Can biotech IPOs bounce back? Third Harmonic to test investor appetite with planned offering

As recently as last year, a biotechnology startup planning a lucrative initial public offering was the norm, not the exception. Now, Third Harmonic Bio finds itself in lonelier company.

This week, the Cambridge, Massachusetts-based biotech aims to sell 9 million shares at an expected price of between $16 to $18 each. At the high end of that range, Third Harmonic could raise as much as $162 million, a sum that would make its IPO the largest for the sector since May, according to data from BioPharma Dive.

Third Harmonic’s plans represent a test of investors’ appetite for emerging biotech companies. After two record-breaking years in which biotech IPOs raised nearly $30 billion combined, new offerings have ground to a halt in 2022, stunted by macroeconomic forces and a sector-wide stock market slide. By this time a year ago, 82 biotech companies had gone public on U.S. exchanges. This year, only 17 have priced an offering, and the majority have raised less than $40 million.

The more challenging environment has led many venture firms and the companies they back to wait out the market rather than test the waters. Investors interviewed by BioPharma Dive in recent months have said they are building companies more conservatively and expect to keep companies private for longer. Some have suggested a shift away from platform biotechs — drugmakers built around technologies meant to support several medicines — and towards companies focused more narrowly on specific products.

Biotechs that have gone public in 2022 have largely done so at significantly lower values, extending a steady decline in the size of stock offerings over the last two years. Median IPO values have fallen in six of the eight full quarters since the second quarter of 2020, when the median biotech IPO reached a recent peak of $183 million.

So far this quarter, by comparison, three biotechs have priced IPOs, raising $10 million, $8 million and $10 million, respectively.

Yet good biotech news has flowed over the past few months, prompting some industry watchers to forecast a turnaround. Positive data readouts from companies like Alnylam Pharmaceuticals, Regeneron Pharmaceuticals and Karuna Therapeutics, among others, led to large share price surges and helped boost a widely followed stock index for the sector.

The pace of dealmaking has also picked up, headlined by the recent multibillion dollar buyouts of Biohaven Pharmaceuticals, Global Blood Therapeutics and ChemoCentryx.

Strong interest in Third Harmonic’s IPO could add to the momentum. The company was formed and seeded by Atlas Venture in 2019. It’s run by Natalie Holles, the former CEO of gene therapy biotech Audentes Therapeutics, and emerged from stealth in February with $155 million in funding.

The company fits the profile of a “product”-focused biotech as it is built around an inflammatory disease drug, THB001, that it licensed from Novartis and is developing for a chronic form of skin hives known as urticarias. The drug works by blocking a receptor called KIT that regulates immune cells called mast cells. It’s the same approach Celldex Therapeutics is pursuing with an experimental medicine that’s shown early promise in testing. Celldex’s drug is an injectable antibody, while THB001 is an oral small molecule.

Like most biotechs to go public over the last few years, Third Harmonic doesn’t have much proof yet that its drug works. An early trial in Europe showed the drug lowered levels of a protein associated with an effect on urticarias. It began a Phase 1b trial in Europe this month, and expects to report data next year. A Phase 2 study in the U.S. should follow in 2024. It’s also studying the drug in asthma and plans to evaluate it in a range of other allergic and inflammatory diseases, according to its IPO prospectus.

Third Harmonic paid Novartis $350,000 and issued the Swiss drugmaker roughly 6 million shares of preferred stock — equivalent to a pre-IPO stake of about 9.5% — for rights to THB001. Novartis could get another $232 million in milestone payments if the drug progresses, gets to market and hits certain sales targets.

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