Early Stage Biotech IPOs Join Late-stage Plays In Appealing to Investors

With Epizyme as a top performing biotech IPO and bluebird bio primed to go out soon, investor appetite would seem whetted for early stage biotechs on the public market. With improving overall IPO performance, these returns could again become meaningful for more than a few life science VCs.

Early stage biotech IPOs are coming back. Targeted therapeutics and orphan disease companies, which have a narrowly defined population with high unmet needs and low clinical trial costs, are proving attractive to public investors even without Phase II proof-of-concept data in hand.

Epigenetics oncology play Epizyme Inc. is in Phase I with its lead candidate, but managed to pull off one of the best performing U.S. biotech IPO of 2013 so far, with a gain of about 59% since its May 30 debut. And orphan-disease focused bluebird bio Inc., which has Phase I/II data for its lead candidate, may be next. It’s currently on its road show, with a target IPO date of June 17.

Another early-stage biotech recently threw its hat into the ring. On June 10, preclinical oncology company Agios Pharmaceuticals Inc. filed to raise up to $86 million in an IPO. It hopes to get into the clinic by the middle of this year with AG-221, a candidate that targets cancer with mutations in the enzyme isocitrate dehydrogenase 2 (IDH2). By early 2014, Agios expects to be in the clinic with AG-120 to target IDH1-mutation positive cancers.

Last year, a few preclinical companies came out with IPOs: microRNA company Regulus Therapeutics Inc. and cancer stem cell play Verastem Inc. While Verastem is off 1% since its initial offering, Regulus is up 149%.

Also, IPO companies from prior years have had stellar performances on early-stage data in recent weeks. Oncology companies Clovis Oncology Inc. and Tesaro Inc. each popped recently on early data in clinically and genetically defined sub-groups presented at the American Society of Clinical Oncology (ASCO) conference. Clovis is now the top performing 2011 biotech IPO, having added a whopping 455% since its offering. Similarly, Tesaro is the best 2012 biotech IPO performer, with a gain of 192% since IPO.

But only a handful of VCs stand to benefit routinely through multiple IPOs for portfolio companies, according to a data analysis in The Pink Sheet’s sister publication Start-Up (Also see "When To Hold ’Em: Post-IPO, VCs Keep Their Cards" - Scrip, 13 Jun, 2013.). Only a few VCs were invested in several biotech IPO companies over the last few years, and they’re largely still sitting on their shares well after the 180-day lock-up period has expired.

VCs who own stakes in multiple companies that went public expect the current enthusiasm could last at least until year end, allowing a queue that includes late and early stage companies to make it out with decent valuations.

“We’ve really benefitted from the market opening up. We expect to see a number of reasonable high-quality companies take advantage of that in the next 6-12 months,” MPM Capital Managing Director Luke Evnin said in an interview. MPM is a VC in recent IPO companies Epizyme, Portola Pharmaceuticals Inc. and KaloBios Pharmaceuticals Inc. (Also see "Ambit IPO Ambles Out; Portola And Bluebird Prepare" - Pink Sheet, 16 May, 2013.).

As a group, 2013 biotech IPOs in the U.S. are up about 36% since debut. That outstrips the 20% gain for small-cap biotechs and even the 30% uptick for mid-cap biotechs, according to indices for this year through May 31 from investment bank Burrill & Co. Large cap biotechs have fared the best, with that Burrill index adding 37% during the same period (Also see "As Some New Listings Thrive, IPO Pipeline Burgeons" - Pink Sheet, 22 Apr, 2013.).

Epizyme Emerges

The star of the 2013 IPO group, Epizyme, had a debut that was 10 times oversubscribed by investors. It’s already valued at about $640 million; that’s up from a pre-money IPO valuation of $400 million. Investor enthusiasm for Epizyme has cooled a bit. At its peak valuation in early June, the biotech was worth over $800 million.

“When you’re talking about targeted therapeutics, there’s a different definition of stage than with more traditional drug development. With a rare disease or a biomarker, it tells you immediately if you’re modulating the target or not. With a genetically identifiable population of tumors, the stages get very much compressed so that Phase I/II companies start to look very much like Phase III companies,” NEA General Partner David Mott said in an interview. NEA was the lead pre-IPO investor in Epizyme.

Epizyme is conducting a Phase I trial for lead candidate EPZ-5676, a DOT1L histone methyltransferase (HMT) inhibitor to treat mixed lineage leukemia (MLL-r), a genetically defined sub-type of acute myeloid leukemia (AML) and acute lymphoblastic leukemia (ALL). The company said its scientists defined the HMT class in 2011, and that this is the first clinical trial for an HMT inhibitor. HMTs are a class of enzymes that are part of the system of gene regulation. Epizyme expects the HMT class contains many potential oncogenes. Initial Phase I data for EPZ-5676 is expected in the second half of 2013. Abbott Laboratories Inc. is developing a companion diagnostic to identify patients with MLL-r.

Evnin said Epizyme has traded up primarily off of investor interest in its next program slated for the clinic with EPZ-6438. It’s an EZH2 HMT inhibitor for the treatment of a genetically defined subtype of non-Hodgkin lymphoma. The biotech and partner Eisai Co. Ltd. expect to start a Phase I/II trial of EPZ-6438 this quarter. Roche is developing a companion diagnostic for this program.

Eventually, Epizyme VCs may be in for an exponential return. The biotech sold only $76 million in equity pre-IPO; the current valuation is eight times that figure. It raised an additional $122 million through collaborations with partners including Celgene Corp., Eisai and GlaxoSmithKline PLC.

VCs expect Epizyme could be a precursor to more IPOs for early-stage companies with targeted therapeutics and innovative technologies.

"If you examine the 2011 or 2012 IPO's, public investors were primarily looking for de-risked investment opportunities with later stage portfolios, differentiated products and proven management teams. I think that in the current market, that seems to have widened," summed up General Partner James Healy of Sofinnova Ventures. "Buyers in offerings are looking not just at late-stage de-risked assets but at earlier stage high-science opportunities where the underlying biology and targets that they are addressing are unique. Epizyme is a good example," he said.

"There's a trend toward targeted therapies. If you've got a drug that is targeted toward treating a disease or a subset of patients with a disease where there is a single molecular cause, you can run smaller trials, have better capital efficiency, higher clinical efficacy and more pricing flexibility," Healy concluded.

The next early-stage IPO will likely belong to gene therapy company bluebird bio. Its lead candidate, Lenti-D to treat the rare hereditary neurological disorder childhood cerebral adrenoleukodystrophy, has completed a Phase I/II trial and is slated to start Phase II/III before year end (Also see "Third Rock’s Mark Levin Warns of System-Wide Failure To Support Young Biomedical Companies" - Pink Sheet, 24 May, 2013.).

Many Happy (IPO) Returns

IPOs have been an insignificant source of returns for years in the life sciences. That’s also made it tough for VCs to use IPOs effectively as a bargaining tool in partnering and acquisition talks. But if recent IPO performance is sustained, perspectives might change.

“No one’s made money in IPOs in a decade,” said MPM’s Evnin. He estimated that in the last decade, the split between M&A and IPOs as a source of life science venture returns has been about 80% from acquired private companies and about 20% from IPO companies.

“If you roll back three years, valuations weren’t really attractive. You might take a slightly less lucrative strategic deal than you might have wished. In the IPO market, it was uncertain if you’d get it done and that the valuation would work out well,” he noted.

Two of the most active life science IPO investors, Sofinnova and NEA, both said their venture returns in the last few years have been roughly 50/50 from private M&A and IPOs. That typically involves years of investment both pre- and post-offering, so VCs with large funds and the flexibility to sustain positions long-term benefit.

Sofinnova aims to have a relatively short time pre-IPO, giving it more flexibility later. "Our average time from initial investment to completing a public offering is about three to three-and-a-half years. In private investments, we often position the companies with a viable a go-it-alone strategy so they can end up doing a public offering where investors fund product development and self-commercialization" said Healy.

"Our returns over the last three years were almost 50/50 between M&A and IPOs; the absolute multiples are about the same as well," he added. Sofinnova isn't in a rush to sell once its portfolio companies reach the public markets. "We'll have an investment thesis, and when that has played out or our return targets have been hit, we're typically looking to monetize those investments." Sofinnova was involved in two of the best performing IPOs in 2012: Tesaro and Hyperion Therapeutics Inc. It also invested in Durata Therapeutics Inc. and KaloBios, so far two of the worst life science IPO performers in the last few years.

NEA has been involved in seven IPO companies in the last 18 months, several of them top performers. They include Clovis, Supernus Pharmaceuticals Inc., Hyperion, Tesaro, Omthera Pharmaceuticals Inc. and Epizyme; it also has an IPO for European Prosensa Holding BV on file.

“In the last couple of years, we’ve been more weighted toward IPO than M&A. The M&A market has been surprisingly slow. Measured over a longer period of time, our returns are probably close to 50/50,” split between private IPO and M&A, Mott said. He noted that in some NEA portfolio companies acquired after going public, like Pharmion Corp. and Inhibitex Inc., the firm still held its position at the time of the acquisition.

VCs such as Sofinnova and NEA, as well as firms such as OrbiMed Advisors, Abingworth and Aisling Capital, are increasingly making new investments during IPOs or afterward, Mott said. In addition to new venture money, also the number of public market IPO investors is growing. He observed, “It still remains a relatively narrow group of specialists, but it seems to have broadened a bit from where it was a year or two years ago. It’s still much narrower than in technology.”