The boom for biotech initial public offerings that began early last decade reached what seems to be its apex in 2020. Dozens of new companies flooded the marketplace and largely excelled, buoyed by a rising tide of enthusiasm in life sciences and the sector’s role in containing the coronavirus pandemic. Previous records were smashed.
The IPO surge has continued in the first half of 2021, especially among developers of gene-based medicines. But there are signs of change, as biotech stock indexes have receded and dragged down valuations as well as IPO performances.
Here are three themes that have emerged amidst all the activity, and what they may mean for biotech IPOs in the months ahead.
A blistering IPO pace continues, with some caveats
Despite a once-in-a-century pandemic, 2020 was a stunning year for biotech IPOs, both in terms of the number of offerings and the total amount raised. There were 71 biotech offerings of at least $50 million, compared to 38 and 44, respectively, in the two prior years, according to Biopharma Dive’s database. Biotechs raised nearly $15 billion in those deals, nearly tripling the totals set in 2019 ($4.7 billion) and 2018 ($5.4 billion). Follow-on offerings soared as well, topping $41 billion, according to a report from Wall Street investment bank SVB Leerink.
The record year was driven by several factors. The continued availability of capital was crucial, some say. So was biotech’s starring role in developing coronavirus vaccines, while other sectors faced uncertain prospects. But essential to the prolonged run was “an explosion of technological advancement,” said Charlie Kim, who co-chairs the capital markets practice of the law firm Cooley and has worked on several biotech IPOs and follow-on offerings. “It’s a really exciting time.”
That momentum has spilled into 2021, which looks set to eclipse 2020 by a wide margin. As of Wednesday, 49 biotechs have gone public, collectively raising $8.8 billion. One more is expected to price its offered shares this week, and another 11 have publicly disclosed their IPO plans.
But while the pace of IPOs has increased, their relative size appears to be creeping downward. Twenty-six, or 53%, of the 49 biotechs to go public this year raised at least $150 million, versus 64% of 2020’s IPOs. Those companies raised an average of about $180 million per IPO, compared to $211 million a year ago, which “could be a sign that money flow is moving away from biotech” along with “less risk appetite” for early, unproven platform technologies, Jefferies analyst Michael Yee wrote in May.
The average 2021 IPO is still much larger than the typical $75 million to $125 million range for biotech offerings in the past. But the decline has caught the attention of Wall Street analysts. The size of IPOs fell during what SVB Leerink, in early June, called a “softer quarter” for biotech, a trend that coincided with a flattening or downturn in multiple biotech stock indexes and a slowdown in IPOs in May. The markets “have tightened and corrected,” Kim said.
Still, the changing environment hasn’t impacted the flow of deals. IPO activity picked up considerably in June. By Friday, 14 biotechs likely will have gone public this month, which would be the highest monthly total this year. Kim hinted that more is on the way, with “two big waves coming” in July and after Labor Day.
IPO performance is lagging
Over the past decade, a typical biotech IPO quickly earned its investors sizable returns, a trend that continued last year. A February report from SVB Leerink calculated a 34% one-week return on 2020’s IPO class, with the first trading day accounting for 90% to 95% of the gains seen after both one week and one month.
That first-day trading pop was often seen this year as well, with shares in companies like Edgewise Therapeutics and Recursion Pharmaceuticals, two of 2021’s top performers, taking off instantly. But, overall, share prices for this year’s crop of newly public biotechs have fallen off fast, breaking from prior years’ pattern. As of Wednesday, a majority of the biotechs in this year’s IPO class were trading below their offering price.
The lagging performance has become more pronounced as the year has gone on and more companies have priced. Some in the industry believe it’s reflective of a return to more typical, pre-2020 numbers for offerings. As biotech stocks soared to record levels last year, for example, new IPOs performed unusually well. That, in turn, resulted in private companies raising mezzanine rounds — the type that precede an IPO — at steep valuations that are now more difficult for those biotechs to carry into an initial offering. In May, Jefferies’ Yee suggested the group’s performance, which tracked “well below prior IPO classes,” was suggestive of investors becoming more “valuation sensitive.”
2021’s class has also fallen in parallel with biotech stock indexes, the latter of which “could be an indicator of a shift in capital market cycle,” according to analysts at SVB Leerink. Still, those working on IPO deals view the change more as a return to business as usual, with 2020 being an outlier.
“It was a correction toward more where these deals normally price,” said Kim.”You shouldn’t have every IPO upsizing,” he added, referring to when offering sizes climb due to increased demand.
The genetic medicine boom
Last year wasn’t the best for gene and cell therapy. Some of the field’s top programs faced unexpected regulatory and clinical setbacks, resurfacing old questions about the uncertainties that surround these technologies.
Despite the hurdles, the potential upside of genetic medicine continued to attract investors, as developers secured nearly $20 billion in funding in 2020, a record. New companies have emerged with tools meant to overcome the technological limitations. Gene editing stocks, in particular, soared on the promise shown by a potential CRISPR Therapeutics treatment for two inherited blood diseases. Though share prices eroded between January and May, they rebounded in a big way this week following encouraging results from Intellia Therapeutics.
That momentum has led to a boom in IPOs. Thirteen biotechs with genetic medicine technologies went public in 2020, nearly as many as the previous two years combined. Another 13 have already gone public in 2021, with six months still to go.
Four of the year’s top performers are developing gene-based treatments, led by CRISPR biotech Verve Therapeutics. Cell therapy developers Sana Biotechnology and Lyell Immunopharma pulled off two of the year’s three largest offerings. The appetite to invest in the field despite lingering questions remains large, said Kim.
“There’s risk in any new technology,” he said. “But the broad applicability of their technology in different, huge areas, that’s why those companies are so highly valued.”