After a record-breaking year for biotech IPOs, the market slowdown that began in the second half of 2021 is here to stay. 2022 opened on a much cooler market, and the first quarter was the slowest in three years for new stock offerings.¹ For young biotechs and their investors, life after the IPO cliff is now a test of patience and caution.

As of mid-2022, both the number of biotechs going public and the average amount of money raised continue to plunge well below the soaring valuations only a year ago. Compared with the 45 biotechs that went public by June 2021, only 14 biotechs have gone public by the same time this year. Of these, 10 are trading below their initial offering price as of June 2022.²

Last year’s top IPOs are seeing a similar slump. At the end of last year, 80% of biotechs that went public in 2021 were trading below their initial price.³ As of close of markets on February 1, 2022, the top 10 biotech companies to go public in 2021 had lost on average nearly 40% of their initial price, with nine out of 10 trading below their IPO, and only Verve Therapeutics maintaining an increase in value.⁴

In the second quarter, these numbers continue to play out. As of close of markets on June 15, the same 10 companies have now lost on average 71% of their opening price — Verve, valued at –36% of its opening share price, is no longer raising the curve.² Far from leveling off, the downward trends seen at the beginning of 2022 continue to run their course.

Ripple Effects Across the Sector

IPOs are a cornerstone of the biotech industry, giving young companies the critical chance to raise the funds to bring therapies to market and letting their venture backers earn a return on their investment and use it to fund more emerging biotechs. As a result, shockwaves from the slowdown have rocked the entire sector, and new biotechs are facing consequences in the aftermath of 2021’s record run that go beyond sinking IPO prices.

In response to the slower market, stocks values in the second quarter continue to decline across the sector, and VC investments are trending down.⁵ Venture firms still possess the funds, but crossover investors are becoming more selective in their investment choices.¹ With funding drying up, company creation is tapering off, biotechs are staying private longer and conserving cash, and the list of companies announcing layoffs and closures to survive the drought continues to grow.^1,5,6 In response to a cooler market, young biotechs are generally staying private longer, startup creation has slowed, and investors are moving from growth-oriented to value-oriented sectors.^1,5,7

2021’s Postmortem Reveals Big Promises, No Results

While the market slowdown may be a sign that the market is reverting to pre-pandemic norms, bullish optimism could prevent investors from seeing the bigger picture. A more critical view of the current cooldown is that an overwhelming number of young companies sprinted to Wall Street prematurely, without sufficient evidence that their therapies were feasible and close to being market ready.⁴

The record capital flow seen in 2020 was an expression of enthusiasm for new innovation, in part inspired by the drive to put novel mRNA vaccines for COVID-19 on the market.^4,9 However, what followed was an unprecedented number of early-stage biotechs going public, the majority of which made big promises without demonstrated results. Of the 78 biotech IPOs in 2021 that BioPharma Dive tracked, 52 were preclinical or in phase I trials when they went public.⁸ Initially, this wave of IPOs rewarded crossover investors with high returns over short turnover times.¹⁰ Now, reality has set in, in the form of lulls in M&A, regulatory setbacks, and cooling investor interest, as many of these new biotechs continue to lag in getting their first therapies to market months and years after their initial offering.⁹

The Path Forward is Clear, But Not Easy

Despite the cooldown, judicious use of existing funds and a healthy amount of caution may be able to prime the sector for future growth and success. Today’s market is not a good time to go public, meaning that biotechs looking to raise funds will need to pursue alternative options, and many emerging biotechs are planning to stay private longer,^1,4,10 but life science VC firms still have deep reserves to invest in emerging companies and technologies.¹⁰ Reopening after COVID-19 shutdowns may also encourage an upswing in launches for new therapies and M&A activity, though not without accompanying risk and volatility.⁹ Additionally, even with current layoffs, the biotech job market is currently strong and fueled by past expansion.⁵

The cooldown may also come with unexpected benefits for pharma’s bigger players. 2021’s characteristic high valuations for new biotechs had put large pharma companies at a disadvantage, as indicated by lower M&A activity and smaller deals during that period, and now the IPO drought may put these larger companies in a stronger position for the rest of 2022.¹⁰

For investors eyeing the sector, a number of biotechs that were previously selected by various media outlets earlier in the year as having growth potential, though still carrying risk, are now living up to their promise. According to the NASDAQ Global Select Market Composite, Alkermes, BioMarin Pharmaceutical Inc., CRISPR Therapeutics AG, Exelixis Inc., Ionis Pharmaceuticals, and Vertex Pharmaceuticals have been trending upward over the past three- and six- month periods as of close of markets on June 17, 2022.^7,11

In the meantime, as the companies that released their initial offering while still preclinical or in phase I clinical trials begin to produce good trial data — the result of increased focus on realistic milestones in the wake of 2021’s lofty promises — their value may once more appreciate.^9,10 Many dedicated investors see this renewed scrutiny of young companies’ ability to hit milestone goals as a healthy sign that biotech companies are now being traded on the basis of their true value, rather than the uncritical excitement that drove 2021’s overbought market.¹⁰ After a tough first half of 2022, biotech stakeholders willing to change their strategies will be better equipped to play out the endurance game of the next two quarters.¹⁰

1. References

   1. Fidler, Ben. “Biotech startups face ‘trickle-down effects’ as sector’s IPO drought endures.” BioPharma Dive. 11 Apr. 2022.
   2. Fidler, Ben. “After a record run, fewer biotechs are going public. Here’s how they’re performing.” BioPharma Dive. Updated 16, Jun. 2022.
   3. Elmhirst, Edwin. “After a record year, where next for biopharma flotations?” Evaluate. 13 Jan. 2022.
   4. LaHucik, Kyle. “Biotech IPOs in the current market environment? Experts say it's 'a bit silly, if not suicidal'.” Fierce Biotech. 22 Feb. 2022.
   5. Mullard, Asher. “Clouds gather over biotech industry.” Chemical & Engineering News (C&EN). 7 Apr. 2022.
   6. LaHucik, Kyle, Max Bayer, and Annalee Armstrong. “‘Stay alive’: Wave of layoffs crashes into biotech startup inferno.” Fierce Biotech. 28 Mar. 2022.
   7. Reeves, Jeff. “8 Best Biotech Stocks to Buy in 2022.” U.S. News. 5 May 2022.
   8. Fidler, Ben. “As three biotechs head to Wall Street, a battered sector braces for a pullback.” BioPharma Dive. 7 Jan. 2022.
   9. Abrahams, Brian. “Biotech Outlook 2022: Ample Opportunity for a Rebound.” Endpoints News. 21 Mar. 2022.
   10. Bica, Iris. “Beyond the IPO: biotech market update post 2021 sell-off.” Seedsprint. SeedVantage LLC. 7 Apr. 2022.
   11. Speights, Keith. “Investing in Biotech Stocks in 2022.” The Motley Fool. Updated 8 Jun. 2022.