The Biotech IPO Slump Persists in 2023, But Signs of Recovery Emerge

The biotechnology industry has experienced a continued decline in initial public offerings (IPOs) throughout 2023, reflecting a two-year slump. As per data from BioPharma Dive, only nine biotech firms have gone public since January, marking the slowest pace in six years.

This downturn follows the impressive performance of the industry in 2020 and 2021, when 183 biotechs raised over $30 billion in public markets. The unexpected reluctance of investors to support emerging drugmakers in 2023 has contributed to the persisting IPO slump. However, recent developments and industry predictions suggest a potential turnaround is on the horizon.

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Comparing the IPO activity of the past two years, it becomes evident that 2022 and 2023 were slow even before the pandemic. In 2018 and 2019, a total of 54 and 47 biotech companies priced their offerings, respectively, which more than tripled the total for 2022 and maintained a similar pace this year. The decline in IPOs since then has raised concerns within the industry and puzzled experts who expected greater investor interest in young and innovative drugmakers.

Despite the limited sample size, there are noticeable shifts in the types of biotech companies going public. Between 2020 and 2022, two-thirds of drugmakers pricing products were in preclinical or Phase 1 trials, often selling below their initial asking prices. However, in 2023, five out of the nine companies that went public had medications in Phase 2 or later, and most of them had either held or increased in value. This indicates a preference for later-stage biotechs with promising clinical trial results among investors.

An alarming trend is the significant decrease in cancer biotech IPOs over the past two years. Only ten cancer-focused biotechs went public, a substantial drop from the over 90 IPOs seen in 2020 and 2021. This decline suggests a potential shift in investment priorities within the biotech industry, highlighting the need for companies to showcase compelling Phase 1 results to attract funding.

While the first half of 2023 witnessed a slowdown in biotech IPOs, there are positive signals for a potential recovery in the second half. Five companies have filed for IPOs since mid-June, and IPO research firm Renaissance Capital predicts a "steady rise in listings" due to a slowdown in interest rate hikes and increasing profits among this year's debuting companies. Nasdaq's healthcare listings leader, Jordan Saxe, expects 25 healthcare companies to go public in 2023, indicating a busier second half.

Saxe suggests that the companies currently waiting to go public have medication candidates in clinical trials, particularly in hot therapeutic areas like diabetes or weight loss. Furthermore, these companies may be approaching significant milestones that could enhance their valuation and attract investor interest. However, Saxe emphasizes that the valuation must be palatable for existing investors, new investors, and employees of the company to drive successful IPOs.

Although the biotech IPO slump continued through the first half of 2023, there are promising signs of recovery in the industry. While investors have become more cautious, they appear increasingly interested in later-stage biotech companies with compelling clinical trial results.

The potential rise in listings and the presence of a backlog of IPO candidates indicate a more positive outlook for the second half of the year. Biotech companies with promising medications in clinical trials, coupled with an appealing valuation proposition, have a greater chance of successfully going public.