The state of capital is in flux: the initial public offering (IPO) window will remain open for 2019, but the rate and number of IPOs will slow down, according to investment bankers at the BIO CEO & Investor Conference in New York last month. Other panellists at the conference believe mergers and acquisitions (M&A) offer a wiser growth strategy over the next year.

Many bio/pharma IPOs in 2018 were of companies that had previously benefited from crossover investors, funders who first invest during a company’s private stage and continue through the IPO.

Life sciences funding: IPO outlook

This trend of underwriters and companies seeking crossover investors is likely to increase in 2019, and if capital markets decrease this will guarantee the size of the IPO, said Jennifer Sheng, managing director of equity capital markets at Citi, during a panel entitled ‘Market outlook: leveraging market corrections for M&A or IPOs’.

The panel, comprised of investment bankers, expressed concern about whether all crossover funds were of equal worth, with doubts about the due diligence of sovereign wealth funds.

Of the initial IPOs this year, Sheng estimated that between “50 to 60 per cent [of shares] were already spoken for” by crossover investors. To search for these deals, use the Pharma IC Deals database to search deals by date, and select IPO as the deal type listed under ‘capital raising: equity offerings’.

Katherine Andersen, senior market manager of Silicon Valley Bank, told the panel that crossover investors had helped fund over 60 unique bio/pharma companies in 2018, in anticipation of these companies going public in 2019.

The recent trend for larger Series A and especially Series B raises is allowing companies to bide their time before launching an IPO, said Andrew Gitkin, managing director of Piper Jaffray, also on the panel.

However, experts at JP Morgan’s 37th Healthcare Conference in San Francisco in January noted these large Series A and especially B rounds may not be able to continue if foreign capital is restricted under new national security rules.
(See: Beware of chilling effect on life science investment from Trump’s FIRRMA)

Life sciences funding: M&A Outlook

In a more bearish panel during BIO CEO, entitled ‘Are record levels of IPOs still disrupting M&A deals?’ experts favoured M&A deals over IPOs as a growth strategy in 2019.

Philip Ross, vice-chairman of JP Morgan, told the panel the low historic volumes of M&A deals prevent that being a valid strategy for growing a company and also create problems in structuring a public company.

It might seem more likely that M&A deals would happen at times of market weakness, but Ross asserted that historically M&A deals took place at the height of valuations.

Many recently floated bio/pharma companies are now at 40% below their top share price, said the panel’s Chris Garabedian, CEO of Xontogeny and portfolio manager of Perceptive Advisors, so it may be hard for these companies to continue to raise money.

Despite record-breaking capital raises, 40% of these recently public companies have less than a year of funds left at their current burn rate, said Dennis J. Purcell, founder of Aisling Capital. These high valuations are “the best takeover defence” and it might require some more time for the valuation of these companies to decrease to the point where they become takeover targets, Purcell said.

Also on the panel was Jie D’Elia, executive director of business development transactions for Bristol-Myers Squibb (New York, NY), whose company announced in January 2019 it would acquire Celgene Corp (Summit, NJ) for $74 billion.

When asked about how BMS’ acquisition strategy will change if valuations continue to increase, D’Elia said, “if the valuation is too great we will use creative structures to bridge the gap.” BMS plans to continue a “bolt-on strategy [of] assets or platforms to optimise our pipeline,” she said.

The company was previously interested in immuno-oncology, but has now become more interested in kinase inhibitors because of the interaction in combination oncology trials, she added. To search for these trials, use the Pharma IC Clinical trials database to search by Indication and drug Mechanism of Action.

Panellists expressed concern about the high valuations of IPOs leading to investment by electronic trading funds, making companies subject to macro trends in the market. They also disagreed about whether recent high-value IPOs for platform-based drug discovery companies are justified based on scientific advances, or inappropriate due to the lack of a lead pipeline molecule.

For further coverage of 2019 capital markets, see
JP Morgan: no expert consensus on 2019 capital outlook for bio/pharma