Three drug developers have raised roughly $480 million combined in the biotech sector's first initial public stock offerings of 2022. Their performance, as well as that of the companies that join them in the weeks and months ahead, will be an important barometer for an industry that ended a record-setting year on a sour note.
The three biotechs making their debuts on the Nasdaq stock exchange Friday are Amylyx Pharmaceuticals, CinCor Pharma and Vigil Neuroscience. Of the three, only Vigil priced shares below its projected ranges, while CinCor and Amylyx each sold more shares than they originally planned.
The offerings are a positive, though preliminary, sign there is still demand among investors to participate in the IPOs of emerging biotechs despite a up-and-down 2021. Yet industry analysts nonetheless expect a significant pullback for initial stock offerings, which are often viewed as a bellwether for the biotech industry, fueling the clinical development plans of young drugmakers and generating returns for the venture investors who back them.
New IPOs "will get done," wrote analysts at SVB Leerink in a recent report, but "volume, size, and value [are] likely to be materially reduced."
Biotech IPOs peaked and then crashed in 2021, the culmination of a boom that began early last decade and soared to record heights during the coronavirus pandemic. According to data compiled by BioPharma Dive, 78 drug developers raised at least $50 million in an IPO in 2021, outstripping a record total set just a year earlier. Those offerings collectively pulled in nearly $14 billion — slightly below the roughly $15 billion that offerings amassed a year earlier, but far outpacing the $4.7 and $5.4 billion respectively raised in 2019 and 2018.
Yet nearly 80% of the class finished the year trading below their offering prices, a sharp contrast to prior years' performance and a warning sign for the sector. The 30-day return for the class was about 1%, versus 30% a year before, according to SVB Leerink.
A Jan. 2 report from investment bank Jefferies, meanwhile, found the average biotech IPO was down 22% in 2021, compared to gains of anywhere from 10% to 100% between 2016 and 2020. The lackluster results were the worst for an IPO class since 2016, Jefferies analysts wrote, and mirrored biotech index funds, which significantly underperformed compared to the broader market.
The amount raised in IPOs tracked by BioPharma Dive also fell in 2021, declining from an average offering of $207 million in 2020 to an average of $174 million last year.
Over the course of the year, some industry watchers viewed the lagging performance as a reversion to pre-pandemic norms for biotech stocks. Others noted that the private investors backing them were often still "well in the money," an indication of the strength of the IPO market compared to past years.
Shares in publicly traded companies soared to record levels in 2020, lifted by the successful development of coronavirus vaccines and drugs, and new IPOs were carried along with them. That led to private companies raising the funding rounds that precede IPOs at higher and higher valuations, which became tougher for biotechs to carry into an offering and sustain afterwards.
Those high valuations were increasingly held by biotechs going public earlier and earlier, often before any proof in clinical testing that their drugs hold promise. In 2021, for example, 52 of the 78 biotech IPOs tracked by BioPharma Dive were in preclinical or Phase 1 testing, up from 47 in 2020. Both numbers were more than double what was seen in 2019 and 2018. The stock prices of several of those companies collapsed following early clinical setbacks.
As a result, Jefferies' analysts wrote, investors are "fatigued" by the high values of companies "trying to outdo each other to get the highest valuation when they go out." The continuous step-ups left public investors who bought into IPOs holding stocks at higher valuations, despite the fact those biotechs hadn't hit any new milestones to support them, the analysts added. (Notably, Amylyx and CinCor, which both raised much larger sums than the preclinical biotech Vigil, have drugs in either mid- or late-stage testing.)
"We'd like to see a healthy pace of transactions at less step up, more conservative valuations, and a realization that when IPOs do well, the whole sector can do better and it makes investors less turned off," Jefferies analysts wrote. "Valuations should go up when companies hit milestones and show good data but instead companies were having to 'grow into' their valuations."
As a result, they and others expect fewer IPOs, as well as other types of financing rounds, in 2022. Analysts at investment firm Baird, for example, predict a "moderation" in both the numbers and amounts raised in financings. "Capital has been almost limitless in the last few years, but there are multiple signs of that drying up," they wrote, adding that they wouldn't be surprised to see "some down rounds," or financings at lower valuations, coming.
"Although we don't expect a complete closure of the window," Baird analysts wrote, "we believe we could see a significant falloff."