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Hello Avatar! Welcome to another week of biotech analysis. Today’s commentary is as always on Thursday focused on the general market update. For the week XBI was DOWN -1.5% and remains red at -8% for the year. Today, we are going to address an controversial topic that has been getting quite a bit of attention recently. That being the use of the Private Investment in Public Equity (PIPE) vehicle as a follow-on (post-IPO) financing mechanism for public biotech companies. The controversy is around specialist institutional investors getting an early look at confidential data before catalyst data readouts. As one can image, this has been incredibly lucrative to investors and as a result the use of the PIPE has skyrocketed. Think of it as the new SPAC rush. Will this story end the same as the SPAC revolution of 2022? Stay tuned.
We are now publishing 4-5x per week according to the following cadence:
Mondays: BioBucks: Stock Analysis & Biotech Catalysts
Wednesdays: CRISPR Corner: Monthly gene editing news
Thursdays: Insiders Track: Public & Private Biotech Markets
Fridays: Sweat Equity: Your Weekly Biotech Fix
Sundays: Building Biotech: Strategic Topics
This Sunday’s Building Biotech strategy discussion will be dedicated to fibrosis - a mechanism which is recently drawing heavy attention from pharma and investors.
Monday’s BioBucks column will feature Biohaven which is expected to share Phase I clinical data from their high profile BHV-1300 IgG degrader program. Options pricing suggest 20% volatility!
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Lots to cover this week, let's get started!
BIOTECH PUBLIC MARKET UPDATE
For the week, the public indexes were both UP, with the S&P +1% & DOW moving +1%. For the year both remain UP +6% and +1% respectively. The XBI (the biotech index) comes in DOWN -1.5% for the week and remains -8% for the year.
MACRO
Things appear to be playing out as we project last week. That being trouble into the end of the month as liquidity dries from the BTFP program expiration and the repo account running out.
Again, no need to worry as the FED will soon release the general account from tax collections - with ~$1T in cool cash the markets will be moving again in no time.
And of course it is rate cuts the market desires - we have covered many times the correlation between interest rates and biotech. Today we finally saw some softness in the economic numbers with falling GDP. If you have been with us for sometime you know this will be the trigger to catalyze rate cuts.
FOLLOW-ON FINANCING AND PIPES
Today’s analysis is going to be driven largely from a recent BMO report titled: What We’re Thinking About This Month – Financing in Today’s Market (and what’s with all of the PIPEs?).
The analysis starts at a high level laying out the current situation for follow-on financing of biotechs in the public markets. The discussion will then shift specifically to PIPEs, how they are being used, and the controversy which has arisen around their use.
After reading today’s newsletter you are guaranteed to be the expert in the room amongst your colleagues when the topic of PIPEs in biotech comes up.
2024 Financing Boom: Follow-on Deals and Dollars Surge
Biotech companies have been experiencing a significant surge in public, post-IPO, follow-on financing activity in 2024 compared to the previous two years. This has been characterized by three trends:
Sharp Increase in overall activity: 3-4x increase in both the number of financing deals and total proceeds raised in 2024 compared to the same period in 2022 and 2023 (see Graph 1 below).
Strong YTD Performance: As of the time of writing of the BMO report (3/24), there have already been 69 follow-on offerings for biopharma companies, raising a total of $13.3B. This surpasses the figures for all of 2023 (123 deals, $20.4B) and 2022 (108 deals, $17.1B).
Year-End Projection: If the current trend continues (annualized data), 2024 could see a total of 331 financing deals raising $63.9B. This would represent a substantial increase compared to both 2023 and 2022:
2.7x more deals and 3x more proceeds than 2023.
Over 3x more deals and 3.7x more proceeds than 2022.
As noted above, recent biotech financings have come with better pricing and aftermarket performance compared to previous years. Graph 2 below quantitates this dynamic.
Pricing: Graph 2 below shows that companies raising money in 2024 so far (YTD) have gotten much better terms than in the past. The average discount offered to investors has been only -3.2%, compared to -6.8% in 2023 and -7.6% in 2022.
Aftermarket Performance: Companies that have issued follow-on offerings (additional stock sales) have seen their stock price increase after the offering in all three years (2022, 2023, and 2024 YTD). The average increase for offerings in 2024 YTD has been 41.9%, compared to 50.6% in 2023 and 45.0% in 2022. While the 2022 and 2023 numbers are higher, this likely reflects the general rise in biotech stocks during this period.
Outperformance: Even considering the improved market conditions, companies issuing follow-on offerings in 2024 have seen their stock price rise by an average of 41.9%, which is significantly better than the 5% return of the XBI (an index of biotech stocks) over the same period.
OPPORTUNISTIC FOLLOW-ON DEALS DOMINATE IN 2024
Opportunistic deals, those completed without a specific catalyst, have surged to represent over half (50.7%) of all financings in 2024 year-to-date (YTD) according to Graph 3 below. This compares to just 28.5% and 27.8% in 2023 and 2022, respectively.
This trend aligns with our expectations. Tough equity markets, like those seen in the past two years, make investors cautious. They often wait for positive developments (catalysts) that reduce the risk of an investment before committing capital.
However, things have changed and companies are now raising more frequently without the need for a catalyst to backstop the deal. This is a positive indicator!
Opportunistic Deals Performance
Graph 3 below also reveals that opportunistic deals have performed well. Despite the lack of a specific trigger, the total proceeds from these financings ($6.1B YTD) are nearly on par with those driven by catalysts ($7.2B YTD).
While the average deal size is slightly lower for opportunistic deals ($180M) compared to catalyst-driven deals ($205M), both types have outperformed the XBI (an index of biotechnology stocks) so far in 2024. However, aftermarket performance has been stronger for catalyst-driven financings (mean return of 58.8%) versus opportunistic deals (mean return of 24.8%).
Shift in Deal Types to PIPEs
Publicly-marketed deals have become less common over the past two years (2022-2024 YTD), with private placements (PIPEs and registered direct offerings) becoming the most common vehicles for financing.
FOLLOW-ON FINANCING SHIFTS TOWARD PRIVATE MARKETS
Publicly marketed offerings (PMOs) and Confidentially Marketed Public Offering (CMPOs) were the main ways biopharma companies raised additional capital in 2022 and 2023 (see Graph 4 below).
In 2022, PMOs accounted for 72.3% of all follow-on funding, with CMPOs at 41.7% and PMOs at 30.6%.
This trend continued in 2023, though with a slight decrease: PMOs made up 66.9% (CMPOs: 43.9%, PMOs: 23.6%).
However, 2024 is showing a significant shift. So far this year (YTD), PMOs have dropped to 50.7% of follow-on funding (CMPOs: 34.8%, PMOs: 15.9%).
Meanwhile, private market transactions, including private investments in public equity (PIPEs) and registered direct offerings (RDOs), are on the rise.
In 2022, they comprised 26% of follow-on funding (PIPEs: 16.7%, RDOs: 9.3%).
This number grew to 33.1% in 2023 (PIPEs: 19.5%, RDOs: 13.0%).
The trend continues in 2024 YTD, with private markets reaching 47.8% (PIPEs: 31.9%, RDOs: 15.9%).
PRIVATELY MARKETED FINANCING OUTPERFORM PUBLIC OFFERING SINCE 20203
Why have private financings come to dominate? Easy answer, they are outperforming! Since 2023, private financing methods (PIPE financings and RDOs) have delivered stronger aftermarket performance compared to publicly marketed offerings.
Overall Trends (2022-2024 YTD):
While the average return across all financing methods appears similar (Table 1 below), a closer look reveals significant year-by-year variations:
2022: Publicly marketed offerings dominated with CMPOs returning 68.3% and Follow-Ons at 41.6%. Conversely, private placements (PIPEs) saw negative returns (-24.4%) and RDOs performed poorly (-28.1%).
2023: The tide turned. Private financings (PIPEs: 63.3%, RDOs: 54.0%) significantly outperformed public offerings (CMPOs: 62.9%, Follow-Ons: 16.3%).
2024 YTD: This trend continues. PIPEs boast a phenomenal 90.0% return, with RDOs at 30.3%. Public offerings struggle: CMPOs returned 27.1%, while Follow-Ons experienced negative returns (-1.9%).
In short, privately marketed financings have surpassed publicly marketed offerings in terms of aftermarket performance since 2023.
Biopharma PIPEs on the Rise in 2024
The use of Private Investments in Public Equity (PIPEs) has surged in the biotech industry so far in 2024 as follows:
Increased Volume: Compared to the full year in 2023 (24 deals) and 2022 (18 deals), there have already been 22 PIPE transactions (Table 2).
Growing Importance: PIPEs are becoming a more significant source of follow-on financing. In 2024 YTD, they represent 31.9% of such deals, compared to 19.5% in 2023 and 16.7% in 2022 (Graph 4).
Larger Deals: The average size of PIPE deals has also increased significantly. In 2024 YTD, the average deal value is $175 million, 38% and 54% higher than the average deal size in 2023 and 2022, respectively.
PIPEs for Opportunistic Funding
As noted above, biotech companies are increasingly using PIPEs for opportunistic financing rather than relying on specific events (catalysts) to drive investment.
Opportunistic Focus: Table 2 shows that a significant portion of PIPEs fall under opportunistic financing. In 2024 YTD, 45.5% of PIPEs were opportunistic, compared to 41.7% in 2023 and 55.6% in 2022.
Strategic Choice: This trend is likely because PIPEs allow companies to raise capital without the dilution typically associated with public offerings, especially in the absence of positive data or regulatory milestones that could boost investor confidence.
BONUS METRICS FROM WILLIAM BLAIR
The BMO data is excellent for providing directionality around PIPE use. We came across the data below from William Blair that shows PIPEs in action to give you a sense of deal sizes and performance.
The chart lists the top 10 biotechnology companies based on the amount of money they raised through public offerings (PIPEs) in the first quarter of 2024. The chart title is “Biotechnology Top 10 Biotechnology First Quarter 2024 PIPES”. It includes company name, ticker symbol, amount raised in millions (M), date completed, first day performance, and first quarter performance.
Shown below is for the 1Q of 2024 where 40 PIPEs were raised for a cumulative amount of $5.7B. By comparison the VC market was $5.5B over the same time period. Median PIPE performance was 11.6%.
Denali Therapeutics raised the most money at $499.7M, while enGene Holdings raised the least at $200M. The first day performance ranged from a loss of 2.5% for Crinetics Pharmaceuticals to a gain of 182.0% for Avidity Biosciences. The first quarter performance ranged from a gain of 14.3% for Cogent Biosciences to a gain of 188.5% for Dianthus Therapeutics. Overall, the median company raised $240M and had a first day and first quarter performance of 29.1% and 68.3% respectively.
PIPEs: From Technical Plays to Mainstream Financing
Early PIPEs: Catering to Technical Investors
In the past, PIPEs were a financing option mainly used by small companies that couldn't raise funds through regular public offerings. These smaller financings were typically sold to investors who focused more on the stock's technical aspects (price, trading volume, short interest) rather than the company's fundamentals (overall business health).
Structure and Regulations
To comply with stock exchange rules limiting discounted stock sales, PIPE offerings often involved selling shares at the current market price. To make up for the lack of a discount, PIPEs frequently included sweetener warrants. These warrants are designed to avoid counting towards the discount limitations. It's important to distinguish these sweetener warrants from pre-funded warrants, which are sometimes offered to existing investors with ownership restrictions.
Increased Scrutiny in the Early 2000s
In the early 2000s, the SEC investigated some PIPE transactions. The SEC accused certain hedge funds of manipulating stock prices by shorting shares of companies involved in PIPE financings. These investigations led to changes in how PIPEs were sold and structured.
PIPEs Today: Larger Companies, Broader Appeal
The current generation of PIPEs is used by larger companies and sold to bigger investors who focus more on fundamentals. These PIPEs also raise larger amounts of capital. This begs the question: with these changes, will there be more regulatory scrutiny?
Potential for Increased Scrutiny Due to Confidential Nature
As the BMO analysis shows, PIPEs have transformed from a somewhat limited financing option to one used by established companies with strong investor bases and growth prospects similar to companies that traditionally raise capital through public offerings. However, due to the confidential way PIPEs are conducted (involving the sharing of non-public information, also known as "wall-crossing"), there is a possibility of increased regulatory scrutiny, especially as the use of PIPEs becomes more widespread.
Why Companies Use PIPE Transactions:
There are several advantages that make PIPE transactions attractive for companies looking to raise capital:
Speed: PIPE deals can close very quickly, often within days of signing agreements.
Investor Interest: Established or new investors might express interest in buying a significant amount of stock, but only through a private, negotiated sale (PIPE).
Market Volatility: PIPE transactions are not impacted by current market conditions because pricing and marketing are confidential.
Flexibility: Companies can explore pricing and deal terms privately with investors. If the terms aren't favorable, they can walk away without public disclosure.
Cost-Effectiveness: While banks are often involved in larger PIPE deals, some companies can save on fees by self-managing the process.
In-Depth Due Diligence: PIPEs allow for more time for investor due diligence, which may lead to better pricing for the company.
Investor Lock-Up: It's important to note that investors in a PIPE transaction receive restricted shares. These shares cannot be sold immediately. The company must either register the shares (usually within 6-8 weeks) or the investor must wait for an exemption to apply, such as Rule 144 (typically after six months).
Why PIPE Deals Are Attractive to Some Investors
PIPE investments offer several advantages that can't be found in traditional public offerings:
Early Information Edge: Investors brought "over-the-wall" (meaning they sign a confidentiality agreement) get a sneak peek at potentially market-moving information. This might be news of a future stock sale or even exclusive data (like early clinical trial results). However, they can't sell their shares until this confidential information becomes public.
Deeper Dive Due Diligence: PIPE investors have a chance to do more in-depth research on the company compared to a public offering with many participants. This can involve more face-to-face meetings with company leaders.
Potential to Influence Deal Structure: As part of a select group, investors may have some say in the pricing and terms of the PIPE deal. This is especially true if the investor initiated discussions with the company.
Discounted Price with Upside: PIPE shares are typically priced lower than the current market price because they're sold privately. Once the confidential information is released publicly, the stock price might rise, allowing investors to profit.
Guaranteed Allocation: Unlike a public offering where getting shares depends on demand, PIPE investors know exactly how many shares they'll receive beforehand.
Why Some Investors Dislike PIPEs
Several factors make PIPEs (Private Investments in Public Equity) unpopular with some investors:
Limited Access: PIPEs are typically offered only to accredited investors and company insiders. This excludes most retail investors and some institutional investors with policies against confidential investment opportunities.
Information Asymmetry: PIPE deals are negotiated based on non-public information, potentially giving PIPE investors an unfair advantage. Public investors only learn about the deal after the fact, missing out on a potential price increase.
Perceived Unfairness: Critics argue that PIPEs favor a select few who can access confidential information and potentially lucrative deals. They advocate for public offerings, where everyone has access to the same information and can participate.
Dilution Concerns: Existing shareholders may worry that PIPE deals dilute their ownership stake by issuing new shares at a discount. While PIPE investors gain from a potential price increase, existing shareholders might see their ownership percentage decrease.
PIPEs DRAWING CONTROVERSY
PIPEs have been a topic of intense controversy recently as retail investors feel there is asymmetry of information and specialist investors are getting an opportunity to invest at a cheaper price ahead of data.
This was recently covered in the Wall Street Journal see below and here.
As well as by Peter Kolchinsky - see here and below.
And finally was discussed intensely on BioTech Hangout last Friday - see here and below.
CONCLUSION
In today's newsletter, we examined the issue of using PIPEs as a financing tool for public biotech companies. The controversy stems from specialist institutional investors gaining early access to confidential data before key data disclosures. This practice proved highly profitable for investors, leading to a surge in PIPE utilization, reminiscent of the 2022 SPAC boom. The lingering question was whether this trend will meet a similar fate as the short-lived SPAC craze, potentially with increased regulatory scrutiny.
Again, we are now publishing 4-5x per week according to the following cadence:
Mondays: BioBucks: Stock Analysis & Biotech Catalysts
Wednesdays: CRISPR Corner: Monthly gene editing news (monthly)
Thursdays: Insiders Track: Public & Private Biotech Markets
Fridays: Sweat Equity: Your Weekly Biotech Fix
Sundays: Building Biotech: Strategic Topics
Sundays and Mondays are under the paid umbrella, everything else is FREE. It is $5/month and we encourage you to support our efforts. It is less than 1 cup coffee these days and keeps us motivated to keep producing the hybrid science and business biotech focused content you will not find anywhere else all in the same place.
If you or a loved one are considering a career in the life sciences (medical, academic, or industry) we encourage you to check out our book REJECT REJECTION. Also available in paperback on Amazon.
As a reminder, if looking to go deeper into the topics we cover check out our website BowTiedBiotech.com, or DM us on twitter, or email us: bowtiedbiotech@gmail.com
ABOUT BOWTIEDBIOTECH
As a reminder, the purpose of the BowTiedBiotech substack is two-fold. Primarily, we aim to provide our scientist audience the tools to build a biotech company and ultimately translate their ideas into medicines for patients. Secondarily, biotech investors may find this substack useful as we will be providing weekly market updates of the public AND private markets as well as heavily leveraging current financing events as teaching examples.
DISCLAIMER
None of this is to be deemed legal or financial advice of any kind. All updates are sourced from publicly available disclosures. Insights are *opinions* written by an anonymous cartoon/scientist/investor.
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