Biotech companies hoping to go public face a different world than they did just one year ago.
Tumbling stock prices have shaken the sector and the pace of initial public offerings, which set records the past two years, has slowed as a result. Young drugmakers no longer can command the lofty valuations they did in 2021 when they and their investors were able to sprint to Wall Street.
"It's a more challenging market environment right now than we've seen in many years," said Charlie Kim, who co-chairs the capital markets practice of the law firm Cooley. He added that most offerings he's involved with "have been on pause."
So far, the numbers bear that out. According to data compiled by BioPharma Dive, nine biotechs have gone public this year versus 33 by this time a year ago. The average amount of money raised through those offerings has nearly fallen by half, from $146 million to about $83 million. Since the beginning of March, only one company, AN2 Therapeutics, priced an IPO.
To be sure, it's still early in the year and the slowdown might prove more of a reversion to pre-pandemic norms. The $744 million in biotech IPO proceeds to date isn't far off from what new stock offerings totaled in the first three months of 2018 and 2019, for instance.
Things could change quickly, too. Three biotechs, Belite Bio, HilleVax and Intrinsic Medicine, filed for IPOs last week. Jordan Saxe, the head of healthcare listings at Nasdaq, said the queue of more than 75 drug companies planning IPOs, which built up near the end of 2021, remains intact. None have withdrawn their applications.
"They're just sitting on them and waiting until the investors and banks are comfortable taking these deals out to market," Saxe said.
Still, the IPO slowdown already has had an impact.
Many biotechs are conserving cash while planning to stay private for longer. Although venture firms are flush with cash, so-called crossover investors, who specialize in getting startups to an IPO, are becoming more selective. Some say financing rounds now are harder to close and, in certain cases, include more onerous terms.
"We started to see a trickle-down effect this quarter," said Chris Miller, a partner with law firm Troutman Pepper who works on private financing deals. It will "only get worse the longer the IPO window stays shut," he added.
Watching and waiting
IPOs are a critical source of funding for young biotech companies and give their backers a return on their investment. Beginning in 2013, public markets became more accessible to life sciences startups, luring more to form than ever before. In 2020 and 2021, biotech companies raised almost $30 billion combined from IPOs.
However, in the second half of 2021 biotech's momentum reversed. Shares of newly public drugmakers slipped as the year went on, and nearly 90% of those that debuted in 2021 now trade below their IPO price. That poor showing, combined with the sector's overall market downturn, has appeared to chill interest in new stock offerings.
Still, some of those involved with IPOs have expressed confidence that new offerings will resume this year, albeit with lowered expectations. Saxe expects a "reset" in how companies are valued in their IPO, especially compared to their previous financing round. In 2020 and last year, companies could expect a higher-than-usual "step-up" in value when seeking an IPO and a normalization could renew interest, he said.
"I wouldn't be surprised if in June or July, there's a lot more activity than there is today," Saxe said.
Whether IPOs return to pace will be a key test of investor confidence in emerging biotechs.
Saxe said the "makeup" of the current IPO backlog is similar to what it was in 2021, when nearly two-thirds of the 182 companies that went public were either in preclinical or Phase 1 testing. Many of those companies have struggled since, leading to increased scrutiny from investors.
One question on their minds is "what the correct value is for some of these companies, especially for the earlier-stage companies," Cooley's Kim said.
Saxe said he is watching for positive data from some of the preclinical companies that have gone public, which he believes could restore some confidence in those looking to follow.
A return to a more typical IPO pace, even on its own, could still help the sector, said Jason Rhodes, a partner at biotech startup creator Atlas Venture.
"The issue wasn't the stage or quality" of the companies going public, but "just the sheer number" of them," Rhodes said.
"There just isn't the capacity in the industry, on a sustained basis, to take that many companies public," he added. "Two years in a row, at that level, was just too much."
IPO-ready biotechs aren't the only ones impacted. Earlier-stage startups and venture capitalists are noticing changes as well.
Though some venture investors this year have said they aren't making wholesale changes in strategy, they all foresee a shift in how their companies are funded and how long they will stay private. Whereas biotech last year might have gone public immediately after a Series B round, now they may now need additional financings to get to an IPO, Rhodes said.
"You have to assume that you're going to build these companies with private capital for longer than you did [before]," he said.
The good news for startups is that, unlike in previous downturns, many life sciences venture investors recently raised new funds and have plenty of cash to put to use. Overall, there has been little slowdown in private investment activity during the first quarter. According to an overview of the first three months of 2022 from data firm Pitchbook, "many areas of VC data appear relatively unscathed."
"Deals are getting done," Rhodes said.
There are warning signs, though. The pace of biotech financing deals has slowed since peaking in early 2021, according to data from Pitchbook. Biotech consulting and research firm Bay Bridge Bio has observed a decline in financings as well, finding that monthly venture investments in startups fell 61% between March 2021 and March 2022.
Biotech venture deals are trending downward
Troutman Pepper's Miller said he's noticed an impact on financings he's worked on this year. Investors with struggling public biotech stocks in their portfolio are now choosing startups more cautiously. That's made some financing rounds harder to fill and, in certain cases, led to "revaluations" of companies in the middle of a deal, he said.
According to Miller, the fear of financings falling apart is leading investors to consider "risk mitigation strategies." Tranched financings, in which biotechs have to hit milestones to access portions of a round, are more common than they've been in recent years, he said.
At the same time, some investors are turning to "draconian" financing provisions that reduce the stake of another investor that fails to fund a promised tranche, Miller said, adding that financings that are getting done are either selling shares at the same price, or lower, than in previous fundings.
As large pharmaceutical companies hold onto cash reserves, this environment has heightened anticipation of a surge in deals for emerging biotechs. A recent survey of 100 biotech financing executives, conducted by accounting firm BDO, found that 33% are planning to pursue acquisitions in 2022, versus 6% for IPOs. (Last year, 24% of those surveyed were considering IPOs.)
However, M&A predictions haven't panned out. Biotechs "don't want to sell at a low," said Adam Golden, a partner and head of U.S. life science transactions at law firm Freshfields. "People are kind of waiting for valuations to settle out."
A lot, then, is riding on how biotech IPOs perform over the rest of the year. A wave of IPOs that price within the companies' target range and then hold their value could suggest the sector's downturn is more a correction than a bubble bursting.
"I was in the dot.com boom. You felt like 'this isn't real,'" said Kim, referring to the rise and fall of internet stocks two decades ago.
But "this is so real," he said, pointing to cutting-edge technologies such as messenger RNA vaccines and gene editing that biotechs have helped advance. "I hope the right money goes to the right companies."