The big question at the start of 2019 was whether the IPO window would stay open for biotech companies, particularly those seeking to pull off ever-larger IPOs at increasingly earlier stages of development.
The short answer is yes—kind of. Here’s the long answer:
In the words of Renaissance Capital, the IPO market had “a mostly good year.” The total number of deals fell to 159 from 192 the year before, but technology and healthcare companies were standout performers. The latter—which include biotech, medtech and diagnostics companies—led the pack, making up 43% of all IPOs in 2019. By Renaissance’s count, seven companies went public at valuations exceeding $1 billion, up from five the year before.
In raw numbers, 2019 saw fewer IPOs in healthcare than 2018 did. Despite that decline, the sector outraised itself, banking more in total proceeds than the year before.
No one eclipsed Moderna’s record-setting $604 million IPO at the end of 2018, but the top IPO of 2019, Genmab’s, came pretty close. Its $505 million Wall Street debut valued the company at an eye-watering $11.6 billion. Four companies joined Genmab in the billion-plus valuation club: BridgeBio Pharma, Gossamer Bio, Alector and BioNTech. AstraZeneca spinout Viela Bio was knocking on the door with a $150 million IPO that gave it a $985 million valuation.
Biotech companies had some of the best returns, too, taking six out of the top 10 spots for best-performing IPOs. Schizophrenia-focused Karuna Therapeutics came out tops with a 364% return on its $89 million IPO, while No. 7 Turning Point Therapeutics was also a top 10 performer, raising nearly $167 million for a return of 245%.
Silicon Valley Bank described the 2019 market as “buoyant,” noting in its 2020 Healthcare Investments and Exits report that the returns from biotech IPOs in 2018 and 2019 nearly equaled returns from the four prior years put together.
Predictably, cancer-focused companies pulled off half of the top 10 biotech IPOs: BioNTech, SpringWorks, IGM Biosciences, Turning Point and Genmab. In second place were companies taking aim at genetic diseases: Gossamer Bio and BridgeBio. Rounding out the top 10 were Phathom Pharma—the gastrointestinal specialist that launched with a late-stage Takeda drug—central nervous system player Alector and Viela Bio, the AstraZeneca spinout focused on inflammatory and autoimmune diseases.
Jon Norris, managing director at SVB and author of the bank’s report, noticed a decline in early-stage IPOs in the second half of 2019. Nearly all of the companies on this list had early-stage assets in their pipeline, but only three—Turning Point, Alector and IGM Bio—were in the preclinical stage or phase 1 at the time of their IPO.
“Of the IPOs that went out in the first half of 2019, about half were preclinical or phase 1 at IPOs. We saw that go down pretty significantly in the second half,” Norris told FierceBiotech. But a company’s stage at IPO didn’t necessarily portend how well the IPO would perform.
“I did see in the bottom five performers, two to three were preclinical or phase 1 when they went public. In the top five, there were two to three preclinical or phase 1 companies,” he said.
Compared to the year before, IPO deal size might be settling. In 2018, all but one of the top 10 biotech IPOs surpassed $150 million. Seven deals exceeded $200 million and, excluding Moderna’s $604 million outlier, the average deal size in the top 10 was $209 million.
In 2019, all 10 of the top IPOs raised at least $150 million, but the deal value was concentrated at the top, with BridgeBio and Gossamer—the only companies to break $200 million—raising $348.5 million and $276 million, respectively. Including Genmab’s $505 million IPO puts the average deal size in the top 10 at $229 million. But take it out—as we did with Moderna’s in 2018—and that average drops to $179 million.
So, what does this all mean for 2020? This is where the answer gets even longer.
“Perhaps because there will be so much going on in 2020—the U.S. presidential election, Brexit, and US-China trade negotiations—forecasting trends in the U.S. IPO market seems riskier than usual,” Renaissance said in its 2019 annual review.
That said, it predicted that "small technology and biotech companies will continue to be the mainstay of the IPO market.”
“Much depends on broader market conditions next year; as well [as] the U.S. political situation, macro-economic factors like changes in interest rates will dictate the market’s appetite for high-risk biotech stocks,” Vantage wrote in its 2020 Preview. “All of this is very unpredictable, of course, and companies are making the most of the window while it remains open.”
Vantage thinks the trend of biotechs going public earlier and earlier will abate in 2020. Despite a “flurry” of IPOs in the last quarter of 2019, “investors are still expecting something of a retrenchment next year, particularly of the most high-risk propositions. It would be surprising to see preclinical companies managing to get away next year,” Vantage wrote.
“Bankers are now advising companies to gather more data, or at least have some clinical proof of concept before they consider a public offering,” Carolyn Ng, managing director at Vertex Ventures, told Vantage.
Norris thinks there’s a playbook for early-stage biotechs looking to get their IPO out. That includes snagging a proven management team and getting crossover investors to chip in to their series B round. But certain types of companies, namely cancer-focused biotechs and platform companies, may be more likely to pull off an earlier stage IPO in 2020, he said.
His team studied the top 15 crossover investors and the companies they backed as a proxy for investor appetite for IPOs. These investors back private and public companies and include the likes of Deerfield Management and RA Capital.
SVB ignored smaller, earlier rounds and focused on mezzanine rounds that banked at least $40 million. The bank found that, since 2017, about half of the 137 companies that met those criteria went public or were acquired. The top 15 crossover investors made 61 such deals in 2018 and 45 in 2019.
“What’s really interesting for me is, of the 45 deals in 2019 [that met the $40 million threshold], 31% of them have already gone public. Within a year of their mezzanine financing, they’ve already gone public. It creates an IPO pipeline for companies to go public in 2020,” Norris said.
“We would have seen a significant decline in the number of deals by crossover investors if they did not think the IPO market was going to be solid,” he added. “All the companies they’re investing in—they want them to go public. They’re going to double down in the IPO and, based on performance in the public market, they’re going to do really, really well.”
Sources: Brad Loncar, “Biotech IPOs Class of 2019," Renaissance Capital, "US IPO Market 2019 Annual Review,” Evaluate Ltd., “Vantage 2020 Preview,” Silicon Valley Bank, “2020 Healthcare Investments & Exits Report”