By Anthony Hughes, Bloomberg
Drug developers aren’t expected to come back to the US equity markets in full force until next year — lagging other industries as biotechnology has delivered only subpar investor returns.
Only five biotech companies raising more than $50 million have gone public so far this year, following last year’s already stunted number of 18 initial public offerings, data compiled by Bloomberg show. The debuts are far from the frenzy of activity during the pandemic when roughly 150 companies from the sector went public over a two-year stretch starting in 2020.
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“The IPO and follow-on equity market is not closed completely for biotech and biopharma, but unfortunately for now, it’s more of a trickle than a flood,” said Moelis & Co.’s Ashish Contractor, who advises biotech clients.
The last biotech IPO of note was the $98 million debut of obesity-drug focused Aardvark Therapeutics Inc. in mid-February. Its share performance is indicative of how new listings in the sector have been underwhelming compared to the overall market. The San Diego, California-based company’s stock is down over a third from its $16 debut price.
The Trump administration’s plans to cut the Food and Drug Administration’s budget and staff as well as the US Health and Human Services Secretary Robert F. Kennedy Jr.’s skeptical attitude toward vaccines and obesity drugs have weighed heavily on the industry’s share prices.
Those factors along with the uncertainty regarding the administration’s Most Favored Nation pricing initiatives have created a significant obstacle in the biopharma market, said Contractor.
All but four of the biotech companies that have raised more than $50 million in IPOs since the start of last year are trading below their listing prices, according to data compiled by Bloomberg. Meanwhile, the Nasdaq Biotechnology Index is down 4% so far this year, trailing the S&P 500 Index’s 0.7% decline over the same period.
The biotech index has only produced a positive return in one of the past five years and hasn’t produced a double-digit return in any of them.
Too many of the biotechs that went public in the prolific pandemic years lacked maturity or a strong investment thesis, said Jason Fenton, Cantor Fitzgerald’s co-head of equity capital markets. Biotechs that went public in 2020 and 2021 are showing an average share loss of more than 40%, data compiled by Bloomberg show.
Nevertheless, long-term tailwinds should deliver more vibrant IPO activity over the next year or so, he said.
Later-Stage Names
More money than ever is dedicated to the sector and science is better than ever, Fenton said. Big pharma, facing a patent cliff, or a need to replace tens of billions of dollars of revenue from drugs coming off patents by the end of the decade, would likely fund or acquire companies with strong clinical data. Rising contract research costs also mean the biotech sector will remain hungry for capital.
“At some point, likely in 2026, we are going to have a normal biotech IPO market,” said Fenton, noting that there were about 30 to 40 biotech IPOs per year on average from 2017 and 2019, which is representative of more normal conditions.
In the past, biotechs almost reflexively raised capital when they released new clinical data. Now they need to go further to demonstrate they have a route to continued value creation and potential commercial success, said Seth Rubin, Stifel Financial Corp.’s head of global ECM.
“Investors have a much more discerning view, not just of what does the data tell us today, but what’s the development pathway from here,” Rubin said.
With the uncertainty around drug pricing and regulation, it’s become even more challenging for investors to confidently invest in a sector where not even clinical success can guarantee a good investment.
As a result, investors are looking at later-stage names in which they can get some clarity on the business, Rubin said.
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