A Very Big BTK January

We all heard reports that January was a great start to 2012 for the stock market, and even more so for Biotech. But how big was it, really?

The Amex Biotech Index (the “BTK“) had its biggest January on record, since 1992, with a +21% pop:

The companies behind the numbers?

The Nasdaq Biotech Index was up 11%, the best in a decade. The January 2000 jump of 15% is still a tough month to beat for this broader Biotech index.

Venture Capital increases in 2011, but…

The National Venture Capital Association (NVCA) has released their 4Q 2011 numbers for biotech venture financing in the US. The report echoes the global numbers already out from BioCentury and BioWorld – a boost in investment for 2011.

The take away, however, is not the total amount, but 1) the drop in the total number of biotech deals, and 2) the drop in start-up, early-stage deals from 2010. The total number of deals near 447 was down 8% from 2010, and the number of start-ups receiving funding dipped 19% from 2010. Biotech 1st round deals fell below 100 for the 3rd time in a decade (see table below). The NVCA defined “Life Sciences” group had the lowest deal number in FIFTEEN years. (They add device companies to biotech to get their “Life Sciences” number, which essentially means things are worse off in the device space.) As is often the case in our sector, the devil is in the details.  So, take the 20% jump in VC $ funding with a grain of salt.*

Here are the 1st round VC financings from NVCA since 1995:

Below is the US biotech venture investment from NVCA, 2005-2011. The second chart shows TOTAL US venture investment and total deals. Note that the second chart shows the total number of deals for all sectors going up, yet biotech (in the first chart) goes down for 2011:

What this implies is that although we did see more investment, the funding is becoming more concentrated. We see fewer deals, but more money invested. There are two possible reasons for why this could be happening. First, VCs are very conscious of capital constraints in a volatile macro environment and want portfolio companies to weather the next storm if need be. Second, later stage assets in biotech require more funding. With LPs demanding closer time horizons for an exit, these companies may have a better chance receiving additional rounds vs. discovery start-ups (without an asset) seeking a first round.

*A point that has been brought up since the NVCA release, see Bruce Booth and Rick Soltero, is the over reaction to the magnitude of the drop in the 1st round deals. Bruce argues that 100 is still a decent turn out, and Rick argues that they get more than they used to, with quality the focus on the VC front. Both are valid points and do not disrupt the thesis that more late-stage rounds deals are occurrring vs. early stage. When we plot the number of biotech deals that are 1st round vs. later round, the divergence is pretty clear (see below). However, when we plot the amount of money going into 1st rounds as a percent of total biotech investment, it is far more consistent (15-20% of all invested biotech VC money). Thus, taken together, this would mean the following:

1. There is no growth in the number of start-ups per year, potentially at a baseline near 100 (the 98 companies in 2011 is off peak levels of 140, by 30%, and below the 15 year average of 105)
2. The VC allocation discipline to early stage is about the same, but off peak allocation of 20% of invested money (typically 15-20% range since 1995)
3. Because there is more VC money invested in 2011, and start-up numbers stagnate, the investment per start-up is increasing (see last chart)

IPO Update – Jan 2012

2011 ended quietly for the US biotech IPO market. It has now been almost two months without a biotech IPO. The last few IPOs back in November continued the theme that was in place at the beginning of the year – you can get out, but with a -30% haircut. In fact, only two of the 12 IPOs in 2011 raised more than they filed for. This is shown in chart 1 below.

The two companies evading the haircut are not your typical emerging biotech drug companies. One is Sagent, which actually sells 22 marketed generic drugs, a specialty pharma company. It makes it into our coverage here due to its small size, biotech commercial overlap, and 46 ANDAs in the pipeline. The other is Solazyme, a bio industrial company focused on converting plant sugar into oil. This is the 4th bio industrial IPO for the recent IPO window, coming in after Codexis and Amyris in 2010, and Gevo in 2011.

Since the 2009 Cumberland IPO, no pure-play drug biotech has made a debut without a discount to the offering price.

Chart 1: Amount Raised vs Filed for Biotech IPOs 2009-2011.

Looking at IPO performance in chart 2, only four of the 12 IPOs in 2011 were up by year end (33%). The mean and median performance for the class of 2011 is on par with the class of 2009-2010: -26 % and -33%, respectively. (IPOs from 2009 and 2010 dropped -27% and -37% for their collective mean and median performance.)

Chart 2: Performance of IPOs 2009-2010.

So far, the IPO picture is still generally negative for biotech fundraising. However, in terms of the number of companies that are exiting from the private to the public realm, biotechs are actually on track with the last US IPO window of 2003-2007. The total number of US IPOs since 2009′s Cumberland IPO is 31, compared to 30 at this time back in 2005. That averages out to a rate of one IPO per month for both time periods. With 22 companies “on deck” for a public offering, biotech IPOs could easily match this trend in 2012.

Chart 3. Comparing IPO Window of 2003-2007 with 2009-2013.