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Biotechs Insulate Region as IPO Market Cools

The once white-hot market for initial public offerings in the U.S. has cooled in recent months as private companies stay private longer or opt to be taken out by larger rivals. But the local biotechnology scene may be insulating San Diego from the trend.

Last year marked the most active U.S. IPO market since 2000, with 275 companies going public and raising $85 billion. But so far this year, the IPO market has slowed dramatically.

“The stock market is more erratic this year,” said economist Alan Gin, a member of the faculty at University of San Diego. “Oils are under pressure this year, the market was hitting new highs and some people were calling for a correction. We never got the full correction, but the stock market is not going gangbusters like it was last year.”

Deals Down 36%

In the first half of 2015 there have been 101 deals, down 36 percent from the same period last year. Even worse, total capital raised amounted to only $19.7 billion in the U.S., down 45 percent from the same period in 2014.

IPO expert Doug Regnier, the West Region IPO leader at Ernst & Young, said this year’s pullback reflects a trend toward private financing.

“Unicorn” companies — or private businesses with valuations over $1 billion — such as Uber, Pinterest and Spotify are able to attract private inflows of cash rather than raising capital through a traditional IPO channel.

Regnier said this could be the result of a booming stock market in 2013 and 2014 dumping cash into investors’ hands. These same investors are now increasingly funding pre-IPO companies, offering huge chunks of cash usually only associated with the IPOs of later-stage, mature companies. This surge in private financing lessens the need for companies to list publicly in order to attract the scale of funding they require.

Unicorns of a Different Kind

While the national IPO market cools, San Diego is uniquely isolated from the trend. This, according to Gin, might be attributed to the local biotech scene.

“Biotech seems to be immune to the economy,” said financial analyst Bill Gunderson earlier this year. “I proved this to myself during the recession. Stock went down 53 percent, but biotechs didn’t. You see, they don’t have to depend upon the consumer, or jobs reports, or anything. They just keep developing drugs that are in incredibly high demand.”

Out of the 66 San Diego companies that went public since 2001, 44 were health care companies. The life science cluster’s domination in the public scene has only intensified in the last few years. Since 2013, all 19 local companies that went public were life science firms.

“The dynamic of life sciences is different than other markets,” Regnier said. “When you get into technology or other traditional companies, the stock price is determined by the performance of the company and projected growth. But with biotech there’s no product and no revenue. So there’s a group of life science investors that are constantly evaluating the science behind the pipeline of drugs being developed. They keep an eye on potential inflection points that might drive valuation, like the release of promising clinical trial data.”

So far this year four San Diego companies have gone public, which puts San Diego right on track to meet or exceed last year’s count.

“There were five IPOs this same time last year,” Regnier said. “From confidential information that I have, I’m aware of a handful of companies preparing to potentially launch later this year. I would think we’ll be very close to last year’s numbers.”

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