The number of initial public offerings (IPOs) involving corporate venturers as exiting investors, which we at GCV Analytics have been tracking has been going up over the past few years: in 2017, it increased to 45, up from 39 such transactions the previous year, and by the time of writing of the present piece, there were 56 recorded IPOs with corporates exiting throughout 2018. This is still far from the peak (70 IPOs) recorded in 2014 but the overall trend is upward.
This is also true for the total dollar amounts involved in these flotations. We observed a four-fold increase from $4.32bn in 2016 to $18bn in such IPOs in 2017. So far, the total estimated dollar value of such exits stands at $20.62bn in 2018.
While there are recorded exits of corporates in IPOs of companies from virtually all sectors, one sector in particular – health and life sciences – sticks out when analysing the number of exits by sector. This has been the case since 2011, when we started our publications and began recording data.
Is there anything about developing medicinal drugs, treatments and medical devices which is inherently favourable when it comes to becoming part of public markets?
The surge of biotech IPOs is currently a trend in public markets, which has drawn the attention of large financial media outlets like Forbes Magazine. According to Forbes, the rise of “biotech IPOs” is due to a combination of an attractive tax package for established pharmaceuticals, which enables them to pour funds into licensing deals as well as mergers and acquisitions, along with the presence of “crossover” institutional and traditional financial investors that are active in both private and public markets (e.g. Deerfield Management).
This, however, seems to have been a consistent trend at least in the realm of corporate venture capital exits for much longer. The drug and medical devices development business is characterised by long and expensive R&D processes when it comes to obtaining regulatory approvals and patents to subsequently reap economic benefits. In short, if executed internally, it is a long-term investment that is rather tardy in generating returns. In an economic environment of low interest rates (in which we have been living since the end of the Great Recession), it is more financially viable for incumbent pharmaceutical companies to externalise their costly R&D and engage in a variety of investment to harness external innovation and eventually make it commercially viable – whether it is via licencing deals, minority stakes in startups, outright acquisitions or IPOs. It is not surprising, therefore, this heightened interest in health and life science innovation has brought about a bigger demand for funding by life sciences enterprises in equity markets, private and public alike.
Finally, as shown on the third chart here, IPOs of corporate-backed business from the Health sector are not necessarily even among the most sizeable ones. While there seems to be no particular pattern associated with median size of such IPOs, in recent years companies from the consumer, media, IT and transport sector appear to have been raising larger IPOs than businesses from other sectors.
