Biotech Listings Help Prop Up Anemic U.S. IPO Market

(Bloomberg) -- Biotechnology offerings are one of the few bright spots in an otherwise dreary market for initial public offerings and could hold steady for the rest of the year, even as the pandemic keeps listings in other sectors shut.

Biotech companies usually go public at the clinical trial stage without products or revenue. They tend to find long-term investors who are betting on whether these companies will ever have a successful product. Their businesses can survive volatility or a downturn in the economy.

“Biotech companies should be less impacted by the demand-shock resulting from Covid-19,” said Morgan Stanley’s head of biotech equity capital markets Kalli Dircks said. “They are in early stage development, they aren’t selling their products yet, and thus their business is less impacted versus other segments of the market.”

Oric Pharmaceuticals Inc., which specializes in cancer treatment, is the latest to test the market. It set terms Monday for an IPO that could raise as much as $80 million and is planning to price its shares on Thursday, according to people with knowledge of the matter. An Oric representative couldn’t be reached for comment.

Only three companies have gone public in the U.S. since Covid-19 was declared a pandemic, and two of them were in the biotechnology space. Both companies, Zentalis Pharmaceuticals Inc. and Keros Therapeutics Inc., have traded in double digits above their debut prices while equity indexes have seen some of the biggest daily drops during the period. Zentalis is up 34% while Keros is up 75%.

Though their management teams met with some investors before the pandemic, the IPO road shows were all done virtually.

In Australia, Atomo Diagnostics Ltd., a small biotech company that makes Covid-19 tests, soared 183% in its first three days of trading in Sydney this month.

Jordan Saxe, Nasdaq’s head of health-care listings, said these successful virtual roadshows will encourage more companies to try them.

Saxe estimates that 30 to 35 biotech companies will go public this year, raising about $3.5 billion, assuming social distancing aimed at curtailing the spread of the pandemic ends by June.

To be sure, that projection is still below last year’s numbers, when 46 biotech companies went public in the U.S. raising a combined $5.5 billion, Bloomberg’s data shows. The shutdown has also impacted the biotech industry as laboratories shuttered could delay drug approval processes.

Some of these biotech companies are going ahead with IPOs because they have no other choice. These businesses usually need to raise funds to keep their clinical trials going and seek IPOs out of necessity for capital rather than as a liquidity event for existing shareholders.

COMFORTABLE WITH VOLATILITY

Another reason biotech companies are comfortable bracing the extreme volatility in the near term is that they’re more dependent on U.S. Food and Drug Administration approval, which usually come 12 to 18 months after the IPO, said Rahul Chaudhary, head of equity capital markets for SVB Leerink, a boutique investment bank focused on health-care.

“Investors in biotech, while they want the stock to trade well on the first day, that’s not their source of out-performance,” Chaudhary said.

Existing investors of biotech companies tend to “double tap” in the IPO, which is know as crossover capital. This helps create built-in demand in the IPO.

There’s more to come. Lyra Therapeutics Inc., which develops treatments for ear, nose and throat diseases, and NLS Pharmaceuticals Ltd., a biopharmaceutical company that focuses on neurobehavioral and neurocognitive disorders have filed with the Securities and Exchange Commissions to go public.

So far this year, eight biotech companies have raised a combined $1.3 billion. Close to half of all IPO fundraising volume in the U.S. this year, or $3.53 billion, was from health-care companies, according to data compiled by Bloomberg.

Health-care stocks, especially those with drug development focuses, have outperformed the broader market. The Nasdaq Biotechnology Index is trading at the highest level since 2015 and out-pacing the S&P 500.

“Covid-19, is likely to get solved with capital and science,” said Bank of America Corp.’s Gregg Nabhan, global vice chairman of global equity capital markets. “Health-care companies are somewhat insulated from long-term economic volatility.”

©2020 Bloomberg L.P.