Biotech - Don't Call It a Comeback
Approximately one year ago I was given the opportunity to write an article for Contract Pharma magazine. The article was titled, "Are Biotech Companies Strong Investments?". I thought with all of the economic challenges and social challenges we are facing it might be a good time to revisit the question. The result of my previous article was that biotech companies were indeed good investments, we will see if that is still the case.
Index Returns
Okay, easiest analysis first - a monthly trend comparing the Nasdaq Biotechnology Index (NBI), the Dow Jones Industrial Average (DJIA) and the Standard & Poor 500 (S&P 500) from January 1, 2019 until June 1, 2020. The chart below clearly communicates that all of the indexes have done fairly well since 1/1/19 and have recovered nicely (at the moment) from the March 2020 COVID downturn. However, NBIs drop in March 2020 was not as steep as the DJIA or the S&P 500. Crazy to think that biotech may have been a defensive stock strategy, but in a world where restaurants, airlines, energy, retail and travel sectors were all shut down or compromised, investors were looking for an attractive place to invest. From a percentage return standpoint, the NBI was up 21.1% over that time frame, while the S&P 500 and DJIA were up 19.5% and 10.3% respectively.
Initial Public Offering Demand
Ernst and Young reported on April 3, 2020, "Despite initially riding momentum carried from Q4 2019, hopes for an IPO window of opportunity and rebound in the first half of 2020 were cut short by the global impact of COVID-19." Below is a summary (both total capital raised and number of IPOs) of biotech and pharma Nasdaq and NYSE IPOs from January 2019 through May 2020. As you can see there are see there are some pretty high peaks on both charts in 2019 - we've clearly seen a slow down in 2020 IPOs.
However, upon closer inspection there is an interesting wrinkle in the data. May year to date year over year data shows that the number of biotech/pharma IPOs are down 44% (27 down to 15), however total capital raised is only down 10%. The trend suggests that while there are less IPOs, the amount of capital raised per IPO is increasing.
Below is a list of biotech/pharma IPOs that have been priced and planned for June 2020. Assuming all the planned IPOs occur, June will be the best month of the year with eight IPOs raising $3.4B (the best month in 2019 was $1.446B). Clearly, Royalty Pharma is an outlier with a $2.254B offering, however even without Royalty Pharma, the total amount raised is expected to be around $1.15B.
The chart below shows the six month trends in how the average IPO offering has been increasing. I have added the priced and planned June 2020 offerings to create a pro forma first half of 2020 (with and without Royalty Pharma). Without Royalty Pharma, the average IPO offering is up 40.5% from the 1st half of 2019 compared to the 1st half of 2020 (the increase is 133% if Royalty Pharma is included in the analysis). Taken in perspective, in a year where the COVID pandemic has stymied numerous industries, capital raised in the biotechnology/pharmaceutical industry could increase more than $1.7M June YTD (or only down about $500M excluding Royalty Pharma). Investors believe the biotech/pharma industry offers a wealth creation opportunity.
I actually think the raw data below tells a better story than the chart. The average biotech/pharma IPO value jumped from $108.5M to $139.7M (excluding Royalty Pharma) from the second half of 2019 to the first half of 2020. The average 2019 IPO raised approximately $103M - assuming the 2nd half of 2020 has the same number of IPOs as the first half AND excluding Royalty Pharma, 2nd half 2020 IPOs would need to average $67M of value to bring down 2020's average to that of 2019. Possible but seems unlikely at this stage.
Additionally, there are another four biotech/pharma IPOs that have been filed without a defined pricing date totaling another $357.5M (these offer amounts could change based on investor demand). I suspect there will be more on the horizon soon.
Follow the Money
Attractive markets generally receive the most capital, so I decided to take a look at how biotech/pharma IPOs were faring against all IPOs priced since January 2019. Further proof that investors are flocking the the pharma/biotech sector compared to other industries. You can see the raw dollar totals below, however the most interesting stat for me is that in the first half of 2020, IPO capital raised by biotech/pharma IPOs will represent 21% of total capital raised across all industries (that same metric was just 9% in the first half of 2019). I excluded PPD's IPO (its on the CRO line), one could easily argue that you are betting on the biotech/pharma sector if you invest in PPD (Adding PPD would increase the pharma/biotech sector to 27% of all IPO capital raised in the 1st half of 2020).
I was curious so I researched what made up the huge 1st half of 2019 for the IT & Software sector and how those key stocks were performing now. As you can see 4 companies (Uber, Lyft, Slack & Pinterest) made up over $16M of the $20.7B raised. Cumulatively, those stock were down about 18.2% from their IPO pricings (with Lyft down 54.7%).
Why Is The Sector Appealing?
Investing has always been about risk and reward - the more risk the greater the reward expected. The graphic below (created by IQVIA) shows that through 2018, the average composite success rate rate of clinical development from Phase I to regulatory submission was 11.4% (3rd lowest over the past decade). In other words, 88.6% of all compounds fail (high risk). that being said, look no further than Moderna Therapeutics as an example of a great investment (thus far). Moderna's 4/19/19 stock price was $22.51 (actually slightly below its $23 IPO price), it was $60.07 when the markets closed on 6/11/20 - close to tripling in price in 14 months.
Again, why are biotech stocks so attractive now when the overall economy is struggling? Here are some thoughts:
Biotech business cases have not been disrupted due to COVID. We know that closed clinical trial sights have adversely impacted clinical research in Q2 2020, but has begun to turn around. Additionally, many biotechs are pre-revenue so its not like a decline in sales have impacted cash flow.
The COVID pandemic has brought clinical research into the spotlight - the world is now more informed about the industry. I Wouldn't be surprising if stocks with COVID related trials appealed to investors.
Limited investment opportunities - entertainment, travel, energy and many other industry business cases are now challenged. A lack of understanding of our new normal made it hard to figure out when those industries would get back to a normalized state (if ever).
Wrapping Up
Clinipace has a vested interested in the continued success of the biotech sector for both our customers and patients. What we haven't discussed is how biotech companies are structured to maximize innovation without being slowed down by bureaucracy. Working with fast moving companies that make quick decisions can make for an inspirational work experience. A popular misconception is that biotech companies quickly reach success - not true it is usually a long-time coming. Many biotechs spend years raising capital, learning from failure and making progress from small successes. Maybe the industry's secret sauce is an experienced bench of leaders increasing the odds of success. Fingers crossed for continued success for the biotech sector for employees, investors and patients.
Jason Monteleone joined Clinipace in October 2017, bringing extensive expertise in the midsized clinical research organization (CRO) sector. A recognized health care and life science leader with more than 20 years of experience, he accepted the role as CEO after several months of strategic consulting with the company. Prior to Clinipace, Monteleone founded Pivotal Financial Consulting LLC, was executive vice president and chief financial officer of Theorem Clinical Research, was chief financial officer of Omnicare Clinical Research and held executive finance positions at MDS Pharma Services and VIASYS Healthcare. Jason can be reached at jmonteleone@clinipace.com, jmonteleone@pvtfinance.com. Follow me on Twitter @JMPivotal and sign up for Jason's latest blogs and updates at www.pivotalfinancialconsulting.com.