Headquartered in Hayward, California, Intarcia Therapeutics is a force to be reckoned with in the biotech world. It has raised over $1 billion in total equity funding and recently acquired Phoundry Pharmaceuticals for an undisclosed amount.
It hasn’t gone public.
Cambridge, Massachusetts-based Moderna Therapeutics is another fine example. Founded in 2010, it has raised $1.1 billion in five rounds of private and corporate financing. Two of those investment rounds totaled $450 million and $474 million respectively — an industry record.
It’s a major financial theme from 2016: Biopharma companies foregoing the IPO to instead raise hundreds of millions through private and corporate financing.
“If these were public companies they would certainly be among the top 20 or 30 valuations by market cap of all the public companies,” said Paul Yook, co-founder of LifeSci Index Partners and a portfolio manager at Bioshares funds. “It speaks to how well developed the private funding market is for biotech companies.”
In a recent phone interview, Yook outlined his 2016-2017 analyses and financial predictions as they relate to the one-of-a-kind drug development sector.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
The public market
The increase in private funding comes as many trends converge, Yook explained.
For biotech companies, the equation is quite simple. There is ample money to be raised through private and corporate networks. If they can remain independent, that’s an added bonus.
“Many companies prefer to be private because you have a lot more flexibility to focus on the long-term,” Yook said. “You don’t have to cater to investors on a daily, monthly and quarterly basis.”
The appeal of public markets has always been the money, but in 2016 the money was hard to come by. The vast majority of biotechs that did IPO are now trading below their initial filing price.
As Fierce Biotech also noted, a greater proportion of the shares — 40 percent — are going to existing investors, approximately double the ratio seen in the previous two years.
Looking forward to 2017, Yook believes the IPO market will recover and move closer to the sector’s 2015 highs. In the meantime, there is a backlog of private companies waiting to go public.
“I think any company that went public this year definitely got a much lower valuation than they would have in a robust market,” he said. “Many deals were downsized and placed below the initial filing range.”
Private investment
By contrast, financing is abundant in the private and corporate investment sectors. Major venture capital funds have been consistently oversubscribing, while also cashing in on successful exits.
It’s good news for those that receive tens of millions of dollars, but the concern for the industry is two-fold.
The first is that the VC funds are not well diversified when fewer, larger checks are written. Biotechs are an unpredictable investment. The second potential issue is that the blockbuster rounds could come at the expense of many smaller startups, seeking to raise modest sums of cash.
Yook acknowledged the risks but said they are largely offset by the increasing size of the investment reservoirs.
“The math is getting to be that these funds are getting larger and larger given the big successes and exits they’ve had,” he explained. “Over the past few years, they’ve been able to raise record large funds, so I think that’s why the check size has gotten much larger.”
Merger and acquisition activity has also been down in the public markets, but once again, it has been offset by a solid number of private deals.
“It has been a very long winter for biotech,” Yook said of the market downturn. “We’re going on 20 months now. I expect that to turn around pretty dramatically in 2017.”
Photo: RomoloTavani, Getty Images
