Investors turn attention to biotechs with clear path to market

Companies that are further down the road to market are more attractive to investors than those in early development 

Interest in biotech companies looking to go public is now primarily focused on those with candidate drugs which are already in clinical trials, according to interviews given to Reuters by six industry experts. This risk-averse approach has been prompted by a fall in valuations and a lack of big deals this year.  

It is a challenging time for biotechs looking to go public, as stock prices ballooned in 2021 and fell in 2022. Only five of 102 biotech firms that listed last year in the US are now trading above their debut price. 

Speaking to Reuters, global healthcare leader for investment research firm Third Bridge, Lee Brown, said: ‘Small- and mid-cap biotech were coming at valuations that were incredibly high and so folks that were involved with those have been burned by them.’ 

Now, investors are trying to guard against unstable market conditions by selecting targets with a clear path to commercialisation over targets that are in the earlier stages of development.  

Biotech IPO environment  

Last year, there were a record 152 biotech IPOs globally, with companies raising more than $25 billion in total. As of June 10, 23 biotechs had gone public in 2022 raising $2.3 billion, compared to 68 in the same period last year. 

Due to unfavourable market conditions, many biotechs are reportedly sitting on their IPOs, conserving cash, and waiting until investors and banks are more comfortable taking these deals to market.  

In 2021, nearly two-thirds of the 182 companies that went public were either in preclinical or Phase 1 testing. Many of those companies have struggled since, which has prompted increased scrutiny from investors.  They report that it can be difficult to gauge the correct value of earlier-stage companies compared to later-stage targets. 

Regulating M&A 

Concurrently, mergers and acquisitions in the pharmaceutical industry have been subject to increased scrutiny from regulators in Europe, the United Kingdom, and United States. Antitrust enforcers have raised concerns that such deals could stifle competition, push up prices or hold back innovation. 

This comes as the industry has seen increased consolidation in recent years, with larger firms often choosing to acquire small, specialised companies to build out their pipelines, rather than expanding existing in-house capabilities.  

As the number of biotech IPOs declined this year, so too did the number of biotech M&As. As of June 10, six of these deals had been announced, compared to 32 throughout 2021.