The IPO markets have been robust this year and perhaps no more so than in healthcare where more than 100 companies have gone public thus far, generating nearly $9 billion in proceeds, representing more than 35% of total new issue activity. Overall the IPO market is enjoying its best year in over a decade, raising over $80 billion, more than one third greater than the prior year, and the most since the record year of 2000. An improving economy, low interest rates and a bull market nearing its sixth year of recovery have all contributed to the friendly backdrop necessary for this kind of investment activity. While Federal Reserve Chair, Janet Yellen, earlier this year cautioned that, “some sectors do appear substantially stretched in valuation, particularly the smaller firms in social media and biotech,” new issue investors have taken little pause. Capital has come unleashed and only time will tell whether it is misplaced irrational exuberance or thoughtful capital formation.
At this time of year, in addition to their daily calculation as to what their bonuses might soon be, investment bankers also take time to review the IPO results to determine what has “worked on the calendar” and what trends can be gleaned. The capital markets desk will summarize which companies were the most successful in raising money, which ones enjoyed increases in deal size, which had the best aftermarket returns, and what were the common attributes of success. It’s an old adage on Wall Street that when the ducks are quacking, find out what they are eating and feed them more. Associates will then move from the slow industry group to the group in demand, prepare the obligatory pitch books, arrange the flights, and begin the march to new capital formation.
So what have these bankers learned, what is “hot” this year in healthcare, what new products and new innovations are being incubated and launched? Not surprisingly, as in most bullish healthcare calendars, biotech has played a prominent role. As risk capital surfaces, biotech typically rushes to capitalize. In 2014 year to date, there have been over 100 total offerings in biotech (IPO and follow-on), representing 35% of the healthcare new issue total. Pharmaceuticals were nearly equal in activity, followed by devices and services for the remaining third.
Atara Biotherapeutics (ATRA) came quietly to the IPO market this year raising $55 million, pricing below its filing range, and trading down slightly on its first day. Since that launch, however, the reception has been remarkable, up 145% and ranking among the top five performers of the year. Atara is an early clinical stage company targeting muscle loss in end stage renal disease, and is based in Brisbane, California with just 15 employees. Goldman Sachs was the lead manager and to some, that pedigree may have allowed for investor confidence, further supported by the notable financial backing of Kleiner Perkins (13% owner), Domain Associates (10%), Baupost (12%), Amgen (7%) and Celgene (6%).
Second Sight Medical (SSM) is another of the year’s top “winners” but announced its arrival more dramatically with a one day return of 162%, ranking among the six IPOs in 2014 to have doubled on the first day. The strong aftermarket reception has been sustained, trading in a range of 50-100% above launch. Second Sight targets retinal implants to restore partial vision to blind individuals, implanting a camera type device that provides electrical stimulation of the retina. This is the fifth company to target this sector this year, all having enjoyed strong receptions to their offerings (AAVL +94%, AGTC +66%, PFNX +35%, OCVL +27%). In this case, confidence may have been buttressed by the presence of the co-founder, Alfred Mann, who is also the CEO of Mankind (MKND) and enjoys a well recognized success in the diabetes space.
Perhaps the most notable healthcare IPO, however, came from the devices space where ReWalk Robotics (RWLK) jumped 210% in its first day debut and remains over 120% above the offer mark. ReWalk designs and develops exoskeletons to improve mobility of wheelchair bound individuals who have suffered spinal cord injuries, using its patented tilt sensor technology to drive motorized legs. Israeli based, the company was founded in 2001 by Dr. Amit Goffer, who is himself a quadriplegic and also previously a founder and CEO of Odin Medical Technologies which was subsequently sold to Medtronic. ReWalk’s product is the first exoskeleton to be cleared by the FDA for personal use. The company is in the development stage, with revenues of $1.7 million for the previous twelve months.
So with this kind of reception one would expect more filings to come, and that has certainly been the case. In fact this September saw a record 37 filings. Among the largest now on the calendar is Juno Therapeutics which is seeking to raise $150mm and, if successful, would be the second largest biotechnology offering of the year. Juno develops immunotherapy for hematologic and solid tumor cancer cells, seeking to genetically engineer patient’s own cells to fight the tumor. This follows other immunotherapy based cancer companies launched this year, Kite Pharmaceuticals (KITE +146%), Immune Design (IMDZ +165%) and Affirmed Therapeutics (AFMD +10%). The well renowned Fred Hutchinson Research Center has a collaborative research agreement in place with Juno and maintains a significant ownership position as a result. The lead managers for the underwriting are Morgan Stanley, JP Morgan and Goldman Sachs.
Reviews of IPO activity must always conclude with the obligatory but often ignored caveat that prior trends are not necessarily reliable predictors of the future. In fact, several of the best returns from early 2014 proved not to be sustainable. Care.com, Mediwound and Akebia Therapeutics were each launched with nearly 50%+ one day returns and each have since settled down fairly meaningfully - 20 to 50% lower. The challenges in stock selection and valuation in biotech (and devices) are particularly daunting. Even the best of the PHD’s and MD’s on staff at many hedge funds and large mutual funds often find technology appraisal to be extremely difficult, even when supplemented by the many external sources of expertise from the medical community that they have on retainer. Once the technology is validated, the valuation becomes another dimension of challenge altogether. How big the market, how fast the regulatory approval, what will be the correct labeling, the correct dosing, and when might competition surface, all are demanding examinations that have varying probabilities of outcome. Lack of earnings begs the question further as to whether the capital is sufficient to the fund the losses, whether the company can survive “the burn rate” and reach commercialization. Yet the possibility for a major therapeutic break-through, one capable of a unique and profound effect on millions of lives is hard to resist, especially when the financial models show tremendous pricing power and negligible production costs. It is that potential which drives the animal spirits and makes the IPO space a fascinating place to follow.
Scott Coburn is currently Managing Partner of Maywood Partners. Prior to Maywood Partners, Scott was Head of Equity Origination at Gleacher & Company and Head of Equities at First Albany Capital as well as holding the same role at Citigroup. Prior to Citigroup, Coburn was Head of Equity Capital Markets at PaineWebber, where he was responsible for the solicitation and execution of the firm's equity underwritings, amounting to $10 billion in total business, including approximately $1 billion in lead managed transactions.
Coburn has served as Chairman of the Securities Industry Association Syndicate Committee and was previously a board member of the Investment Association. He holds an MBA from Columbia University and an AB from Brown University.