For certain parts of the population, “summer” is a verb, and in the U.S., one does it until Labor Day. One more week, then, before sunburned financial types return to their desks and biotech IPO hopefuls hit the road to plead their cases.
Whether August’s market volatility continues its stomach-churning ways or recedes in September’s rear-view mirror, it will be showtime for plenty of biotechs. Xconomy has found two dozen biotechs that are likely IPO hopefuls, if not right after Labor Day, then in the months ahead.
Some have signaled their intent by filing their S-1 paperwork, like CytomX Therapeutics did late last week. Others haven’t, or at least the paperwork hasn’t become public, as U.S. rules allow companies to prep for an IPO in stealth, and some do for months. (They only need to declare their intent publicly 21 days before a final roadshow.)
Whether they’ve officially declared their IPO intentions or not, all companies on our list have raised a round of funding since the start of 2014 that looked, smelled, and felt like a mezzanine round—that is, the final splash of private cash before trying for an IPO. The most recent came today, with a $70 million Series B round for Intellia Therapeutics. (See table “Public Horizon?” at the end of this post for more details on the 24 companies I found; if you think I’ve missed one, let me know.)
A few companies on the list might insist they have no desire to go public. Moderna Therapeutics, whose $450 million round in January was likely the largest private biotech funding ever, was adamant back then that an IPO was not “just around the corner.”
But all investors need a return. And all these companies we found have a certain type of investor in common: crossovers, typically mutual or hedge funds that mainly hold public stock but like to take stakes in pre-IPO private companies to gain a foothold. They range from financial giants like Fidelity and T. Rowe Price to eclectic hedge funds like Viking Global Investors to life science specialists like RA Capital Management and newcomer Cormorant Asset Management.
Circling The Runway:
Selected Crossovers With Multiple
IPO Prospects In Their Portfolios
Fidelity — 9
Jennison Associates — 8
RA Capital Management — 8
Rock Springs Capital — 7
Casdin Capital — 6
Cormorant Asset Management — 6
Foresite Capital — 6
Note: Totals represent publicly
disclosed investments in late-stage
biotechs since January 2014.
In biotech, crossovers have helped buoy the boom. They’ve also accelerated it. The IPO window opened wide in 2013, and it took about six months on average for a company to get from a crossover round to an IPO. In 2014, that final step was on average a month shorter—148 days—and so far this year, it’s yet another month shorter, or 121 days. These figures come from investment bank Robert W. Baird, which is active in biotech financing.
“The shorter the time frame, the less risk there is,” says Baird managing director David Schechner.
One example of the frenzied activity: Since 2012, top crossover RA Capital Management of Boston has made 50 investments, with $300 million deployed. Thirty of those investments using nearly $200 million have come in the past 12 months, says managing director Peter Kolchinsky.
Schechner says the warp speed can’t get any faster—“it’s pretty close to as good as it’s going to get”—but he also says it can be sustained, even with the current market volatility.
What could throw biotech off the rails? Three things, says Schechner: Most important would be a change of heart at the FDA and a slowdown of the dizzying rate at which the agency has been approving new medicines. (Matt Herper of Forbes recently did an excellent analysis of that approval rate and whether it’s sustainable.)
Second is a serious cooling off of M&A activity. And third is a rash of deaths in clinical trials that are linked to the drugs being tested.
What if all those factors remain stable for biotech companies, but external factors—a China meltdown, for example—squeeze the IPO flow to a trickle? What happens to those two dozen biotechs we found likely eyeing an IPO, and no doubt a lot more flying under the radar, when they have to cool their heels?
To answer that, let’s dive into the numbers. For the 24 companies we found,
