After raising round after round of private funding, Moderna finally did it. It filed to raise up to $500 million in its long-anticipated Nasdaq IPO, which would become the biggest biotech IPO in 2018, not to mention all of biotech history. And then it smashed past that goal, raising $604 million in December to eclipse the $324 million that CAR-T company Allogene had raised two months earlier.
Though Moderna’s monster deal is an outlier, biotech companies were going public at higher and higher valuations in 2018—even those who had never tested their therapies in humans. Allogene, the only other company to break $250 million in its IPO, went public with only one clinical-stage asset and more than a dozen preclinical candidates. Cell therapy player Rubius Therapeutics and gene-editing biotech Homology, both preclinical companies, also made the top 10 IPOs of 2018, reeling in $241 million and $144 million respectively.
Biotech IPOs went to town in 2018, after a 2016 that could only be called dismal and a 2017 that Renaissance Capital dubbed “good, but not great.” By Renaissance’s count, the biotech sector posted a total of 58 IPOs—up from 36 in 2017—and raised a total of $6.3 billion.
“Biotechs have been a very strong driver of 2018 IPO activity,” said Matthew Kennedy a senior IPO market strategist at Renaissance Capital, a provider of institutional IPO research. The sector outpaced the broader market’s increase over last year, he said.
Kennedy didn’t think the sector would surpass 2014, the high-water mark for sheer number of biotech IPOs, but noted during our conversation in late November that “we are already well above 2014’s total proceeds for the year.”
More than half of the biotech IPOs raised $100 million or more, and of the top 10 biotech IPOs, only one—Homology—did not surpass $150 million. Seven deals exceeded $200 million and—excluding Moderna’s behemoth—the average deal size in the top 10 was $209 million.
“[In 2018], biotechs have raised more IPO proceeds than any year in two decades. Probably ever,” Kennedy said.
So what’s driving the activity?
Funding. It’s no secret that private rounds have been ballooning in recent years—venture capitalists and other investors are pouring their money into biotech and eventually, they’ll need an exit. Biotechs made up half of all VC exits in 2018, Renaissance wrote (PDF) in its 2018 review of the U.S. IPO market.
The rise of genomic medicine and platform companies is contributing to what Jordan Saxe, the head of healthcare listings at Nasdaq, calls the “third wave” of biotech IPOs, the wave that came after the human genome was mapped.
“[These companies have] multiple assets and potential stages of drug development. Unlike the first two waves of biotech IPOs, if one drug or asset doesn’t succeed, there are still five, six, 10, 15 other potential assets that can be developed through the platform,” he said.
And novel therapies' regulatory success has helped too.
“Signs that advanced technologies like CAR-T and gene therapy can succeed both in the clinic and with regulators have prompted huge enthusiasm for high-risk drug developers,” wrote EP Vantage in its half-year review. “The US FDA’s approvals of cell and gene therapies like Kymriah and Luxturna have paved the way for investors to view these sciences as reality rather than science fiction, allowing subsequent players like Autolus and Avrobio to get away.”
Another driver is insider buying: “That's a trend that we’ve seen the last few years really pick up and it makes it a lot easier for a deal to get done when most of it is covered by insiders,” Kennedy said.
By Renaissance’s count, 84% of biotech IPOs had some insider buying, with about one-third of the average deal being covered by existing backers. The insider buying rate dropped from the 93% reported in 2017, but the average share of the deal size remained constant.
What does this all mean for 2019?
“Obviously, markets have to be cooperating ... Assuming the market has a window open for biotech, we could have another healthy year—it's not like it’s going to drop precipitously with all the interest we’ve seen,” Saxe said.
“[Domestic] concerns about Fed policy and the sustainability of economic growth as well as the fate of Brexit, broader European political instability and trade relations with China” will feed volatility in 2019,” Renaissance wrote. But by virtue of being clinical-stage, prerevenue companies, biotechs may still be able to get out in a challenging market.
What investors are really betting on,” Saxe said, is “whether the company is able to execute with the data and the clinical trial design in a one- to two-year readout.”
“It’s so hard to predict what the biotechs are going to do and with that insider buying component, deals can get done in markets that we would not normally expect,” Kennedy said.
As for Moderna, its massive IPO won’t put off early-stage companies looking to list in 2019.
“I think the thing about Moderna is it had so much hype and backing early on that its private valuation got really high really fast, and that is hard to sustain under public scrutiny. When it traded down on its first day and remains down, I think that reflects some of the skepticism that public investors have for a company like this,” said Cory Murphy, a research analyst at Renaissance.
“I don’t think this one is going to close the door for other early-stage companies to come public. I think there are enough biotech investors out there willing to put a little money on the line for a company they believe has something promising,” he said.
However, those investors may not be willing to pay such a huge premium on promise. Take the example of Gritstone Oncology, another company with a promising platform, that had a market cap of just under $500 million at IPO, Murphy said.
“Moderna is 16 times larger than that. In either case, it is really hard to say now that we know for certain any of their drugs will get approved, that any of them produce meaningful revenue. I think we will see a rationalization of the valuations, but not door close for any of the early-stage companies.”
And with no shortage of biotechs—and very expensive biotechs—ready to go public in 2019, companies may choose to go full steam ahead and just take the lower valuation.