To float or not to float?
Posted: 6 January 2016 | | No comments yet
For many years, global markets had focused their attention on traditional sectors such as natural resources rather than on life science companies, so initial public offerings (IPOs) for such companies were uncommon. The past few years have, however, seen a sea-change and life science companies – from biotech to medical devices firms – have come very much back into favour as the must-have stocks; with opportunities for significant upsides. The turnaround started in 2013; the markets began to pick up that year and 66 life science IPOs were completed globally. By 2014, there were an extraordinary 133 life sciences companies completing IPOs, raising some $11 billion.
The first quarter of 2015 seemed to show a dramatic downturn in life science stock market launches, however, with a number of analysts suggesting that this presaged the closure of the biotech IPO window. This was not to be the case, and the second quarter saw a resurgence; June 2015 was the busiest month on the market for the sector in 15 years. During this month alone there were 35 companies that went through United States IPOs, raking in some $5.9 billion. When, in early September this year, gene therapy company RegenxBio floated at a price of $22 per share, its valuation almost immediately jumped to $37 per share. Business was booming.
However, the market for biotechs is particularly vulnerable to changes in public policy. On 21 September the US democratic party presidential hopeful, Hilary Clinton, tweeted that she would release a plan to combat the high price of prescription drugs. She was apparently responding to the news that Turing had acquired an older antibiotic and increased its price by more than 5,000%. Immediately following this tweet there was a dramatic drop on the Nasdaq Biotechnology Index. It is clear that Clinton’s tweet hit a nerve since the sector had already been concerned about drug pricing, but there appeared to have been a knock-on impact on the markets, with a number of US floats, including Cytomax, Aclaris Therapeutics, Nabriva, Edge and Mirna, not reaching expected valuations. At the beginning of October, UK company Shield Therapeutics postponed its IPO on the London Stock Exchange, noting that current market conditions did not make it a conducive time to raise cash.
This all serves to indicate the inherent volatility of the public markets and the consequential vulnerability of life sciences companies with a presence there. It makes more complex the decision by such a company as to whether or not to float. And such a decision is never taken lightly. For these companies, however, that choice is further complicated by the issue of where to list. The US has dominated the recent boom in life-science IPOs with 106 of the 133 IPOs during 2014 being on US-exchanges and raising some $7 billion, but there has been activity in the UK market and also on other exchanges including, notably, Australia.
Where to float
So should UK life science companies stay in the UK or take their company overseas? According to the Financial Times, UK life sciences companies hit a seven-year high in raising finance in 2014. Big sums have been achieved; take for example, Circassia, the anti-allergy specialist that raised £200m through its IPO. Other significant 2014 floats included those of Abzena and Horizon Discovery. More recently, UK company Acacia announced plans to raise funds through a UK IPO.
Moreover, Boston healthcare company, Puretech, announced plans in May 2015 to raise $160 million on the London Stock Exchange rather than through US markets; US biotech group, Verseon, similarly announced plans to list on AIM in May 2015, and in September 2015 Finnish company, Faron Pharmaceuticals joined Puretech in announcing its plans to float in the UK.
So has the tide turned for the UK markets in the life science sector? It does stands head and shoulders above its European neighbours, however it still trails way behind the US in terms of life science presence. The three top US biotech clusters – Boston, San Francisco and San Diego – have, for example, more than five times as many drugs in development than the UK has. But does that matter? Is access to funding not rather more of an issue?
There has been speculation that one reason UK companies – such as Oxford Immunotech, Lombard and GW Pharmaceuticals – float in the US is due to the funding ‘valley of death’ in the UK at the post seed stage. This year has seen significant activity to try and fill the gap, with London Mayor Boris Johnson launching a £10 billion biotech fund for London in June and Neil Woodford’s new £700 million fund – Woodford Patient Capital Trust similarly being set up.
But will these make a difference? The UK is certainly home to some very exciting and dynamic life sciences businesses, well supported by academia. We have the science, the clinical development and infrastructure in key centres such as Cambridge, London and Oxford, with a number of other vibrant hot spots. We also have well proven, world-class management. All the ingredients are there, and whilst the long-term capital might not yet support it, there is a strong investor community. With the establishment of significant funds such as Johnson and Woodford, the relative attraction of the US markets for all UK biotech may diminish.
And there is, of course, the advantage of being physically close to the markets. The investment community will expect regular briefings and updates from the company’s senior management team, and this can be time consuming. It is clearly much easier to put this into effect if you are based in the same country. But, and these are the critical questions, will a biotech business raise as much in the UK as it would if it were to go public in the US; would the company achieve as high a valuation in the UK as it would across the pond; and in the long term does a US float help the business to develop more than a UK float would?
For all of the inroads the UK has made, particularly recently, the US still remains the preferred global location for life science IPOs. The number of foreign issuer IPOs climbed from 12 in 2012 to 60 in 2014 and overseas companies are continuing to move there. The main attraction of the US markets is always going to be the much larger pool of potential investors that understand the life science sector with the risk appetites to match. This generates greater interest leading to higher amounts raised and an increase in value post-IPO. Until the recent drop, Nasdaq’s biotech index outperformed a lot of other sectors during 2015. And with a significantly larger investor and analyst community, businesses may find it that much easier to tell their story in the US. There is a lot less education required of the investor than is the case here in the UK where life science investment remains a highly specialist and niche market concentrated in a relatively few hands.
However, on the flip side, businesses that struggle or do not sufficiently ‘play the game’ may all too quickly fall out of favour in the US. A number of orphan companies listed here are ignored by analysts and struggling to progress. The US life science investor community is fairly ruthless. The volume of new deals coming to the table means that if sufficient progress is not being made within a company, the investors will move on to the next opportunity.
Other markets have their attractions as well, Australia, for example, is regarded as worth considering following a resurgence in liquidity for the sector there as a result of the collapse of the gold price and the difficulties in the mining industry during 2013. However, as with the other markets the Australian Exchange is also vulnerable to volatility brought about by external forces. Nevertheless, the Australian life science and healthcare sector is becoming much more mature, and some reasonable deals have been executed. Adherium raised Aus $35 million in August in its IPO, backed by its partner, AstraZeneca. The subscription was reportedly oversubscribed by two times. An interesting feature of this deal was the position taken by AstraZeneca which put in $3 million of the fundraising. By the beginning of October, however, things had changed with Australia’s largest x-ray provider, I-MED Radiology, making its IPO, which had been originally slated to raise Aus $350 million. Integral Diagnostics did get a deal away but its float was priced very much at the lower end of expectations. Whilst clearly affected by a wider life science market uncertainty, the Australian market is significantly influenced by its close trade partner, China, which is gong through a slow-down at the moment.
Flotation on an overseas market – whether in the US or elsewhere – has its own challenges and costs to offset against these benefits. During the pre-IPO phase the senior management team will have to carry out ‘road tours’, visiting and pitching the company’s offering to future investors; they will also have to take significant time away from the front-line of the business in working on the IPO process. This will be the case wherever the float market is, but the impact of having to carry this out overseas cannot be under estimated.
Once the company has floated, of course, there is the additional need to provide the investor community with access to the senior management team. This will usually mean two or three visits a year, again taking time away from the day-to-day operations. Dealing with this can necessitate the implementation of a second tier of management within the company. Yet this is unlikely to deter ambitious and forward-thinking life sciences companies looking to go public. On average the businesses that launched onto the US capital markets in 2014 ended the year with 35% rises in market valuations. And that is a powerful pull.
The decision as to which market to float on is ultimately and primarily dependent upon the liquidity of that market, the volume of ‘biotech-savvy’ investors located there and the valuations that are being achieved there. But of no less significance are company-specific factors and contacts the company may have in any particular location; the influence of investors; and potentially the presence of a lead investor or pool of investors in that location with a special interest in the very specific technology area the company is involved in.