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IPO Window Wide Open for Dx, Genomics Companies


NEW YORK – The genomics tools and diagnostics markets have seen an uptick in companies going public in the past year, driven by success in the larger biopharma market and a higher demand for underlying technologies.

Since March 2018, 10 genomics tools and molecular diagnostics firms have filed for initial public offerings, and there are rumors of other companies gearing up to file in the second half of 2019 or early in 2020.  

The success of these filings, including 10x Genomics' recent expectation-shattering $357.5 million IPO, has been driven in part by investments and positive returns in the larger biotech market, said Jonathan Norris, managing director at Silicon Valley Bank.

"The excitement of the biotech IPO sector and the idea that these new technologies are enabling these new mechanisms of action in big markets is creating this tidal wave that's floating all the boats right now," Norris said.

Multiple high-value IPOs in the tools and diagnostics space lead to more IPOs in the same space, noted Jorge Conde, a general partner at venture capital firm Andreessen Horowitz.

Seeing companies like Twist Bioscience, with a $70 million public offering, and Guardant Health, with a $273.1 million public offering, exit with high revenues serves to encourage investors' appetites for companies in similar fields, Conde said. In Twist's case, revenues for fiscal year 2017 were $10.8 million, $25.4 million in FY 2018, and are expected to be around $52.4 million in FY 2019, which ends next week for the firm. Guardant had sales of $49.8 million in FY 2017, the year before it went public, followed by $90.6 million in FY 2018, and Wall Street analysts, on average, expect FY 2019 revenues of $186.7 million.

These success stories feeding the IPO cycle is one of the benefits of being in what Brandon Couillard, an equity analyst at Jefferies Financial Group, called the "Golden Age of genomics."

In previous years, tools and diagnostics companies would go public because it was too difficult to raise the necessary capital privately. But now, more firms are filing IPOs from "a position of strength," thanks to increased access to more private capital, which can help companies sustain higher valuations, Conde said.

That private capital is also coming from unexpected places, according to Norris. Instead of just traditional venture capitalists supporting tools and diagnostics companies, Norris noted more sovereign wealth, family offices, and pension funds have contributed to late-stage funding rounds.  

The increasing complexity and innovation of diagnostic technology is another major factor in the swell of IPOs. Since many diagnostic tests are based on complex technology, such as next-generation sequencing, they're more informative from a clinical standpoint, leading to higher revenues and heightened investor interest.

"If you're based on a novel technology, you have a meaningful use case in terms of the clinic, and that's demonstrated by both growing revenues and a very favorable gross profit margin profile … that's an attractive investment independent of the space," Conde said.

Another selling point for investors is the potential of these tools and diagnostics companies to expand their portfolios, Conde said. Thanks in part to more advanced technologies, there's an opportunity for companies to produce not just a single successful diagnostic, but rather multiple generations or a strong pipeline of successful diagnostics.

Many of these companies are also developing tests for unmet medical needs, which can be a big driver of investments, Couillard said.

Tools focusing on early disease detection and minimally invasive recurrence monitoring, as well as tools that can guide treatments for diseases based on a patient's genetic profile, offer treatment options to patients who may not have had them historically, Couillard said. Companies targeting unmet needs are particularly attractive to investors, since they have less competition and can carve out a niche.

Other tools and technologies driving investment include liquid biopsy and early screening for cancer, as well as gene editing and CRISPR-based products. Artificial intelligence and machine learning, including algorithm-based services, may also be significant investment attractions in the coming months due to their potential to sort through big data, Norris said.

Norris emphasized, though, that companies can't make it in the public sector without having significant revenue and revenue traction, and there are myriad challenges once a company goes public. Companies must continue performing well on a quarterly basis, along with weathering the stock market's ups and downs.  

"You could be the best-performing company in the world, and if the whole market is on the downslope, you're not going to get the benefit of that," Norris said.

He also noted there still hasn't been a sustained breakout in getting value to investors in the tools and diagnostics space, especially in comparison to the biopharma space. But, the IPOs earlier this year from firms such as Personalis and Adaptive Biotechnologies, are a good start.

Since 2018, there have been 83 venture-backed IPOs with a current cumulative market cap of $57.4 billion, as of Sept. 23, 2019, Norris said. In contrast, there have been six venture-backed IPOs in the tools and diagnostics space with a current cumulative market cap of $19.3 billion, as of Sept. 23, 2019. There's been "nowhere near the deal volume and value" in the tools and diagnostics space compared to biopharma, Norris said.

Other companies with successful IPOs in the past year that could be spurring the recent investments include Siemens Healthineers, Bionano Genomics, Precision BioSciences, Castle Biosciences, and Exagen.  

Outside of the biotechnology sphere, strong macroeconomic conditions have also contributed to the booming IPO market.

The positive momentum and increased stability in the US stock market over the past five years has helped companies successfully go public across a variety of arenas, Norris said.

Alternative exit strategies

Going public isn't the only way for companies to exit, but it does seem to be the option of choice over other strategies.

The mergers and acquisitions landscape over the past year has been sparse, which could be the result of differences in valuations, according to Bryan Roberts, a partner at venture capital firm Venrock.

Because larger companies like PerkinElmer or Agilent Technologies have lower growth rates and valuation models, seeing newer firms with high-valuation multiples makes purchasing them a "tough pill for those larger companies to swallow," Roberts said.

In addition, some traditional acquiring companies in the diagnostics market, like Roche, "have shown no appetite in terms of expanding their businesses" recently, Couillard said.

Beyond the weak M&A landscape, there are possibilities for direct offerings, although those are less likely than public filings. Direct offerings, such as the ones Slack and Spotify were able to pull off, aren't as easy in the tools and diagnostic space, since there's a lack of brand name recognition for many firms, Roberts said.

IPOs are more appealing for companies with broad diagnostics platforms, since they can stand alone with their own products and form collaborations and partnerships with multiple companies.

"When the IPO markets are as receptive as they seem to be today, that drives the calculus very much in the favor of the value of being independent," Conde said.

Although none of the industry analysts and investors would name specific companies they're expecting to go public soon, they said they expect the IPO boom to continue, barring any major macroeconomic changes. In addition, there are some recent indications that additional IPO filings may be on the way.

Couillard noted it's not unusual to see private companies doing crossover funding rounds a year or two before going public, and multiple firms have recently closed successful financing rounds.

Some of those companies include Tempus, which closed an $80 million round in March 2018, a $110 million round in August 2018, and a $200 million round in May 2019; Grail, which closed a $300 million round in May 2018; and Inscripta, which closed a $131 million round in April 2019.