IPOs on course for recovery but does biotech need public funding anymore?

The “hangover that won’t go away” is finally going away. “People drank a lot in 2020/21 and they are feeling the after effects,” William Blairs’ Kevin Eisle told delegates at a bespoke summit in Milan, Italy, put on by contract development and manufacturing organization (CDMO) AGC Biologics in September.

Referring of course to the difficult funding environment, he said we are still navigating the “longest recovery in the history of the biotech sector.” But ignoring the advanced therapies space – summarized here with characteristically erudite aplomb – biotech indices have generally rebounded from the lows seen in October 2023, buoyed further by the fall in interest rates.

Spurred on by the Federal Reserve, interest rates are expected to continue its decline from over 5% at the start of the year to hold steady around 3% from 2026. The biotech sector has historically performed well in lower rate environments, and already there is “light at the end of the tunnel.”

On the public funding side, Eisele said his investment bank is seeing increasing numbers of initial public offerings (IPOs) lining up in the biotech space. Excluding IPOs of less than $25 million in gross proceeds, the market went from 88 US-based IPOs in 2021 to 11 and 12 in the ensuing years. While 2024 has still been “very quiet,” it is picking up – 20+ IPOs at the time of going to press – with momentum set to continue going into 2025

“We're going to see a busier IPO market next year, not just in biotech, but across the markets. Some of that is based on, frankly, what we see on our desk that we're working on right now,” Eisele told the audience.

As insight, he said there are over 80 biotechs amid the backlog of companies that check all the boxes viewed as necessary to go public: strong management, robust clinical data sets, significant amount of capital already raised, and a clear line of sight into the value inflection points post IPO.

However, the phenotype of biotech IPOs has changed following the highs of 2021 with Eisele describing a “flight to quality” that is determining a far lower yearly number numbers of IPOs going forward, described as a “return to normal.”

This is due to the lowering of risk with investors moving away from preclinical biotechs to clinical stage companies, with a preference for those at the Phase II stage. “That's become the sweet spot for what investors in the public market are looking for – a differentiated clinical package and something for investors to sink their teeth into.”

As of mid-September, the US logged 18 biotech IPO’s raising just $3 billion raised – close to the total for the full year 2023. And since then there have been four more IPOs, raising another $800~ million: Small molecule developer Septerna, biologics inflammatory disease firm Upstream Bio, amplifying RNA-focused firm Camp4 Therapeutics, and anti-aging company BioAge Labs.

“By no means do I think that the 70/80 IPOs that we saw per year in 2020, 2021 is healthy, that's too many. When I think about our return to normal, I call it 30 to 40, which I think helps keep the equilibrium with the number of companies each year that either get acquired or dissolve.”

Public vs private

The IPO recovery has been slower than that of other funding stages.

Venture capital (VC) “remains elevated amidst choppy macro conditions,” said Eisele, with $20 billion in funding expected in 2024. Private financing, meanwhile, remains selective but total proceeds as of August almost matched the full year 2023 with 175 transactions raising $15.1 billion. And at the same point in the year median proceeds raised for registered offerings had already reached an all-time high of $120 million, while PIPE (private investment in public equity) had also surpassed 2023 totals.

Such a divergence brought the tongue-in-cheek question (and the Betteridge's law headline accompanying this piece) as to whether biotech companies actually still need the public markets?

“I think ultimately, yes,” answered Eisele. “When you think about the private and public markets, while they've sort of blended together into sort of some nebulous gray area, at the end of the day there is still a bifurcation between the two, and the amount of capital that's available publicly still dwarfs what is available privately.”

He added the private capital markets have grown significantly and this “explosion in private capital” has helped companies stay private for longer and advance further into the clinic. “But at a certain point, the capital requirements become too large so that really the public markets are the only available option, or obviously being consumed by a larger pharma acquirer.”