Wall Street’s seemingly insatiable appetite for biotechnology stocks has led to a surge in small companies from Europe listing in the U.S., where they can fetch higher valuations than in their home markets.
Investors in the U.S. have poured more than $1 billion into European biotech companies since the start of this year, easily surpassing the $794 million raised in all of 2014. That compares with just two share issues—one initial public offering and one follow-on offering—for a total of $153 million in 2013, and none in the three previous years, according to data from Bank of New York Mellon Corp.
It is another sign that the bull run in biotech stocks is showing no sign of slowing, though investors remain divided on whether the market has become a bubble.
GW Pharmaceuticals PLC, a London company developing drugs out of compounds from the cannabis plant, has raised $481 million on the Nasdaq Stock Market in just two years in four separate fundraisings. GW’s primary listing is on London’s Alternative Investment Market, known as Aim, but the stock is now more heavily traded stateside.
Justin Gover, chief executive of GW, said the U.S. is “the most active market, with the deepest set of pockets,” and GW’s transition from an early-stage biotech to a commercial pharmaceutical company “would not be possible without access to this type of money.”
This biotech phenomenon can be traced back to “first wave” companies, such as Amgen Inc., Gilead Sciences Inc. and Celgene Corp., that listed in the 1980s and early 1990s and have since grown into biotech behemoths. Those companies’ success gave birth to a large community of specialist investors and dedicated biotech funds that continue to plow new capital into the sector.
The traffic isn’t all one way. Verseon Corp., a Fremont, Calif., company developing drugs designed by computer, raised £65.8 million ($101.2 million) on Aim in early May, with backing from investors that included U.K. fund manager Neil Woodford. Adityo Prakash, chief executive of Verseon, said he was “impressed by the long-term view of institutional investors in the U.K.”
Boston-based Allied Minds PLC, a company that commercializes research from U.S. universities and government research, raised £124.4 million on London’s main market last year.
The U.K. has a rare edge over the U.S. in this so-called technology-transfer space since it is already the listing venue for a number of similar companies, such as IP Group PLC and Imperial Innovations PLC. Another Boston-based technology transfer company, PureTech Health, announced plans to list in London earlier this week.
Still, Europe’s own biotech boom, which came along a few years later than in the U.S., has struggled to gain the same critical mass.
European biotech companies were given another reason to cross the Atlantic Ocean in 2012, when U.S. President Barack Obama signed the Jumpstart Our Business Startups Act, a law aimed at stimulating the growth of small businesses in the U.S. It loosened the regulatory requirements on companies with annual gross revenue of less than $1 billion looking to raise funds on the public markets.
Ayden Dagg, Citi’s head of depository receipts for Europe, the Middle East and Africa, said the JOBS Act had created a “huge draw” for small companies, saving them “thousands if not hundreds of thousands [of dollars] on internal compliance and regulatory costs.”
Most foreign companies access U.S. investors through a vehicle known as an American depository receipt, or ADR, to comply with rules preventing overseas listings. ADRs are issued by U.S. depository banks that have purchased ordinary shares in the company’s home market. While they only “represent” the underlying ordinary share, they can be traded on U.S. stock exchanges. David Stueber, managing director of BNY Mellon Depository Receipts, describes them as “a candy wrapper around an ordinary share.”
Earlier this month, Belgian biotech Galápagos NV raised about $242 million on Nasdaq, the largest JOBS Act initial public offering from Europe this year. It followed several other large fundraisings. France’s Cellectis SA and Adaptimmune Therapeutics PLC of the U.K. raised more than $400 million between them on Nasdaq in recent weeks. Mr. Stueber, who has been involved in a number of these fundraisings, said there were more in the pipeline.
David Grainger, a partner at venture-capital group Index Ventures in London, said he doesn’t think the bull run in biotech companies will last. “The continuing appetite to buy almost any IPO that comes to market is self-sustaining, bubblelike behavior,” he said.
Mr. Grainger predicted that a “significant number” of the pre-revenue biotech companies listed on Nasdaq would “dramatically fail over the next 12 months and dent investor enthusiasm.” Still, he has more confidence in the European companies that have made it onto Nasdaq, since “only the most attractive European IPO-able biotechs will get anywhere on a U.S. listing.”
Biotech fund manager David Pinniger, of Polar Capital in London, is more bullish. He said the valuations of most recently listed companies haven’t looked particularly frothy, adding that an investor who had invested in every single biotech IPO in 2013 and 2014 as a simple strategy would have “materially underperformed” the standard sector benchmark index, the Nasdaq Biotechnology Index.
He added that European companies are heading to the U.S. because “that’s where capital markets are most appreciative” of their growth stories and where investors are “prepared to take risks.”
The performance of the sector in recent years has been driven by the stronger-than-expected earnings growth of the larger, profitable companies such as Gilead being delivered right now, rather than speculation over the long-term potential of smaller-capitalization, unprofitable companies, he said.
Mr. Pinniger also said there has been a “profound” shift in the productivity of the biotech industry, which legitimately underpins investor enthusiasm for the sector.
“Computing power and IT is enabling us to understand what’s going on in terms of the biology of health and disease and enabling us to identify more points of molecular intervention,” he said. “If you ally that with the proliferation of powerful new tools and technology that enable you to intervene and change that biology, that is a profound transformation.”
By Denise Roland
