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Few Signs of Life in the S.D. 2016 IPO Scene

San Diego biotech companies — normally trailblazers for local IPO activity — have been noticeably absent from the initial public offering deck since last spring.

ATyr Pharma Inc., which went public in May of last year raising $75 million, was the last San Diego firm to go public.

The lack of activity is unusual for the San Diego market, home to numerous life science firms normally eager to enter the public markets. Drugmakers and other companies developing therapeutics often go public as a means of raising capital for research and development. Eight local life science firms filed to go public in 2014, but two were delayed and one (Lumena Pharmaceuticals) was acquired before it was listed. In 2015, only four life science firms went public. So far this year, there are none in line.

Local firms are not alone in shying away from the public markets. Two prominent reports show that global IPOs have slowed to a trickle this year, with only eight to nine deals (depending on the report) in the entire United States for the first quarter of 2016 — none of which were San Diego companies.

The quarter showed the lowest levels of IPO activity since the depths of the financial crisis in 2008 and 2009, according to reports by Renaissance Capital and Ernst & Young (EY).

Martin Steinbach

“In the current climate, both IPO-ready companies and potential investors are in effect sheltering from volatile, gloomy weather and waiting for the outlook to improve,” said Martin Steinbach, an EY IPO leader.

There are a variety of reasons for the IPO slowdown, the reports said, including low oil prices, significant valuation reductions in Silicon Valley, and geopolitical issues in Europe causing volatility in the market.

Here in the U.S., the presidential election has majorly influenced the IPO climate, experts said.

“Domestically, sorting out who the presidential candidate will be from the Democratic and Republican parties is causing a lot of noise and

Anani Karim

turbulence,” said EY’s western IPO leader, Karim Anani.

Presidential election years always negatively impact IPO activity, Anani said, because they inspire high levels of uncertainty. However, this year is noticeably less active than the 2012 election cycle.

Tainted Pharma

It’s possible that one particular conversation during this election cycle is the reason for the stagnation: the drug pricing controversy. This conversation went viral in the fall of 2015 when the now infamous pharma CEO Martin Shkreli made headlines for a seemingly greedy move. Shkreli’s company, Turing Pharmaceuticals, raised the price of a 62-year-old drug from $13.50 a tablet to $750 per pill. The price hike outraged the public, and several months of media coverage following the event dirtied the image of drugmakers worldwide.

Presidential candidate Hillary Clinton tweeted a scathing criticism of the pharmaceutical industry, bringing pharma into the political conversation this election cycle and putting drugmakers on the defensive for months to come. Clinton tweeted that she would soon release a plan to combat the high cost of prescription drugs. Biotechnology stocks fell after her comment, and have struggled to recover since.

The drug pricing scandal is important when considering that the vast majority of IPOs in recent years came out of the health scare sector. In San Diego specifically, 100 percent of the companies that went public in the last two years were health care firms. On a national scale, nearly 50 percent of all U.S. IPOs came out of the health care sector. That’s because drugmakers and other life science firms are largely insulated from market conditions.

“The dynamic of life sciences is different than other markets,” said Doug Regnier, an IPO expert from EY, in an interview last year. “When you get into technology or other traditional companies, the stock price is determined by the performance of the company and projected growth. But with biotech there’s no product and no revenue. So there’s a group of life science investors that are constantly evaluating the science behind the pipeline of drugs being developed. They keep an eye on potential inflection points that might drive valuation, like the release of promising clinical trial data.”

If biotech — one of the most insulated and active industries on the public markets — takes a hit, it makes sense to see significant reduction of total IPOs.

It’s important to note that health care companies are the only firms still going public in the first quarter of 2016. All nine of the U.S. firms that went public this year are health care companies. However, there are fewer of these firms going public than in the past. In the first quarter of 2015, for example, twice as many health care firms went public.

Ups and Downs

Local biotech leaders are not too concerned with the IPO slowdown in health care, though they acknowledge that the drug-pricing controversy did impact the sector.

Joe Panetta

“Over the past several months, biotech stocks have admittedly fluctuated, in part (due) to comments from some presidential candidates and others,” said Sara Radcliffe, president and CEO of the California Life Sciences Association. “As with most industries, ebbs and flows are natural, and an improved FDA regulatory environment, increased (federal) funding, and a demonstrated desire from both parties in Congress to do more are all positive signs for growth of the industry.”

Joe Panetta, president and CEO of local industry group BIOCOM, echoed Radcliffe’s optimism in a recent email.

“As an industry, we have a history of being able to navigate market ups and downs, and be highly productive even during times of economic recessions,” Panetta said. “The latest dip in the market definitely had an impact on the companies who may have been in queue for an IPO, making it more difficult for them to raise money in the public markets.

“But for early-stage companies seeking venture backing, their target investors understand the sector and are typically in it for the long haul, so I don’t think this discussion of drug pricing impacts them as much.”

Strong Pipeline

Although biotech companies have had plenty to worry about lately, it’s important to note that biotech share prices started to fall after July 2015, well before the Turing controversy. It’s possible that falling biotech stocks are due to inevitable market correction. After all, investors have long been snapping up the initial offerings of whiz-bang startups with lots of bluster and few real assets. Even after the big declines this fall, the ratio of price to profit remains stratospheric for many established companies.

Demand for life-saving drugs may seem limitless, but the supply of money to develop and buy them could be in jeopardy.

Anani said the IPO slowdown is creating a growing backlog of companies planning to go public.

“The pipeline continues to be strong,” Anani said. “The question is: when does the IPO window open?”

While it’s impossible to predict when the IPO climate may warm up, Anani said all it would take is one big company to take the leap — and be successful in doing it. Any takers?

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