We’ve now entered the 46th straight quarter of biotech IPO activity. New equity issuance for biotech in 2021 has broken records for the amount of capital raised, topping even the strong years of 2020 and 2014.
Although the open and constructive IPO environment continues, the complexion of these newly-minted public companies is changing relative to earlier in the cycle:
- Younger and earlier. The median time from founding to IPO has gone from 10 years in 2013 to only 4 years in 2021. In the past seven quarters, more than 80% of IPOs were preclinical or Phase 1, nearly the inverse of a decade ago. These are young startups with mostly preclinical or biomarker (vs clinical endpoint) datasets.
- Richer but burning more. Balance sheets for new IPOs are larger than ever, and the median proceeds are up two-fold in the past few years (now $150-200M). Further, they are burning money faster than ever: at least 120 biotechs will burn over $100M this year, up from only 20 or so in 2016.
- More robustly valued. The median IPO valuation is up more than three-fold since the start of this secular bull market for going public: it was ~$150M a decade ago, and is now in the neighborhood of $500M.
So “getting public” has never been as easy as it is today.
It used to be the coveted prize, the “brass ring” to go for, which meant you’d made it in biotech. IPOs were considered “exits” and celebrated as rare once-in-a-career events. Today, in a world awash in capital, IPOs are just a step along the journey to bringing drugs to patients, and much more matter of fact steps, as well. They certainly aren’t exits, and, for many, their stage means that even the initial investment thesis has yet to play out (like showing value in a human PoC study, for instance).
For an R&D-heavy, loss-making part of the sector, getting access to the significant pool of public market capital greatly benefits emerging biotech. The dramatically lower cost of capital in the public markets (vs the private market with greedy VCs and their preferred stock) helps biotech startups scale more quickly.
But getting to an IPO is the easy part – being public is hard.
With the incredibly expanding universe of public biotech names, fighting the crowd to get noticed by the best blue-chip investors is a never-ending struggle.
This is the essence of the “Relevancy Challenge” that many young companies face in their first few years as a public company: become a core position of one or more of the large “brand name” public investors, or get lost in the noise. Be compelling enough for marque investors to want to buy your stock.
Sadly, with this many newly minted public companies, many will find themselves asymptotically approaching, but never achieving, interesting “enough” to become such a core position.
This is what Josh Schimmer at Evercore ISI calls the “Like it, don’t love it” problem facing small and mid-cap biotechs today. Lots of biotech names have cool technology or interesting drugs, just not cool or interesting enough. Telling a story that breaks through this problem – and becomes compelling enough – is critical for success as a newly-minted IPO.
A few other key lessons about being public from Schimmer, pulled from prior perspectives he wrote over the summer, are worth calling out, including some verbatim quotes:
- Don’t rest on your laurels as a “successful” IPO. IPOs aren’t the end of the game, or the brass ring noted above, that they once were. You have to keep the fire lit – your first few years running as a public company should almost certainly be more intense than your last two as a private company. “Be aggressive. Hungry teams win”. Don’t cut corners, and do focus on high integrity R&D, but don’t let the team just dream away their mandate to deliver. And don’t let the stock price distract from being hungry; lots of in-the-money options can make teams complacent. “Especially in competitive fields, companies which don’t bring a hunger to move quickly and methodically are at risk of losing investor support”
- Be disciplined on spending. Or “Don’t be frivolous” in Schimmer’s words. Burn rates are way up in these markets, which is great for advancing programs but can turn against you with delays and challenges; fixed costs like FTEs and expenses leases can eat into runway quickly. Be adaptable, flexible – and where you can, keep costs variable so you can dial down quickly if need be.
- Raising money under duress is very hard. Even in “hot” markets, hiccups in R&D can quickly make the cost of capital skyrocket. Hiccups could be as bad as failed trials, but can also just be delays, noisy data, or even good/bad competitor news. During challenges, stock volatility can make raising even modest amounts of capital incredibly dilutive, transferring future returns from the existing shareholders who helped get you here to new ones taking advantage of the opportunity. As an earlier stage investor, I obviously hate it when this happens.
- “Easy to fall, hard to recover”. Gravity in biotech is a constant force, and as my blog tagline says, I consider myself “a biotech optimist fighting gravity.” It’s the constant force that tries to bring valuations lower, and companies have to tirelessly fight against it. Lofty valuations can drop quickly back to earth with bad news, or it can just be the steady gravitational pull of no news at all. Further, once you fall, it’s often hard to recover the mojo in the face of this gravity. Reputation, credibility, and sentiment are all inter-related. Very few “get out of jail free” cards exist in the biotech stock market. High-fliers that blew up because of perceived “bad” management choices can take eons to recover, even with strong data performance, because of team questions. The best answer is never to fall… but that’s a near impossibility over the life of a biotech, so learning how to bounce with a recovery is key.
When I’ve had portfolio companies go public, I often like to remind them – even if the stock popped on the first day – that we’ll very likely go below $10 before we go above $100. Volatility in the journey as a public company is just a ubiquitous feature of the sector. We also like to say “it’s not a price if you don’t sell” – so if you don’t have to issue stock (or trade) than don’t focus on the day-to-day stock movements. The vast majority of biotechs break their IPO issue price at some point. But the hope is that you can raise capital at steadily higher prices (and valuations) over time to advance the pipeline and accrete value to the business.
To the 150 companies that are less than two years old in the public markets, look to your left and right… who will be the #456’s in the “squid game” of the public markets? Sadly, if history is any indication, many of these companies aren’t likely to have won the public market “relevancy challenge” when we look back 5-10 years from now. It’s really hard being a public company – so good luck out there!
