Public Markets in Recovery Mode
Navigating public markets when great science is not enough anymore
The downturn was sobering, but the hangover is waning. In the past years, in an era of unprecedented innovation, the harsh realities of public markets have hit biotechs and pharmaceutical companies hard. The period since 2019 has seen the industry saving the world from one of the deadliest pandemics, achieved more FDA approvals for novel drugs than ever before, and reducing the mortality of cancer, just to cite a few achievements. Yet, great science is not enough anymore to guarantee returns, and pharma companies feel that the unprecedented wave of innovation that they produced has been unrewarded. Aggregated together, the top 50 pharma firms have underperformed the S&P 500 by a third, with biotechs faring worse. Michael Ehlers, president and CEO of Ascidian, a biotech eager to harness the potential of RNA exon editing, said: “Biotech in 2023 was a tale of two worlds: Unprecedented scientific advancements, such as the first gene editing approved therapy, tempered by once-in-a-generation financial constraints, even austerity, and many great companies unable to raise capital.”
Difficulties in raising funds
The first months of 2024 have witnessed biotech stocks undergoing intense surgery, after two cataclysmic years on the public markets. In March 2024, Pfizer’s stock was trading at a 52-week low of US$25, down 32% YoY. In October 2023, before the recent market rally, a record 232 life sciences companies globally were trading with a market capitalization below their cash reserves.
Ask any biotech CEO how his or her stock performed in the past 24 months, and the conversation might turn rather unpleasant. The downturn in private biotech financing in 2022 and 2023 (in 2023, funding decreased by 43.2% compared to 2022 and by 52.3% compared to 2021) can be notably attributed to macroeconomic pressures causing investors to be more cautious and prioritize existing portfolios, along with investors recovering after having been “burnt” during the post-COVID-19 exuberance in public markets. Today, biotechs are feeling the repercussions of the latter point, when arguably many technologies were funded without the right due diligence from investors. Brian Frenzel, president and CEO of Tosk, a small-molecule drug discovery and development company in the oncology space, summed up the period: “Simply put, 2022 and 2023 were abysmal for biotech.”
Compared with the pre-COVID bull market and the post-pandemic exuberance, raising funds is simply harder for biotechs in today’s environment. Given the abundance of companies looking for cash, investors can take their time making funding decisions, sometimes to the dismay of the companies. “In the past, it was quite easy to raise US$100 million on the promise that there would be a potential therapy. The investment community has evolved significantly since then, and every element of risk is today much better understood and evaluated. Advances in medical technologies have grown significantly due to the medical community's ability to interact with the financial community, but for a small biotech and being a future-orientated business, attracting funding can still be a challenge,” confessed Mark Godsy, CEO of CNS-focused Shackelford Pharma.
“2023 was turbulent in the market due to inflation and tightening fiscal policies, making capital formation challenging. This resulted in a dampening effect on IPO markets globally.”
Chris King, SVP, OTC Markets Group
Silver lining: The IPO window cracks open
Compared with the nearly 100 biotech firms that went public in 2020, 22 went public in 2022 and 19 in 2023, according to a BioPharma Drive tracker. Simply put, 2023 was (also) cataclysmic for IPOs. As the lifeblood of the industry, IPOs provide firms with critical capital to develop their technologies. However, the IPO market is well and alive in early 2024. In the first two months of the year, six firms jumped into the fray. Diabetes and weight-loss drug developer Fractyl Health, psychiatric drug maker Alto Neuroscience, and cancer drug developers Arrivent and CG Oncology held IPOs, with Metagenomi and Kyverna Therapeutics closing their IPO shortly after. That run of offerings at US$100 million and more put the sector at its strongest pace since 2021. Jordan Saxe, head of listings at NASDAQ, the leading healthcare exchange with a 98% market share of IPOs in the biopharma space, said: “We are in a new chapter for biotech, and the window for IPO is open.”
In 2024, investors are eyeing specific “hot” therapeutic areas including oncology, autoimmune, and cardiometabolic disease for successful IPOs. One fundamental appears stronger than ever: Favoring de-risked assets. Since early 2023, there has been a notable shift in the types of companies successfully going public. According to data from BioPharma Dive, more than half of the 28 IPOs since then, including nine of the 10 largest offerings, were from companies with drugs in mid-stage testing or beyond. In contrast, only six companies without a drug in human trials have managed to price their IPOs, raising an average of approximately US$88 million, with half of them securing less than US$10 million. This change reflects investors' preference for more secure investments. In 2020 and 2021, a majority of the companies going public were in the preclinical or Phase 1 testing stages. Now, companies with early-stage or broad drug-making technologies are facing greater challenges. Gene editing biotech Metagenomi is a good example. The firm has not yet identified a lead drug candidate but has partnerships with Ionis Pharmaceuticals and Moderna.
The question now is: Will the surge last? After the torrid early weeks of 2024, biotech IPOs have tempered in March/April 2024. But the summer months are – historically – when opportunities line up. This coincides with the Federal Reserve's indication of lowering interest rates, and it is also the time when numerous biotech companies in Nasdaq's pipeline are projected to have data readouts, facilitating the commencement of IPO roadshows. In that regard, H2 2024 will be a crucial indicator in determining the industry’s health for the coming years. “Companies are going public with later-stage data and a shorter time to when the market will see the data flip for the next readout, and this makes for an interesting and attractive opportunity for investors, which is driving this new class of IPOs. The backdrop of greater macroeconomic clarity and potentially positive news coming out of the Fed later in the year will lead to increased levels of IPO activity in 2024 compared to 2023” added NASDAQ’s Saxe.
Chris King, SVP at OTC Markets Group, concurs: “We anticipate an acceleration of IPO activity in the second half of the year, not just due to financing needs but also in the hope of interest rate cuts and robust financial markets.”
Going forward, successful biotech IPOs in 2024 have the potential to generate substantial returns for early investors and provide the crucial capital required for biotech firms to advance their R&D endeavors. Early indicators of a recovery of public markets should however be treated with caution. In a healthy year for public markets, about 50 biotechs and pharma firms might hold IPOs.
“2024 is seeing three main themes: Capital for new and early phase biotechs enables them to move molecules forward, and as flows have slowed down, we have seen the impact on CDMOs. Then there are the twin topics of ADC’s and GLP-1’s. Both areas are showing positive impacts on large patient populations.”
Martin Meeson, CEO, Axplora
Deals are back
New revenue growth and patent cliffs are (finally) fueling M&A activity again in the life sciences industry. In 2023, M&A investment rose over 30% YoY to US$191 billion. Following that trend, the first quarter of 2024 saw big pharma snapping up some smaller but impactful late-stage companies through M&A. Involved with more than two-thirds of deal-making, Big Pharma seems poised to further deploy its firepower in 2024. For pharmaceutical companies, acquiring pre-commercial biotech assets has reignited deal success and fueled growth, while medical technology companies have found that proactively shaping their business portfolios to enhance profitability is the key to success. Kathryn McDonough, head of middle market life sciences, J.P. Morgan commercial banking, said: “In terms of M&A, there is no shortage of news on the patent cliff and the loss of exclusivity that many big pharma companies are facing, but everyone is aware that this is coming in 2025. Innovation and new company creation have continued and big pharma is constantly evaluating acquisition opportunities to add to their pipelines. We will see more M&A activity in 2024.”
One of the main reasons suggesting a sustained trend in M&A in the coming years is large pharmaceutical companies’ search for growth in the form of pre-commercial biotech assets. Depressed valuations, many have lost over 70% since their peak, make them even more attractive targets. Accelerating R&D through acquiring biotech assets can reduce the projected timeline for assets in the pipeline by at least 30% according to McKinsey. Following that logic, the earlier months of 2024 saw a plethora of M&A activity, with notably Gilead acquiring CymaBay Therapeutics, Novartis’ US$2.77 billion buyout of cancer specialist Morphosys, and AstraZeneca’s outlay for Fusion Pharmaceuticals. These deals all spoke to the Big Pharma trend of snapping up small biotechs with a late-stage development focus.
The US remains uniquely positioned
In 2024, and most likely headed into 2025, biotechs will continue to grapple with challenges stemming from inflation and high interest rates. Declines in valuation over the past couple of years have discouraged new investment which has hindered fundraising. But with approximately US$1.4 trillion in available capital, the industry remains poised for growth. This substantial amount enables pharmaceutical companies to pursue acquisitions, particularly of late-stage assets. “However, the biotech sector faces a tale of two cities, with companies in late-stage development or already marketed products thriving, while a significant portion of earlier-stage biotech companies, around 27%, find themselves without sufficient cash reserves to last a year”, commented Arda Ural, partner and Americas industry market leader, health sciences and wellness, at EY.
For the innovation powerhouse of the world, there are unique opportunities to be seized. Supported by pharma giants, the best-educated pool of institutional and private investors, along with the gold standard of pharma exchanges (the NASDAQ Biotechnology Index), the US remains the Eldorado for companies looking to fund and commercialize their promising science. Andreas Grassauer, CEO of the Vienna-based biotech Marinomed, said: “In terms of biotech funding, the US remains ahead of the world. The US is more innovative and moves faster. European investors are still slow to react on US stock exchanges.”
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