the 1990s were largely driven by retail investors and “generalist” institutional investors moving in and out of the market. While a more concentrated group of industry-savvy investors has dominated the market in recent years, generalist investors returned in 2013. The market took off in the second quarter with the return of generalist investors attracted by the overall strong sector performance that was driven by large-cap biotech companies. These investors pulled back from new offerings somewhat in the fourth quarter.
As investor demand for new biotech companies increased, so did the supply and the price. When the generalists moved to the sidelines in the fourth quarter, fewer deals priced within their desired ranges (only 1 out of 5 deals in November and December). It is too early to evaluate the true performance of the deals which closed in the third and fourth quarters because the lock-ups on existing shareholders have not yet expired, but it is interesting to note that deals closing in the third quarter (88% of which priced at or above the range) did not perform as well in the post-market as those closing in other quarters.
Outlook for 2014
Will generalist investors stay in the game in 2014? Clearly, the many companies still in the IPO queue are hoping that the fourth-quarter retreat was about locking in performance for the year and not about waning enthusiasm for the sector. Predicting the open or close of a window is a lot like predicting the top or bottom of the stock market — nearly impossible. That said, we note the following:
- The large cohort of deals in 2013 cleared much of the backlog of IPO-ready companies that had been building since the financial crisis and, as evidenced by the data regarding past windows noted above, there is a limit to the number of new companies that the market can absorb in a short period.
- The class of 2013 has performed well, which should buoy investor enthusiasm for the sector, although we could see investors moving from health care to faster-growing sectors as the economy continues to improve.
- Biotech performance should also be boosted by big pharma companies moving off the M&A sidelines (for more on this, see our Life Sciences website for our report to be released on Monday on pharma’s growth gap and the shifting balance of M&A firepower).
Taking all of this into account, the outlook for 2014 is that we are likely to see fewer deals than in 2013, but more than the 10-15 annual average in the 2009-12 period. But of course, like others who care about the financial health of emerging companies, we would welcome more.
This is the first in a series of blog posts through which we will look back at several aspects of the 2013 IPO class, including the profile and performance of companies and the IPO process itself (such factors as the time, cost and extent of SEC review).