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7:33 PM
Jul 12, 2019
 |  BioCentury  |  Finance

How crossover, insider support and big money correlated with performance across 1H19 IPOs

Big money and crossover support continue to drive IPO performance in 1H19

The performance of 1H19 IPOs point toward a continuation of a dual-class system where biotechs backed by deep-pocketed VCs and crossover investors can tap the public market at will and generate stronger after-market performance than companies lacking these ingredients.

In the first six months of 2019, 47 IPOs raised nearly $6.3 billion -- the largest aggregate amount in the first half of any year since BioCentury began tracking financings in 1993.

Investors showed little discrimination regarding stage of development or therapeutic area, with a wide variety of biotechs coming to market despite heavy volatility that saw the sector roar upwards in the first quarter only to plunge in the second.

One clear observation from the deals is that companies with the best after-market performance in 1H19 were those backed by top-tier VCs and crossover investors that provided insider support -- a continuation of a trend that began in 2016 (see “Elites Always Welcome”).

While the situation isn’t black and white, with several exceptions falling on each side of the performance equation, it does offer a warning that if market volatility remains, crossover investors and top-tier inside support may be the best bet to prepare for an IPO.

More money = better performance

The IPO window this year has been open for biotechs across virtually all stages of development and therapeutic areas, but the deals have not been backed by the type of large-scale investor push that lifts all boats.

Of the 47 deals completed, after-market performance was evenly spread: 18 (38%) deals finished 1H19 up 10% or more from their initial price, while 15 (32%) deals were off 10% or more from their IPO; 14 (30%) companies were largely unchanged at June 30 (see Figure: “IPO performance”).

BioCentury found no correlation between phase of development or therapeutic area and post-market performance.

In both the gainer and decliner cohorts of IPOs, the companies’ lead products spanned the spectrum from preclinical, early-stage clinical, late-stage and marketed.

Cancer and neurology were the most common therapeutic areas in both groups, in line with broader investment themes, with 10 other therapeutic areas also evenly distributed between gainers and decliners.

One distinction between the groups is that the gainers on average raised significantly more capital than the decliners.

For the 18 biotechs that had gained 10% or more at the end of 1H19, the average IPO raised $185 million, about 2.5x the $72.3 million average of the 15 companies in the decliner group. Like a dose-dependent curve, the 14 neutrals fell in the middle, raising on average $87.9 million per financing.

Excluding the largest outlier from the gainer cohort -- Hansoh Pharmaceutical Group Co. Ltd.’s $1 billion IPO on the Hong Kong Exchange -- still leaves the group with an average IPO of $136.9 million.

In the decliner group, five of the poorest performing IPOs were KOSDAQ listings that raised some of the smallest amounts. But even the group’s eight NASDAQ listings had an average raise of only $82.1 million.

A closer look at the 11 biotech IPOs with large first day jumps in share price reveals nine of them had raised crossover rounds prior to their IPO, with most also having substantial insider support in the IPO itself.

For example, Cortexyme Inc. was the best performer of the entire 1H19 IPO class, finishing the half up 146% with a market cap above $1.1 billion. The late-stage neurology play had raised $86.3 million on May 8 for a valuation of $442.2 million. Despite the BC100 index falling 8% in May, Cortexyme had a massive first day pop, jumping $15.89 (93%) to $32.89.

Cortexyme had raised $91.5 million in venture, including a $76 million series B round in 2018 that included crossover investors. The company, which has a new take on Alzheimer’s disease, also had $35 million of insider support in its IPO.

Turning Point Therapeutics Inc. is an example of a biotech in a hot therapeutic area that saw strong venture and crossover support parlay into a good jump out of the gate.

Companies with the best after-market performance in 1H19 were those backed by top-tier VCs...

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