After several dry years, life science and technology companies reaped the benefits of a growing appetite for initial public offerings in 2013.
More companies went public last year, including several in New Jersey, backed by a broader rally in equities markets. Now the top questions heading into 2014: Will the bullish trend continue? Or is a pullback in order?
Early projections are optimistic.
“We're seeing a big uptick,” said EisnerAmper Partner John Pennett, who heads the accounting firm's life science and technology practice in Edison. “Biotech has had a tremendous run, and now you're seeing tech come into play. Twitter leads; everyone else follows.”
A survey by BDO USA LLP, a Chicago-based accounting and consulting organization with offices in Woodbridge, projects a similar sentiment.
About 63 percent of respondents expect an increase in IPOs this year, while 9 percent expect fewer offerings. The rest expect IPOs to remain relatively flat.
The survey, which polled 100 capital market executives, listed technology as the most likely source of new IPOS, with about 73 percent expecting an increase in that sector. Energy ranked second, at 59 percent, followed by biotech, at 58 percent, and health care, at 54 percent.
Observers say the outlook toward technology and life science companies reflects favorable macro trends combined with micro factors specific to those industries.
Mark Giamo, managing partner at BDO's Woodbridge office, said pent-up demand came to surface in 2013 for life science and technology companies, many of whom relied on private equity and venture capital money in prior years before public equity markets heated up.
Now that investing waters are warmer, Giamo said momentum is expected to continue. He cited the Federal Reserve's years-long policy of keeping interest rates near 0 percent in order to encourage risk. The policy, broadly called quantitative easing, shows little sign of tightening.
“There's investor demand for high-yielding assets, and there is no place else to get returns,” Giamo said. “The bond market is still soft. Where do investors turn? They seek returns from equity markets.”
Giamo said IPO investors tend to gravitate toward life science and technology companies because breakthroughs in those sectors can lead to outsized returns.
“IPO markets look for rapid growth potential, and those sectors lend themselves to rapid growth,” Giamo said.
The flip side is, investing in such early-stage companies carries more risk.
But that potential for risk isn't necessarily a deterrent. New Jersey saw several IPOs in 2013: Cancer Genetics Inc., PTC Therapeutics and Omthera Pharmaceuticals all went public last spring. Omthera Pharmaceuticals, a maker of treatments for abnormal levels of fats in the bloodstream, was later acquired by AstraZeneca for $323 million.
Observers say to expect more deals in 2014.
Pennett said a healthier IPO market tends to trigger mergers and acquisitions because offerings divulge financial details and strategies to potential purchasers, giving buyers a better basis to determine value.
Forest Laboratories on Jan. 8 purchased the Bridgewater biopharmaceutical firm Aptalis for $2.9 billion, just weeks after Aptalis' private equity owner TPG Capital LP filed IPO paperwork intended to raise up to $500 million.
“When a company files, it's an alert to potential acquirers,” Pennett said.
Observers also expect big pharmaceutical companies to continue hunting for acquisition candidates in order to refresh their pipelines.
Many promising drugs are being developed by emerging biotechs who don't have the manufacturing or marketing capacity of big pharmaceuticals, a dynamic that often spurs licensing deals and buyouts. Completing late-stage trials can cost $100 million or more, funding that is beyond the reach of many biotechs.
“Larger pharma companies that don't have an extensive and deep pipeline are trying to fill their pipelines with late-stage assets,” said Andrew Gilbert, a partner at DLA Piper, a Florham Park law firm advising life science companies. “They're on a buying spree. I think that trend will continue.”
Gilbert said the climate also helps privately held biotechs and their investors. The increased likelihood of going public or being acquired gives early-stage investors, such as venture capital teams, more confidence to take risks because they can envision a profitable exit.
Another factor observers say will benefit the IPO market going forward is the federal JOBS Act — legislation that, among other things, was designed to make it easier for firms to go public.
Pennett cites a provision that allows companies to file paperwork confidentially with the Securities and Exchange Commission while the agency reviews the submission and provides feedback. He said this encourages more companies to consider offerings, knowing they have time to edit paperwork before publicly revealing details to competitors. Companies can also use that window, usually four to five months, to gauge market interest.
Pennett said he expects more biotech IPOs in early 2014, with technology companies following in spring.
“The queue for tech companies is not as big, but it's definitely starting to grow,” he said.
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