The average increase in the stock values of the 231 public biotech companies tracked by the BioWorld Stock Report is up 38 percent year-to-date. The third quarter was particularly hot for biotechs with their collective stock values soaring by an average of over 12 percent compared with a 4 percent increase in the Dow Jones Industrial Average and a 6 percent increase in the NASDAQ Composite index.

The welcoming capital markets allowed biotechs to take advantage of their increased stock values to conduct follow-on financing. In the third quarter more than $2.8 billion was raised through public offerings compared to only $507 million in the comparable period in 2011, according to data compiled from BioWorld Snapshots.

The same trend held true for private placements such as registered direct offerings, rights offerings and at-the-market deals with public biotechs raising $1.97 billion in the third quarter of 2012 from these financing vehicles well over double the $821 million raised during Q3 2011.

The increased public financing in the third quarter helped biotech companies collectively raise $5.91 billion, an amount that was 111 percent more than the $2.75 billion raised in the third quarter of 2011.

According to statistics compiled by BioWorld Insight, the biotech sector is making up for a very sluggish start to the year with a total of $13.8 billion raised in the first three quarters. This now compares more favorably to the $16.1 billion raised in the same period of 2011, which, by any standards, was considered a very hot year for biotech financing.

On the venture capital front our analysis confirms that deal making for private biotech companies still remains extremely challenging. At the three-quarter post of 2012 global private biotechs had raised $2.35 billion, 33 percent less than the $3.51 billion raised in the same period of 2011.

The public U.S. markets continue to offer an alternative for later-round companies looking for funding. Although the appetite for biotech IPOs cooled off in the third quarter with no deals taking place in August and September, eight companies have gone public year-to-date, comparable to the 9 deals we saw at this time last year. This amounts generated from the 2012 IPO transactions was $536 million compared to $503 raised in 2011.

Given the positive capital markets at the present time it is likely that we will see a flurry of companies, currently on the IPO runway, price their public offerings. According to BioWorld Snapshots there are nine biotech companies that are on the IPO runway.

For full analysis of the performance of the biotech sector in the third quarter read the Oct. 8, 2012 cover story in BioWorld Insight.

I was all ready to blog about how that’s better than I would have guessed, given the negative press we tend to hear about IPOs and the market in general. Then Monday morning brought implosions of two biotechs on my list: Anthera Pharmaceuticals Inc., which halted a Phase III trial of acute coronary syndrome drug varespladib for futility, and Tranzyme Pharma Inc., which saw ulimorelin fail a Phase III gastrointestinal recovery trial.

I guess those are the breaks in biotech; wait a day to post your blog and everything changes. So I reanalyzed the chart, and guess what? Now the 2010-2012 biotech IPO class is trading down about 5 percent, and honestly, that’s still not as bad as I expected it would be.

Some other interesting findings from the chart:

• The average (mean) share price at IPO was $7.30, and the average (mean) gross was $59.94. The median share price was $7 and the median gross was $50 million (@LifeSciVc, correct me if I screwed this up). Again, not as bad as I had expected.
• There are 12 firms trading up by an average of 37 percent. The 11 firms trading down are down by an average of 51 percent. So the ones that have fallen have fallen harder. Does this indicate that buysiders who choose wisely could actually be doing quite well on biotech IPOs?
• The last five biotechs to price are all trading up. I would wonder if that means they have learned their lesson and set pricing expectations lower to allow them to trade up, but in fact three of them priced above the average. I think that’s a good sign.

Anyone else see anything interesting in this chart? Make of it what you will. . .

As John Craighead, managing director of investor relations and business development for the Biotechnology Industry Organization, said during a recent conference, about two-thirds of the biotech initial public offerings (IPO) in 2000 were preclinical. Today however, even clinical-stage firms struggle to get public. With the exception of last week’s pricing by Clovis Oncology Inc., every biotech IPO this year has taken a haircut on price.

Small biotechs are not the only ones suffering. At an SEC forum on small company capital formation last week, John Coffee, Jr., of Columbia University Law School, presented data on how small IPOs have disappeared across all industries:

From 1991 to 1997, nearly 80 percent of U.S. IPOs were below the $50 million threshold. But, by 2000, their share had declined to 20 percent (or less) of all IPOs, and in 2009 and 2010, IPOs of under $50 million appear to have constituted only around 17 percent and 18 percent, respectively, of the number of all IPOs.

Why does that matter? According to Coffee:

Because some prominent high tech companies – Intel, Amgen, Oracle, Cisco, Starbucks and Yahoo – did IPOs of under $50 million, an understandable concern arises that the disappearance of small IPOs implies that the U.S. is today unable to provide equity finance to precisely the smaller companies that historically have fueled job creation.

Hence, as BioWorld Today reported last week, there’s been a flurry of congressional action aimed at opening up new fundraising avenues for small companies.

This week’s issue of BioWorld Insight takes a deep dive into H.R. 1070, the bill predicted to have the most immediate impact on biotech by raising the Regulation A exemption from $5 million to $50 million, essentially allowing private firms to raise money publicly and trade their shares over the counter without going through the pricey IPO process.

Coffee acknowledged that H.R. 1070 is “the best crafted of the pending bills,” but he (and others, as the BioWorld Insight article explores) question whether or not companies will use it, and whether or not there is sufficient buy-side demand to support broad use. The demand issue is also relevant to H.R. 2930, the crowdfunding bill – which BioWorld Insight will explore next week. Stay tuned!

BUT . . . there are some really interesting new options making their way through Congress, as anyone who read either BioWorld Insight or BioWorld Today on Monday already knows. For everyone else, here’s the low-down:

• H.R. 1070 ‑ would provide an alternative to the IPO by letting private firms raise up to $50 million publicly and trade their shares, without the expense of becoming a reporting company (under current Regulation A rules, companies can only raise $5 million, which makes it hardly worth the trouble ‑ see more on that in BioWorld Insight next week)
• H.R. 2930 ‑ would let private start-ups raise up to $2 million through crowd funding, essentially opening the private markets to non-accredited investors and perhaps providing just enough support to get that preclinical proof-of-concept data needed to hook a venture investor or a pharma partner
• H.R. 2167 ‑ would let private companies have more shareholders before they have to start reporting to the SEC
• H.R. 2940 ‑ would loosen the restrictions on advertising private financings
• H.R. 3213 ‑ would expand the small company exemptions from Sarbanes-Oxley compliance

Does H.R. 1070 solve the problem of all those mid-stage biotechs stuck in venture portfolios with no exit? No. Does H.R. 2930 solve the valley of death? No. In both cases, it remains to be seen how much demand the public will have for risky biotech ventures (see, I can be a realist, too). But in both cases: at least the government is trying to give small companies some new options. And there’s a chance some of those companies might actually be able to make it work.