Analysis

Biotech Firms Drive IPO Rebound While 'Unicorns' Gear Up

By Tom Zanki
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Law360 (July 2, 2020, 2:13 PM EDT) -- The initial public offering market ended midyear on a roll and appears poised for a strong second half of 2020, powered by a robust biotechnology sector and potential debuts from venture-backed technology "unicorns" — barring more pandemic-related setbacks.

Research firm Renaissance Capital said stellar returns from recent IPOs are energizing a once-dormant market. Nearly every IPO in the second quarter upsized or priced above its range, the firm said in its second-quarter report, boding well for companies in the pipeline.

Deal makers also note that there is pent-up demand for new issuances following a pause in IPOs from March through May, when few operating companies went public amid coronavirus-related shutdowns and economic fear. But as markets recovered with aid from federal stimulus, IPO candidates returned to the fore and now appear to be making up for lost time.

The pace of new filings appears strong enough to keep IPOs humming for several weeks, which could delay or shorten the traditional summer slowdown that often begins in August or sooner.

"We definitely have a number of IPOs that are targeting late July and early August," Davis & Polk Wardwell LLP partner Michael Kaplan said.

Investor enthusiasm for new offerings is underlying renewed confidence in IPOs. Matthew Kennedy, a senior market strategist at Renaissance Capital, which also manages an exchange-traded fund that tracks recent IPOs, noted that the firm's ETF has soared 52% in the second quarter. The IPO fund outperformed the S&P 500 index by more than 30 points.

"That has really set the stage for a lot of these companies to feed the demand that they are seeing now," Kennedy said. "I expect this summer to be extremely active."

The quick turnaround has surprised even capital markets lawyers, who are guiding new offerings to market and talking to clients about prospective IPOs.

"The IPO market is significantly stronger than we would have expected given the COVID situation," said Paul Hastings LLP partner Chris Austin, whose firm steered underwriters for health benefits management platform Accolade Inc.'s $220 million upsized IPO that priced on July 1.

Biotechnology and health care-related companies are generating most new issuances, responsible for nearly two-thirds of second-quarter IPO activity, according to Renaissance Capital. These include large numbers of early stage startups focused on oncology.

The biotechnology sector consists of many pre-revenue companies that are hungry for cash in order to fund therapies under development. They often appeal to health-focused investors who know the industry and are willing to wait years for success.

"From what I am hearing, a lot of these companies can still go out in this uncertain environment," said Fenwick & West LLP partner Robert Freedman, who advises life sciences and technology issuers. "They are a longer-term play."

Beyond biotechnology, the IPO market is drawing companies with business models that hope to thrive amid widespread social distancing. Online-used car seller Vroom raised $468 million, while supermarket chain Albertsons raised $800 million in a downsized IPO last week.

IPO prospects have also been buoyed by mammoth deals that have raised around $2 billion each, including from music label giant Warner Music Group Corp. and biopharmaceutical royalties company Royalty Pharma PLC. Additionally, seven Chinese issuers completed U.S. IPOs in the second quarter even as legislators threaten more accounting oversight of Chinese firms, while special purpose acquisition companies, or SPACs, continue their torrid pace.

The rebound could also pave the way for technology-focused companies that are expected to be active in the July-September quarter. Kennedy calls these issuers "quarantine friendly," such as cloud software firms and makers of on-demand platforms that can be accessed remotely.

On-demand food delivery app DoorDash Inc. confidentially filed IPO plans earlier this year and competitor Postmates filed confidentially last year, though the timing for a public debut of either company is not certain. Postmates is also reportedly being courted for an acquisition by Uber.

DoorDash and Postmates are among an array of so-called unicorns — market shorthand for venture-backed startups valued at $1 billion or more — being watched for potential IPOs.

Home-rental giant Airbnb, data analytics provider Palantir Technologies and cloud services firm Snowflake Inc. are also among elite unicorns considered IPO candidates. Palantir could go public by the end of summer, while Snowflake has reportedly filed confidential IPO plans. Snowflake, Palantir and Airbnb declined to comment.

Airbnb CEO Brian Chesky has previously said that people "do want to get out of their houses," despite coronavirus-related travel restrictions. Chesky said Airbnb had more nights booked for U.S. listings between May 17 and June 3 than the same period last year.

Messages seeking comment from DoorDash and Postmates were not returned.

With equity markets appearing receptive for the time being, deal makers say the IPO market could remain busy through the fall. The post Labor Day period is traditionally active until Election Day, by when companies like to wrap up deals and slow down for winter holidays.

The big variable remains how the coronavirus pandemic will play out. Increased reports of infections and hospitalizations in parts of the country have triggered several market sell offs in recent weeks, which could create an uncertain environment for companies attempting to price IPOs.

"We have seen an uptick in volatility because of the mixed results — if you could say that — in the lifting of restrictions on shelter in place," said Baker Botts LLP partner Michael Torosian, who is based in San Francisco. "There is some new uncertainty as to where we are in the crisis."

Political uncertainty is another potential headwind. On the flip side, the coming U.S. presidential campaign in the fall could provide companies with motivation to finish IPOs sooner rather than later.

"It's very important to try to get done by mid October before the election," Freedman said, speaking about biotechnology IPOs. "Clients who have started the process and engaged bankers in the last couple of weeks are now really wanting to go (public) in September or early October. It feels like it is going to be continually strong between now and mid October."

--Editing by Alyssa Miller.

For a reprint of this article, please contact reprints@law360.com.

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