Biotech Down Round: How We Got Here, And Where We Could Be Headed
Last year’s biotech IPOs aren’t exactly going as planned.
111 biotech companies went public last year, representing more than $15 billion in cumulative stock. Of those, only five have seen their stock prices rise since. A whopping 95.5% of 2021 biotech IPOs have decreased in value.
Still, experts predict another 75 or so biotech IPOs this year.
Are the flagging numbers a sign of crisis, or just a temporary snag?
A brief history: Biotech since the genomics bubble
Before 2012, investors were generally bearish on biotech startups. The genomics bubble, which resulted from the promise of enhanced medical treatments when researchers were able to map the human genome, had burst alongside the tech bubble in the early 2000s. About a decade of low valuations and scarce capital ensued.
Then, partly because of Big Biotechs driving recovery after the financial crisis, capital strength began to flow back into the sector. In an industry which had long labored through scarce resources, biotech in the late 2010s saw a steady—then intense—ramp-up in IPOs: 36 in 2017, 58 in 2018 (a record), 68 in 2019, 78 in 2020, and then 111 in 2021.
The latest biotech surge was due largely to the pandemic, during which the world leaned on biotech companies to help curb the spread of and treat COVID-19.
In addition to the number of IPOs, this last period saw a change in the standards of IPOs. Many of the companies that went public last year did so without having collected any human clinical evidence. That is, they don’t know whether their treatments worked on people.
So, where is biotech headed now?
- Slowdown in activity. Q1 2022 produced only nine biotech IPOs, compared to 31 in Q1 2021. Activity has slowed already, and with markets showing textbook signs of recession, is unlikely to climb anywhere near 2021’s heights. The question is therefore not whether activity will slow, but by how much. In my estimation, it’s unlikely that we’re headed to full-on bubble-burst territory. But I do expect a reemergence of certain clinical standards for biotech companies looking to go public, making it very unlikely that we’ll ever hit 111 biotech IPOs in a year again.
- Pre-pandemic normalcy. As more and more people declare themselves “done” with the pandemic, life is starting to look a lot like it did in 2019. For example, much more gym time, many fewer Peloton rides. Peloton’s share price graph looks a lot like one of its rides: a slow warm-up, a few steep hills, then a gradual descent back down. Biotech numbers look much the same. By this point in the year, biotech is posting similar numbers to those it posted in 2018 and 2019. The pandemic changed our lives during the time that it was a pandemic. As it approaches the endemic phase, biotech and others are resuming their pre-lockdown lifestyles.
- Mergers & Acquisitions (M&A). Biotech companies need on average several years of capital runway to make it through the all-important clinical trial period. With a slew of share prices dropping more than 80% (just scroll quickly through this database), public companies may have nowhere to turn for that runway other than other, stabler companies. Still, only 15% of biotech companies ever produce free cash flow (according to Ellen Chang of The Street). M&A will not save every player whose fortunes have changed—only the most viable.
If there’s any solace in all of this, it’s that biotech isn’t alone. We just got to the end of a 13-year run of good fortune for anyone invested in public markets. Tech companies of all kinds are feeling the pain of a pullback. As is the case whenever times get tough, we’re about to witness a tremendous weed-out process, where the most valuable companies survive, and new standards are set for what it means to succeed as a biotech startup in 2022.