Over the last year, the market for US initial public offerings (IPOs) set a 14-year record, making it the most active year of issuances since the dot-com boom. The 273 IPOs successfully offered in 2014 represented a 23 percent increase over the prior year, which was also booming with IPOs. Meanwhile, IPO proceeds, which totaled $85 billion, grew 55 percent over 2013, inflated by a record $22 billion-dollar offering by China’s largest e-commerce company, Alibaba Group Holding Ltd. Average IPO performance was 16.1 percent—close to the 10-year average but below the 40.8 percent of 2013.
However, unlike during the dot-com boom, when tech companies with not much more than a business plan and Web site raised tens of millions, life sciences companies were the primary driver for the 2014 boom. One hundred life sciences companies went public in the United States last year—nearly twice as many as in 2013 and four times greater than the 10-year average. These IPOs yielded investors a healthy 31.7 percent return on average, second only to the communications sector, whose average returns were 33.6 percent. By comparison, tech IPOs returned 13.5 percent. Not surprisingly, the life sciences sector made up the largest share of IPO backlog headed into the new year.
The Stock Market, JOBS, and FDA Approvals
There are several reasons for the strong showing among the life sciences. First, public life sciences and biotech companies, particularly those offering innovative therapies, significantly outperformed the stock market as a whole. The NASDAQ Biotechnology Index was up close to 30 percent at the end of December, about twice as high as the NASDAQ Composite Index at 14 percent to 15 percent. As a result, the public landscape is looking particularly strong and inviting to smaller life sciences companies.
Although its effect is often debated, another factor has been the Jumpstart Our Business Startups (JOBS) Act, which was signed into law in April 2012 and has significantly eased the IPO process. Since the law went into effect, start-ups have benefited from both looser regulations and the confidential filings that come with being classified as an emerging growth company. These companies now have up to five years to comply with some public company requirements, and they need to make their IPO filings public for only 21 days prior to their presentations.
These changes have enabled life sciences companies to get a better read on the market before going public and to set their initial price more appropriately, but they also mean that a number of companies may be testing the market and calling off an IPO before they need to disclose their intentions. Overall, emerging growth companies accounted for 85 percent of the IPOs in the past two years.
Finally, the US Food and Drug Administration’s (FDA) approval process for new drugs has also had an impact. In 2014 the FDA approved 41 new molecular entity applications, up from 27 in 2013. The FDA review time for new molecular entities has dramatically decreased over the last two decades to an average of 10 months compared to 19 months, and about half of new drug applications are qualifying for fast track approval, priority review, or accelerated approval. While perhaps not completely causal, this increase in new molecular entity applications is strongly correlated with the life sciences sector's market performance.
Best And Worst Performers
Though life sciences companies dominated the overall US IPO market in terms of both number of issuances and overall returns, individual company results showed great variation. Life sciences companies represented eight of the 10 top-performing IPOs. At the same time, five out of 10 of the worst-performing companies were smaller life science companies in competitive markets.
Best-Performing US IPOs
Worst-Performing US IPOs
Timing the IPO Window
Despite the IPO boom, life sciences companies faced increasing valuation pressure as the year progressed, making it harder for some to achieve their targets. Overall, 2014 IPOs priced on average at 7.2 percent below their midpoint, while 40 percent of companies came to market below their proposed range, the second highest percentage in the past decade. Biotechnology in particular felt the heat: Of 69 biotech offerings, 46 percent priced below range, 8 points higher than 2013 but still below historical averages. Between 2007 and 2012, no biotech IPO priced above its range; however, there were eight in 2014, up from five in 2013.
The volatile environment created some challenges for life sciences companies seeking to go public, and some fared better than others. For example, Juno Therapeutics, which is developing cancer treatments, priced 45 percent above its original midpoint (the year's second highest premium behind Castlight Health) and raised $265 million at a valuation of over $2 billion. This makes Juno Therapeutics the largest biotech IPO in at least 15 years, both in terms of deal size and market cap. In contrast, NeuroDerm Ltd., which is working on a new drug formulation for Parkinson’s disease, priced almost 25 percent below its proposed price range.
A number companies, such as Vyrix Pharmaceuticals (owned by Ampio Pharmaceuticals Inc.), were forced to withdraw their IPO. Others, such as Xenon Pharmaceuticals Inc., postponed their offering, then reentered and sold shares at a discount, and many other life science companies are struggling to maintain value. Dermira Inc., for example, raised $125 million in October while priced at the high end of its range, but it now trades about 1.5 percent above the offer price.
2015: Another Record Year?
Despite these market pressures, the overall strong returns for life sciences companies coupled with an IPO pipeline of more than 100 companies seeking to raise $19 billion (including highfliers such as Inovalon Inc., a cloud-based health care data and analytics platform that hopes to raise $500 million in a coming IPO) suggest that 2015 could be another banner year for life sciences companies. Industry watchers also believe that life science companies will dominate merger and acquisition activity, which is expected to heat up over the next year as companies seek additional capital to grow their businesses.
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