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Insight & Intelligence™ : Jan 19, 2010

Biotech Financing Overview and Trends from Last Year’s Fourth Quarter

Biotechs are lining up to go public after a long wait.
  • Simos Simeonidis, Ph.D.

Last year started on a pretty somber note for the sector, with terms like “biotech nuclear winter” being used on a regular basis. However, after an extremely difficult first quarter, where a number of companies almost did not make it, the year ended up being decent overall.

Consolidation was once again a major theme for last year. In addition to the U.S. large pharma megamergers that transformed that space, for example, Pfizer’s $68 billion acquisition of Wyeth and Merck & Co.’s $68 billion takeover of Schering Plough, we had Roche’s $46.8 billion buyout of Genentech close this past year. There was also the usual big pharma or big biotechs picking up smaller biotechs for their products and pipelines, as in Johnson & Johnson’s $893.7 million acquisition of Cougar Biotech and Gilead’s $1.4 billion acquisition of CV Therapeutics.
 
Another trend that we witnessed throughout the year and especially in the fourth quarter was mid-cap biotechs taking advantage of good data, promising pipelines, and the strong market sentiment to raise $300–$500 million at a time in secondary equity and debt offerings; Onyx Pharmaceuticals, Human Genome Sciences, Vertex Pharmaceuticals, and Dendreon were all able to secure significant amounts of capital and opportunistically strengthen their balance sheets.

Finally, we saw the biotech IPO window open up again, with Cumberland and Talecris being the first two to take place. More IPOs are expected to materialize in the first half of 2010. Overall, it was a turbulent year yet interesting to say the least. 2009 ended with the industry being in much better shape than at the end of 2008. We see the positive momentum of the second half of 2009 carrying over to 2010.

Secondary Offerings

Overall, there was $2.3 billion raised through 24 secondary offerings in the fourth quarter, for an average of almost $100 million per raise. However, three companies’ financings accounted for 60% of the total. Dendreon, Vertex, and Human Genome Sciences together raised $1.4 billion.

All three offerings happened within a matter of days in December. Vertex secured $500 million on December 2, 2009, to support its R&D activities including the development of Telaprevir, its protease inhibitor for HCV. December 2 was a busy day for investors as they decided to put another $478 million into Human Genome Sciences’ development and commercialization efforts for lupus drug Benlysta and HCV therapy Zalbin. Investors had been very bullish on Human Genome Sciences prospects, especially since the company announced promising Benlysta data in lupus, a disease with a very significant unmet medical need. A week after the Vertex and Human Genome Sciences offerings investors rewarded Dendreon for progress with its prostate cancer vaccine candidate, Provenge, and added $427 million to the company’s balance sheet.

The common theme among the three offerings, which provides insight into what investors are willing to pay significant amounts of capital for, is that all three companies are developing drug candidates that have a considerable amount of risk removed, since they have shown strong evidence of efficacy and safety in Phase III trials. Each are within a few months to a year from receiving an FDA decision.

IPO Activity

The IPO window started to crack open in 2009 after a long wait. The majority of the 10 IPOs that took place occurred in the last quarter. Cumberland Pharmaceuticals led the dance with its $85 million IPO in August, followed by Talecris’ $1 billion IPO on the last day of the third quarter. The Talecris IPO was significant not only because of its size but also because the company was able to raise another $600 million in debt financing just two weeks later. Finally, the stock’s performance has been very strong, up 25% since its $19 open on September 30.

Not all new biotech IPOs can claim Talecris’ enviable performance, however. Omeros Biotherapeutics, which concentrates on inflammatory and CNS diseases, was able to raise $68 million through its October offering, but the stock has been down 25% since then. Finally, on the European side, gastrointestinal-focused Movetis raised $146 million in its IPO during December. It was the most significant European biotech IPO of the year.

What’s in Store for 2010

Biotechs are lining up to go public after a long wait. We expect the IPO activity that took off in the third and fourth quarters of last year to continue and possibly be even stronger in 2010. The activity will be fueled by the fact that the IPO window has been closed for a while, and there are at least 13 companies that have already filed for their IPOs. Among them, one of the highest profile firms is Ironwood Pharmaceuticals, which is developing linaclotide, a Phase III candidate for the treatment of irritable bowel syndrome with constipation and chronic constipation. The company filed its S-1 registration in November 2009 and is hoping to raise about $170 million in its IPO.

Another notable company hoping to become public in 2010 is Aveo Pharmaceuticals. The company is hoping to raise up to $86 million during its IPO to further develop lead candidate, Tivozanib, a highly potent and selective oral inhibitor of VEGF receptors 1, 2, and 3, currently being tested in renal carcinoma patients in a Phase III trial.

The third noteworthy potential IPO for this year is regenerative medicine firm Tengion. The company filed for a $40 million IPO in late-December and is attempting to develop neo-organs and neo-tissues, derived from a patient's own cells. Tengion has completed two Phase II trials in the U.S. with its Neo-Bladder Augment in adults with neurogenic bladder due to spinal cord injury and in children with neurogenic bladder due to spina bifida.

Finally, we believe that the strong financing activity in terms of secondary offerings that we witnessed in the fourth quarter of 2009 will continue this year. Out of the approximately $6 billion raised in 2009, $2.3 billion, or approximately 38%, was raised during last year’s fourth quarter.

The financing drought that resulted due to the overall economic meltdown of the previous 18 months has left a multitude of companies in dire need of further financing. The companies that were able to survive 2009 will be able to benefit from stronger market conditions and improved biotech investor sentiment. They are expected to raise capital at significantly better valuations than what was available in late 2008 and early to mid-2009.

Overall, the year will be a good one for biotech, as the problems of the recent past seem to be behind us, at least for the near-term. We expect that investors will continue to be interested in being part of companies with late-stage assets as well as those with earlier-stage compounds that promise to provide answers to large markets and unmet medical needs.