Biotech companies have been raising billions by going public -but many investors are getting burned

• The window for biotech companies to raise money and go public has seemed unending over the past few years.
• Particularly in the past year, private companies are raising staggeringly big early funding rounds, then turning around to tap the public markets for even more cash.
• But the bets haven't always panned out for investors. Of the companies that have gone public in the last six years, less than half have generated a positive return, according to a new report.

For fledgling biotechs hoping to find the money to fund their plans to tackle everything from cancer to Alzheimer's disease, the public markets have been a good avenue over the past few years.

In the first nine months of 2018 alone, there have been 47 IPOs, raising $4.6 billion in capital. That's already more than both the full years of 2016 and 2015. In the biggest biotech IPO of the year, cancer drugmaker Allogene this week brought in $324 million in a public offering that valued the company at $2.2 billion.

But not every biotech investment has been a roaring success.

According to a Leerink biotech review over the last six years, there have been 269 initial public offerings that raised a total of $24.1 billion. But a little less than half of those IPOs have generated a positive return.

Approximately 20% of the companies that have gone public in the last six years have made up about 80% of those positive returns. And almost half of the IPOs in fact had a -10% or worse annual return.

Which is to say, not every bet is panning out, despite record amounts of capital being poured into the sector. Investing in drug development is an inherently risky prospect. Biotech companies are developing experimental treatments for diseases, running clinical trials to see if the drug in question works or doesn't work. If it's the latter, the stock could crater and lose most of its value if not all, depending on if the company has other potential treatments in the works.

"You really have to be selective," Les Funtleyder, a healthcare portfolio manager at E Squared Capital told Business Insider. "I think that's the importance of doing due diligence and spending a lot of time on these things and hoping you get a positive return out of it."

While the biotech sector enjoyed an 18.5 % surge in 2017, its performance has come back to earth since then. Year-to-date, the NASDAQ Biotech Index is up 1.5%, compared to a 3.2% rise from the S&P 500.

See also:

• The market for biotech IPOs is red hot - here are the top 10 of 2018
• 'We're not going to follow the hype': Biotech VCs are concerned by the staggering size of early-stage startup funding

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