Biotech Financings Are On A Tear
On July 10, Mizuho Securities served as one of the bookrunners for Nkarta’s IPO, raising nearly $290 million. The IPO initially traded over 250% of its IPO price of $18 per share and has since settled in around $27 per share, valuing the company at nearly $900 million. This deal was upsized from approximately $150 million and priced $2.00 above the initial range. Nkarta isn’t the only biotech company to have a successful IPO thus far in 2020. Indeed, biotech IPOs in the U.S. have raised approximately $9.4 billion so far this year, the biggest year on record with 4 months left on the calendar. Those IPOs are currently trading at more than 40% over their IPO price on average (Mizuho Securities analysis).
Broadly, biotech outpaced other sectors since the market pullback at the end of Q1. Year to date the XBI S&P Biotech ETF has gained nearly 20% while the S&P 500 has notched less than 5% growth. Biotechs have taken advantage of this momentum, raising more than $32 billion in follow-on offerings, another historical record for 2020.
What’s Behind Biopharma’s Run?
The twin drivers of recent performance are anticipation around COVID-19 vaccines and treatments and exciting new technologies like those being developed in cell and gene therapy areas. Both are fueling massive inflows into the sector. Clearly, investors are betting the biopharma sector will rescue us from the pandemic. One need look no further than the big name companies involved in Operation Warp Speed, the US government’s program to develop a vaccine for COVID-19: Moderna, AstraZeneca, Merck and Pfizer. Their stock prices are up 163%, 26%, 28% and 35%, respectively, since March 23. And it is not just the giants who are seeing cash come their way. Small and niche firms such as Novavax have benefited as well. Novavax was awarded $1.6 billion from Operation Warp Speed and has seen its shares increase by over 14 times over the same period. Biotech investors saw over $6 billion in fund flows in Q2, dwarfing any previous quarter as investors move money toward the sector they believe to be the primary beneficiary of the battle against COVID-19.
Beyond being the go-to sector of the moment, biotech has another key advantage: promising new drugs. At a time when many industries have been eviscerated by the lockdown, the need for more powerful and effective drugs never ceases. Biotech companies are delivering on novel approaches to addressing serious diseases that have shown promise in clinical trials--drugs targeting everything from cancer, infectious diseases, and orphan diseases, among others. As mentioned previously, Nkarta has generated significant investor interest as it pursues novel, off-the-shelf cell therapies to potentially treat a broad range of cancers, which would be a significant clinical breakthrough.
Nowhere To Go But Up?
The belief that biotech will play an outsized role in combating COVID-19, coupled with the fact it is relatively protected from the economic downturn, may launch what could be a lasting virtuous cycle for the biopharma sector. Consider the fact that pharma – pharma! – is getting positive press after years of criticism related to drug pricing and the opioid crisis. In September 2019, Gallop released its annual review of the U.S. public’s opinion of 25 industries. Pharma came in dead last, trailing the federal government! Just 27% of respondents rated the sector positively. Fast forward 8 months. In April 2020, the PR agency Edelman released its annual Trust Barometer, which showed trust in healthcare and its subsectors had improved dramatically. Pharma saw the highest rise across all subsectors, with 73% of respondents expressing trust in the industry. As the world looks to the biopharma sector to end this pandemic, we have seen a massive shift in public opinion.
Greater – and positive – public attention has likely contributed in some way to recent performance as well. Often overlooked while trendier firms and sectors received the majority of the attention, the recent focus on the crucial role the healthcare and biotech sector play has certainly meant traditional institutional investors and retail investors alike have paid more notice.
The recent influx of cash is likely to ensure more drug development occurs and more critical development milestones are met. While companies are flush with cash, they will add more drug candidates into the pipeline and underwrite more drug trials, generating more “shots on goal.” This is good for patients, the biotech sector and its investors.
So What’s The Catch?
With all the positive news coming out of the healthcare space, it is easy to ignore some of the risk factors to continued market strength. There are a few things we are keeping an eye on in the coming months. First, public opinion can be fickle. If early vaccine trials are unsuccessful or immunity proves fleeting, the “halo effect” could be lost among investors and the general public alike, causing share prices to pull back.
Short attention spans may cost the sector even in the event of successful vaccines or therapeutics as well. In the event biotech makes a return to a broadly functioning economy possible, we cannot be sure investors will remember who brought them to the dance. Instead, they may rush back to more traditional sectors that are easier to evaluate and that benefit most during economic recoveries.
There are also unknowns around the new crop of novel therapies. A spate of clinical-trial failures could dampen enthusiasm, for example. A second wave of COVID-19 cases that forces another round of lockdowns could delay clinical trial testing and disrupt the commercialization of new drugs.
Finally, as it becomes more and more apparent that the pandemic and its knock-on effects are here to stay, it’s unclear to what extent the sector will continue to benefit from defensive hedges from investors. Not only will it depend on positive signs from clinical trials, but long-term economic pain with job losses that affect healthcare coverage may affect consumer demand for the sector’s offerings. Investor enthusiasm could also be tied to government willingness to pay up for drugs.
Overall, while we are cognizant of these possibilities, we remain bullish for continued capital raising and performance into 2021. From our perspective, robust investor demand for healthcare/biotech stocks and IPOs should continue, driven by new and innovative therapies, and healthcare being an oasis of strength in a time of unprecedented uncertainty. In a typical election year, companies are hesitant to raise capital as we approach the election, but the pandemic has made this market far from normal. We even have some clients planning for a potential IPO immediately after the election. We believe this will continue through the balance of the year and into 2021 as buzz around COVID vaccines grows louder and as the healthcare sector continues to be a lifeboat in broader market instability.