Biotechnology companies, a mainstay of the Triangle economy, have been finding favor with a wide swath of investors.
Consider the following:
• Argos Therapeutics of Durham went public on Friday after selling $45 million worth of stock in an initial public offering. A second Triangle biotechnology company, NephroGenex, is on track to go public next week.
• Three Triangle biotechnology companies Chimerix, Heat Biologics and LipoScience went public in 2013, each raising tens of millions of dollars.
• Venture capital funding for Triangle companies, which has been in a slump, rebounded in the fourth quarter, led by four biotech companies that each raised in excess of $10 million.
• The Nasdaq Biotechnology Index has significantly outperformed the Standard & Poors 500 over the past three years, according to William Blair & Co. Last year, biotech stocks jumped 66 percent.
Were in a good period here, said Art Pappas, founder of Durham venture capital firm Pappas Ventures, which focuses on investing in life science companies. Im eager to see how this next couple of months plays out.
All of this is welcome news for Triangle biotechnology companies, many of which rely on raising money from investors in either the public markets or privately from venture capitalists and so-called angels, or wealthy individuals to fund the ever-increasing costs of developing new drugs and other products, as well as to finance sales and marketing efforts.
Chasing outsized returns
The Triangle has long been a biotechnology industry hub. The N.C. Biotechnology Center lists more than 400 bioscience companies with operations locally.
In light of the bull market for publicly traded stocks in recent years, Wall Street investors, especially mutual funds, have been gravitating to previously overlooked sectors like biotechnology in hopes of generating outsized returns. Thats because safe holdings, such as utilities and oil companies, have become fully valued, and the bond market has been slumping, said venture capitalist James Rosen of Intersouth Partners.
Its sort of a trickle-down of capital, Rosen said.
The biotech sectors allure has been burnished by success stories such as New York-based Intercept Pharmaceuticals, which last month saw its shares soar more than 500 percent over a two-day period after the company reported surprisingly strong test results for its experimental liver disease treatment.
Biotechs rise on Wall Street has spilled over into creating a hospitable IPO environment.
The 34 biotech companies that went public across the country in 2013 equals the combined total of biotech IPOs during the prior three years.
I think you will see more companies continue to go out, Pappas said earlier this month. The only worry in that kind of building momentum in the market is that were seeing a lot of not-so-great stuff trying to be financed.
Pappas Ventures has benefited from the surge in investor demand. Over the past 19 months, five companies in the firms investment portfolio including Triangle companies Chimerix and LipoScience have either gone public or have been acquired.
We believe our investors are very happy, Pappas said. The privately held firm doesnt disclose the returns earned by its investors.
However, there were signs last week that the market for biotech IPOs might be cooling off.
I think you have to have that concern, said Jeff Abbey, CEO of Argos. It may not go beyond the first part of the year. You never know.
Although a bumper crop of seven biotech companies went public last week, two of them ended up selling shares for less than their target price in order to go out. One of them was Argos, which had hoped to fetch between $13 and $15 per share but settled for $8 per share.
On the first day of trading Friday, Argos shares opened at $8.90 and rose above $9.75 before falling back and closing at the $8-per-share IPO price.
The opening of the IPO window for biotech companies has had a positive impact on venture capital financings, which have been especially depressed in the Triangle in recent years.
Even so, it remains a challenging market for biotech companies seeking venture funding. Thats because, in the wake of the recession, the number of venture capital firms making new biotech investments has shrunk.
I think were in that in-between period where there is a lot of excitement ... but there really isnt that much capital available, said venture capitalist Clay Thorp of Durhams Hatteras Venture Partners.
Thorp anticipates that situation will change because biotechs current up cycle will help venture capital firms raise new money from institutional investors and wealthy individuals. But it wont happen overnight.
I think there will be more (venture capital) firms that will raise capital now than there would have been otherwise, he said.
John Ryals, the founder and CEO of Metabolon, a 140-employee company in Durham, has an upbeat view of the current state of the venture capital market. Metabolon which has two diagnostic tests on the market and also tests medicines and other products for drug companies, universities and other customers recently raised $15 million in venture capital.
For high-quality companies, its easier than it has been for a long time, said Ryals, whose company has raised a total of $60 million in funding to date.
Ryals said his recent experience was a world of difference compared to what transpired when he tried to raise money in 2008, in the teeth of the recession.
The funding environment was so dire back then that Metabolon ended up putting its funding search on hiatus until the spring of 2009, when it ultimately raised $12 million.
There is no point in trying to raise money when nobody is going to do a deal, Ryals said. You just kind of have to hunker down and wait till it blows over. ... We didnt fire anybody or anything, but we werent growing either.
The entire fundraising process, including the hiatus, took about 18 months back then. That compares to just eight to 10 weeks this time around.
Id recommend being aggressive about raising money if you need it, Ryals said. Its a good time.
Sam Taylor, president of the N.C. Biosciences Organization, an industry trade group, said his membership is cautiously optimistic with respect to late-stage financing.
Everybody is also worrying how long this window is going to remain open, Taylor added.
Moreover, he said, North Carolina still faces a real uphill battle with respect to early-stage capital. There is a true dearth of venture capital in North Carolina. The amount of early-stage capital here has declined in the last three years pretty steadily.
Venture capital firms prefer to invest close to home whenever possible because that makes it easier to keep an eye on their investments. According to NCBIO, North Carolinas share of venture capital investments in life science companies nationwide fell from 3.5 percent in 2008 to 1.6 percent in 2012.
Taylor said scarcity of venture capital being plowed into biotech startups and other early-stage companies today could have serious repercussions going forward.
Were afraid ... that our pipeline of companies that you would hope to see doing late-stage financings and IPOs five to 10 years from now is very small, Taylor said. We really feel we need to be addressing that at the state level.