Biotech reverse mergers are becoming more acceptable and are more commonplace this year. But startups are already ramping up for IPOs during the first half of 2017 in the hopes of taking advantage of an anticipated easing of market sentiment and volatility after the conclusion of the U.S. presidential election.
That was the conclusion of a panel at the FierceBiotech Drug Development Forum in Boston, MA.
“There have been four or five reverse mergers this year. And there will be many more through the rest of the year. There are about 20% to 25% of IPO companies over the last wave of IPOs that went public and then blew up,” observed Atlas Venture Partner Bruce Booth of the biotech field, concluding that those remaining shells with cash offer potential reverse-merger matches. “I expect to see more of these for the next year or so.”
A reverse merger typically consists of a private company that’s seeking to become public but isn’t pursuing an IPO path. Instead, the company investigates existing public companies that have cash but little or no viable programs or products. The companies then merge, perhaps with a simultaneous fundraising to drum up more cash.
The resulting company gets a public listing, albeit sometimes an OTC one that may require a couple of years to up-list onto a major market. It also typically lacks analyst coverage, which is built into an IPO process with its attendant investment banks.
New Allergan ($AGN) acquisition target Tobira ($TBRA) did a reverse merger in 2015, as have even more prominent biotechs including some with multibillion-dollar valuations such as oncology players Medivation ($MDVN) and Puma Biotechnology ($PBYI). Their successes and ability to generate a vigorous valuation have helped to make reverse mergers more acceptable.
“There was a time when a reverse merger was seen as a last resort, but those times have changed,” noted General Partner Wende Hutton of Canaan Partners. “If you do a lot of work and have fundamental value, it’s a reasonable option to consider. It doesn’t necessarily have some negative aspect versus an IPO.”
On the IPO front, Booth observed that there have been about 20 biotech IPOs so far this year, and he expects to end up with about 30 all told this year. He noted that puts 2016 in the top 5 or 6 best years for the number of biotech IPOs in the last couple of decades.
Neurodegenerative-focused AC Immune, nonsystemic biologics company AzurRx BioPharma and dermatology player Novan are all slated this week to test the IPO waters, which have remained almost entirely still all summer.
Booth is even more optimistic about next year’s IPO prospects. “A lot of companies are working on 2017 IPOs; dozens are looking at the first half of next year. It will likely be crowded, if we see a settling of macro-volatility after the elections,” he said.