As we cross the mid-point of 2020, the second quarter turned out to be the busiest quarter for biotech equity to date, and just two weeks into the third quarter, the IPO market is firing on all cylinders. Only a couple weeks into July, we’ve already seen IPOs by Relay Therapeutics, Pandion Therapeutics, Nkarta and Inventiva, and we continue to see issuers pushing to expeditiously get on file and take advantage of the investor receptiveness to biotech equity offerings.
The recent uptick in activity following the Covid-19 pandemic has brought about some interesting trends during the 2020 IPO frenzy, that we expect to continue throughout the second half of 2020 and beyond.
Roadshow timelines are accelerating
Although many were at first hesitant to launch an offering in light of the pandemic and economic uncertainty, Zentalis Pharmaceuticals and Keros Therapeutics were the early canaries into the coal mine, with each successfully launching and pricing upsized offerings at the top of the range. The inability to have the traditional 10-day in-person roadshow meetings as a result of the pandemic and social distancing has resulted in companies conducting truncated four-day virtual road meetings. This was the strategy utilized by both Zentalis and Keros, who showed that virtual meetings could effectively substitute for in-person meetings, with the added benefit of reducing the cost and strain of travel, while allowing management to conduct more meetings per day. This same strategy has been used by every biotech IPO that followed, with Repare Therapeutics shortening the marketing period to an unprecedented three days. This shortened book-building process has shifted priority and significance to testing-the-water meetings, resulting in more robust and fulsome meetings to allow issuers and underwriters to assess market interest.
Deals are bigger, earlier stage and more aggressive
The investor demand in biotech has been bolstered by the XBI outperforming the S&P, which has pushed generalist investors to shift their investment strategy to biotech. This increase in demand has, in turn, resulted in larger-than-usual IPOs, with several early-stage issuers raising in excess of $200 million after upsizing their offering and pricing at the top of – or above – their initial offering range. In the third quarter, we saw Relay Therapeutics price a $400 million IPO – representing the third-largest biotech IPO ever, and the largest biotech IPO by a Phase 1 company. Importantly, the completed IPOs have generally traded well, opening sharply up on the first day of trading, which in turn continues to fuel the pipeline of issuers and demand.
Another differentiating characteristic of the Class of 2020 IPOs has been a return to earlier-stage issuers. In 2019, we saw a trend of banks shifting their focus to companies that had demonstrated proof-of-concept, and earlier-stage companies were often advised to wait for clinical data before commencing their IPO. Instead, 2020 is shaping up to be more akin to 2018 and 2019 with earlier-stage companies completing successful offerings without Phase 1 data and being underwritten by bulge bracket banks. In particular, we have already seen several pre-clinical companies complete IPOs for proceeds in excess of $200 million.
Lack of insider demand language
2020 is also the year where the ever-present insider participation language has been largely absent. In 2019 and previous years, issuers typically signaled the support of their pre-existing investors by placing prominent legends on the cover of their S-1s stating that these insiders had expressed interest in a large portion of the IPO. Similarly, in 2019, banks typically looked to have insiders commit to backstop the entire offering amount before launching a deal. In 2020, we have seen banks move away from this express disclosure and marketing strategy. We believe the banks are still signaling strong to full insider coverage to investors during discussions, but have moved away from the express S-1 disclosure in order to signal to new investors that meaningful allocations will be made available as the company looks to diversify its inventor base.
Increased interest in biotech north of the border and abroad
The activity and interest in the U.S., market has also attracted a larger-than-usual number of foreign issuers, including large offerings by Legend Biotech from the Cayman Islands, Repare and Fusion Pharma from Canada, and Burning Rock from China. We believe there is a significant pipeline of other foreign companies from the U.K., other European countries and Australia eyeing to tap the U.S. market in 2020.
Robust IPO calendar through the end of 2020
As we look forward to the back half of the year, it’s clear that the desire for companies to commence their IPO process with organizational meetings and bake-offs continues, and if the market holds, the third quarter (and even the fourth) could continue on the trends we have seen to date.
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