Fledgling biotechnology companies have adopted the philosophy "strike while the iron is hot" during the Covid-19 crisis. After all, in 2020, investors' appetites for biotechs entering the public markets has been insatiable. So far this year, at least 37 venture-backed North American life sciences companies have carried out IPOs, raising a total of $6.7 billion, according to an article in Crunchbase. In all of 2019, 51 public offerings raised $5 billion.
With more biotech IPOs waiting in the wings, 2020 looks like it will rack up the highest industry totals in five years. Companies are raising plenty of money and scoring comparatively high market valuations too.
In an article in Nature, Geoffrey Porges, senior biopharmaceuticals analyst at SVB Leerink, said many are surprised that the capital markets have been so receptive to new biotechs. As to the reason, he noted the non-discretionary aspect of health care and the pain other industries—restaurants, airlines and retail—are having because of the pandemic. So money is flowing into pharmaceutical companies that under different circumstances would likely have gone elsewhere.
Venture funding for life sciences companies is also up this year, Crunchbase reported in late July. In the first six months of 2020, industry companies secured 44 so-called supergiant funding rounds of $100 million or more. Investment totals are way up, too. In the first half of 2020, investors globally put $16.55 billion to work across over 450 deals in biotech and life science sectors tracked by Crunchbase at Series A and beyond.
But all that glitters is not gold. Buyers might want to beware, because at some point all good things come to an end. One stumbling block for industry companies is the difficulty of actually bringing a drug to market, and the efficiency of the system hasn't changed just because of a short-term influx of funding. Back in 2014, a study in Nature Biotech showed that only 32% of drugs have a probability of making it to phase 3 trials, and only one in 10 drugs overall actually makes it to market. Things haven't improved since then.
BIO recently put out a study reporting that the average overall likelihood of approval by the Food and Drug Administration from Phase I was 9.6% – a one in 10 chance. The rate is even lower for major disease areas like oncology. Phase 2 clinical programs continue to experience low success rates as well, with only 30.7% of candidates advancing to phase 3, a slightly worse rate than it was a few years ago.
Equally sobering is the cost of failure. Estimates vary, but figures range anywhere from $800 million to $1.4 billion. Companies that have to quit a drug trial often face a plummeting stock price and may even be forced to fold the tent altogether.
So what could cause the party to end? Joshua Schimmer, senior managing director of biotech at Evercore, thinks we may still see a great deal of volatility but he doesn't see anything that could cause the biotech IPO market to go south.
He does paint a somewhat different picture if government support of the economy dries up. That could cause the market to collapse, with all but the best-capitalized companies taking a hit. Slowing markets will disproportionately affect smaller and pre-revenue companies, including those whose clinical trials have ground to a halt during the pandemic lockdown, he added.
There are already signs of trouble. Companies generating sales from a limited offering of hospital drugs have been forced to cut costs or sell out at cut-rate prices.
In May 2020, Portola Pharmaceuticals, which sells Andexxa for excessive bleeding, was picked up at a bargain price by Alexion Pharmaceuticals (ALXN) for $1.4 billion, or $18 per share — well below Portola's pre-Covid-19 share price of close to $30. Sage Therapeutics Inc. (SAGE), a top raiser of follow-up financings, had to reduce its workforce and cut costs in response to falling sales of its hospital-administered postpartum depression treatment.
Disclosure: The author has no position in any of the companies mentioned in this article.
Read more here:
- Anti-Depressant OK Could Boost Intra-Cellular Drug into Blockbuster Territory
- Renaissance Capital Expects Grail IPO to Raise $500 Million
- OraSure Hopes to Have 2 Covid-19 Tests Approved by Year-End
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
