It’s unsurprising that the second quarter of 2022 was a low point for biotechs going public. Until the middle of June, indexes for the industry, namely the XBI biotech fund, were spiraling, a clear warning sign for companies considering launching an IPO.
But just how impactful that downturn was is now coming into focus, with a new report from Evaluate Vantage showing that last quarter was the weakest for new public biotechs in more than five years. According to the report, both the number of IPOs and the value of those that did get off the ground were the lowest since at least the first quarter of 2017.
The decline in IPOs mirrored the underlying market challenges, where the XBI hit the second-lowest point in the last five years at $67.03 per share on June 10, beat out only by a price of $65.74 in December 2018.
Three companies successfully hit the public market during the quarter, including norovirus vaccine maker HilleVax, which notched $230 million in May. But as the report authors note, valuation bumps have all but evaporated, and HilleVax is now among the 62% of drug developer IPOs that are trading underwater.
The reverse sticker shock has had ripple effects across the industry, particularly in terms of prospective M&A deals. As values have shrunk, investors and executives alike have made it clear that the environment for plucking undervalued biotechs is ripe. But deal activity in the second quarter is roughly middle of the pack compared to the last five years, with transactions eclipsing just $25 billion in total value. Almost half of the industrywide M&A value was made up just by Pfizer’s $11.6 billion acquisition of Biohaven’s migraine franchise.
Lee Cooper, senior director of venture investments at Leaps by Bayer and a lecturer at Dartmouth, says that M&A has been a lagging indicator and that more activity may be on the horizon.
“I don’t know many people that think September is going to be a quiet month for the biotech industry,” he said. “If there was a lull, we’re already seeing a lot of excitement.”
Possibly contributing to the separation between expectations and execution is the oft-forgotten reality that deals take time, says Cooper. He added that value is a lot more than just some of a company’s prized assets.
“A long-term strategy should never be built around the near-term price of something,” he said. “And so pharma companies are smarter than that.”
As valuations have been reevaluated via M&A and IPOs, venture capital has, naturally, undergone a similar reassessment. The Evaluate Vantage report found that the second quarter of 2022 was the lowest in more than five years in terms of the number of fundraising rounds but not the lowest in terms of total value, with more than $3 billion raised. That’s likely due to the number of large deals, with five companies making up more than $900 million in fundraising. Among the top hauls include gene therapy-focused Kriya Therapeutics with a $270 million series C, Upstream Bio with a $200 million series A and Frontera Therapeutics notching $160 million in series B funds.
Still, Cooper says one “subtle” change is that venture capital investors like himself are taking a closer look at fundraising rounds and making sure companies are “appropriately” funded to accrue necessary data. In other words, companies should have enough money to prepare for the worst.
“If something takes a little bit longer, actually, it might be good to have more cash on hand, not to blow up the size of the team more quickly, but to ensure that the runway is there if there’s a bump in the road on the current work plan,” he said. “And in biotech, there usually is a bump in the road.”