After several moribund years of initial public offerings in the life sciences industry, executives and investors had high hopes when the year started as they expected a friendlier climate on interest rates, taxes and regulation.
But with the first quarter now complete, the results have not lived up to the expectations. Only six biopharma companies have completed IPOs. This pace slightly exceeds last year’s activity but is hardly the splash that the life sciences industry was hoping for.
What’s more, those IPOs that are going to market are later-stage companies that have built up more of a track record and have better financing. The rising appetite for risk that many executives were hoping for has simply not materialized, cooled by a pervasive sense of uncertainty that has rattled markets.
Eyeing uncertainty
Rising economic skepticism, market volatility related to federal government policy decisions and Treasury yields reaching their highest point in over a decade have all tempered investor interest in an inherently risky industry.
The 10-year Treasury yield has exceeded 3.5% since 2023 and there are no indicators that that rate will meaningfully decrease in the near term. This level of return on low-risk assets is likely to drive near-term investment appetite away from biopharma IPOs. With policy uncertainty still high, executives and their potential investors continue to take a wait-and-see approach.
But capital investment is still critical to the life sciences ecosystem. Given these challenging conditions we believe companies should be acutely focused on current market dynamics and how they should position themselves when approaching investors. To that end, even in this climate of uncertainty, our analysis of IPO data from Evaluate Pharma and public filings has shown a distinct shift in the preference for biopharma IPOs.
Biopharma IPO activity has recently moved away from pre-clinical and Phase I companies and back to firms with later-stage assets. During the pandemic boom, pre-clinical and Phase 1 companies were able to complete successful IPOs. But investors have not had an appetite for the level of risk associated with early-stage companies, regardless of their market potential.
Now, a company looking to access the public markets is expected to have, at a minimum, positive safety study results, an adequately enrolled efficacy trial and a sufficient capital runway when beginning the IPO process. With that in mind, we expect nearly all 2025 IPOs to be biopharma companies in Phase 2 or 3.
In addition, there has not been an IPO of a commercialized biopharma company since 2021. This is because most companies with strong enough clinical results to reach commercialization would have already had the opportunity to go public, or to be acquired by large pharma. We expect this trend to continue. As an aside, the average period from completion of research and development stage work to commercialization is 7.5 years, according to Federal Trade Commission data.
Window of opportunity
A bright spot for the life sciences industry is the recent upward trend in market performance of biopharma companies. Likewise, the biopharma and pharma sectors had significant spikes in performance since the beginning of the year, while the S&P 500 and tech-heavy Nasdaq have retreated. In part, this trend is attributable to uncertainty and disruption in the tech sector, another area with high risk/high reward from an investor standpoint.
As investors reconsider their capital allocation strategies, we anticipate that more money and attention will find its way to biopharma stocks, which offer a similar risk profile but have not been burdened with the same level of recent negative headlines, or over exposure due to the so-call “Magnificent 7” tech stocks or boom in artificial intelligence. This could create a window for IPOs later this year, particularly for companies that meet the profile described above.
Readiness considerations and other options
To anticipate investor interest, biopharma companies should evaluate their current position to determine if they are a candidate for an IPO when an opening in the market does occur. IPO readiness efforts should include PCAOB-compliant audits, internal controls evaluations and Section 382 studies to help ensure that the company can move quickly when a window opens.
Additionally, companies that may not fit the profile for a successful IPO should explore the possibility of a drug licensing transaction. Such transactions involve a contract with a large commercial pharmaceutical company. Generally, a significant amount of cash is provided upfront with additional funds available upon the achievement of milestones.
The payments are in exchange for distribution rights or royalties to the large pharmaceutical company upon commercialization. These arrangements provide early-stage biopharma companies with cash to fund clinical progress without diluting existing investors.
As shown below, pre-clinical companies have received the bulk of this type of funding. We expect continued activity in this area as large pharmaceutical companies face an approximately $350 billion patent cliff, according to Forbes, and will be seeking opportunities to add to their pipeline to recover revenue lost to generics and biosimilars.
The takeaway
While the biopharma IPO market has been sluggish, there may be a shift in the marketplace later this year, particularly for later-stage biopharma companies. Companies must take action now, however, in order to be ready when that window of opportunity presents itself.
Check out additional IPO readiness insights.
