Beyond the IPO: biotech market update post 2021 sell-off

If the atmosphere of the pandemic is feeling somewhat optimistic after years of tumultuous ups and downs, the tenor of Biotech financing is feeling rather the opposite. While 2021 broke records in biotech IPO and private investment markets, it left many disappointed by the aggressive cool-down following the February peak. With a steady downward trajectory for the XBI, the S&P index for Biotech, leaders at emerging biotechs, established pharmas, and life science VCs have had to change strategies to face the challenge. Now, with some distance from the bubble of 2021 and the first quarter of 2022 over and done with, it’s time to evaluate how the biotech markets have been faring.

Recap of 2021 biotech capital markets

2021 started out strong with a record-breaking total of IPOs and an unprecedented number of early-stage biotechs going public, with many not yet able to provide clinical data. This frenzy was fueled by high demand for IPOs and rewarded crossover investors with high returns over short turnover times. This steady string of successes compelled even investors traditionally interested in less risky ventures to turn their attention to biotech.

Large early-stage crowd at the IPO door 

A dearth of M&A deals by large pharma companies accompanied this IPO craze, despite pharma giants purportedly holding ample cash. The lucrative IPO market and inflated valuations pushed smaller biotechs and large pharmas away from more traditional M&A partnerships and collaborations.

This rush to list brought a crowd of insufficiently de-risked companies to the public markets, causing a disappointing run for XBI. In total, 80% of 2021’s biotech IPOs ended the year below their initial offering price, signalling investor flight and sapping demand for IPOs. With the bubble of investor enthusiasm for biotech financing burst, startups and fund managers moved to reevaluate their strategies for the coming months.

Little clinical data, similar indications

The early IPO plan pursued by many biotechs in 2021 needs revision for those looking to go public in 2022. The poor performance of 2021’s batch and the tightening availability of capital has made IPOs a much more difficult process. Only five biotechs have had IPOs in Q1 of 2022, and of those only two are currently trading above their listing price.

The aftermath of 2021’s frenzied IPO market are cut-down valuations for biotechs and increased pressure to show value through concrete milestones. Moreover, the 2021 biotech IPO surge brought with it a glut of similar technologies for similar indications, frustrating investors who were seeking differentiated offerings for their money.

Tourists flee, layoffs, but VC & industry at the ready

Investor hesitation in biotech markets is now reflected in a recent rise of layoffs in biotechs, such as at Zymeworks and Passage Bio. The CEO of life sciences executive search firm Slone Partners recently told Fierce Pharma that layoffs seem more prevalent at public biotech companies, underscoring the direct impact of the market-wide decrease in investor confidence in the real strategies of public biotechs.

Despite the flight of investors from last year’s poorly performing market, life science-focused VCs have maintained a deep purse to invest in new biotech startups and technologies. Atlas Ventures recently announced a new $450 million fund, targeting new venture formation. Frazier Healthcare also announced a fund of $987 million to invest in novel biopharmaceuticals in a range of maturities.

Slow down the race to the IPO gate, get concrete milestones in order

According to some biotech leadership and VC managers, emerging biotechs are likely to stay private longer in lieu of the abridged IPO timeline of the last few years. While the enthusiasm of crossover investors has waned with the demand for IPOs, the reshuffling of VC and startup strategy may be a beneficial correction in the long run.  

Perhaps most interestingly, large pharma companies are in a strong position for transactions for the remainder of 2022. The lofty valuations for emerging biotechs in 2021 proved difficult for pharma, evidenced by low M&A activity which consisting primarily of small acquisitions rather than large deals.

Slight uptick in M&A 

In 2022, M&A deals have seen a small uptick. So far, major deals include UCB taking over rare disease biotech Zogenix and AbbVie acquiring neuroscience-focused Syndesi Therapeutics. Furthermore, giants like Pfizer have ample cash on their books and have stated their willingness to spend it on deals. Though yet to play out, such prospects are no doubt on the minds of many.

In addition to the IPO hangover, the slow return of M&A activity may also stem from uncertainty in the regulatory environmentsince March of 2021. At that time, the FTC announced a ‘working group’ to the include European, Canadian and UK competition authorities to create a framework for analyzing pharma mergers, triggered by a spate of deals and high drug prices. However, the FTC recently allowance of  Pfizer’s acquisition of Arena Pharmaceuticals may resolve some lingering concerns holding up similar transactions.

Seasoned investors have plenty of dry powder for clear milestones

Despite a tough couple of quarters since the 2021 cool-down, biotech stakeholders are changing strategies to weather the current market. Many committed investors see the increased scrutiny and focus on milestone-realism as a healthy voice for the true value of biotechs, rather than the overexuberance that led the overbought market of 2021.

Though unclear how long the climb from the 2021 sell-off will take, seasoned life science investors and leaders see this as a temporary blight.


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