IPO Step-Ups By Therapeutic Area: Is Your Disease Focus Hot or Not?
This article was originally published in Start Up
Executive Summary
Valuation Watch: an analysis of pre-money step ups for the 2003-04 biotech IPO window demonstrates that public investors are favoring companies in some therapeutic areas over companies in other areas. CNS and jump-start technologies, for example, are doing well.
The average pre-money IPO step up for US biotech companies that have hit the public markets in this last financing window is 2.11. We've pointed out in this space that biotech investors are saving their money for companies with Phase III products—the only development stage which peaks above this modest average, at 2.60 (see "Biotech Investors: Believing the Dream, Rewarding Phase III IPOs," START-UP, November 2004 (Also see "Biotech Investors: Believing the Dream, Rewarding Phase III IPOs" - Scrip, 1 Nov, 2004.)).
But not all Phase III products are alike, and an analysis of these same companies suggests that investors prefer certain therapeutic areas over others. (See Exhibit 1.) We've omitted categories with fewer than three companies; thus ophthalmology-focused Eyetech Pharmaceuticals Inc. 's early 2004 IPO (step up of 3.70) [See Deal] is excluded, as are several other above-average firms such as Barrier Therapeutics Inc. (dermatology, 2.49) [See Deal], GTx Inc. (men's health, 4.81) [See Deal], and Tercica Inc. (metabolic disease, 2.49) [See Deal].
Companies focusing on diseases of the central nervous system fared well, led by Corcept Therapeutics Inc. 's 5.28 step up [See Deal]. Corcept's mifepristone (Corlux) is fast tracked in Phase III development for psychotic major depression and is being tested in Alzheimer's disease as well. Renovis Inc. , the other above-average step up CNS player [See Deal], also has a project in Phase III: its Cerovive neuroprotective treatment for acute ischemic stroke is partnered with AstraZeneca PLC . [See Deal]
While the warmth investors have shown toward CNS companies is mildly surprising—the field has long been viewed as one of the most difficult drug development areas—at first glance the rise of so-called platform biotechs seems like a sign of the apocalypse. But our crop of platform companies reflects the changing nature of biotechnology firms in general: these aren't the genomics and proteomics firms of the biotech bubble.
The platform group is led by strong step ups from New River Pharmaceuticals Inc. (5.40) [See Deal] and Momenta Pharmaceuticals Inc. (2.78) [See Deal], and both might cringe at the label. Indeed each belong to the jumpstart generation, applying a platform technology to make safer or more effective versions of existing therapies or stalled development compounds. Momenta applies a proprietary sugar sequencing technology to improve performance of existing drugs (the firm aims to also develop its own novel compounds) while New River wants to ameliorate the unwanted side effects associated with drugs like amphetamines or opioids—overdose, abuse, or addiction—with its Carrierwave technology.
Traditional go-to therapeutic categories like oncology aren't necessarily getting the short end of the public financing stick. The cancer group was pulled down by a poor step up from Xcyte Therapies Inc. (0.99) [See Deal] as well as the vast sums of private money raised by the three other companies in the category, Pharmion Corp. [See Deal], CancerVax Corp. [See Deal], and Cytokinetics Inc. [See Deal], which each raised well over the entire window average of $120 million in private funds. What's more, oncology is very competitive: treatment costs are high given the tendency toward cocktail therapies and clinical development is increasingly risky, complicated by growing difficulties in recruiting trial patients.