The strong demand from public market investors dipping toes in private markets is likely to see another big year for initial public offerings (IPOs) in the biopharmaceuticals sector, despite significant market volatility in recent weeks, according to US-based bank SVB.
SVB said in its H1 Trends in Healthcare Investments report, which outlines trends in biopharmaceuticals, medical devices, as well as diagnostics and tools published last week, ”We remain firm in our prediction of 45 to 55 IPOs for the year.”
This would see the year compare strongly against 2014, where there were 66 IPOs. Jonathan Norris, managing director for SVB’s healthcare practice, said the 2014 IPO number was “Unbelievable. I don’t think anybody thought we could beat that number in 2015.” Of greater significance, according to Norris, is SVB expects there to be more biopharma IPOs than in 2013, where there were 32 flotations, after 24 IPOs in the first half of 2015.
A big reason for the bumper IPO crop since the beginning of 2014 is a large influx of capital rich investors from mutual funds and hedge funds, meaning biopharmaceutical companies are raising large sums ahead of flotation. These businesses have been driving biopharmaceutical companies towards exit, with 39% of the companies they have backed in broader healthcare, going to IPO or a trade sale (see graph).
However, there is some concern the interest from the cross-over investors in funding biopharmaceutical companies will dip, as they adjust to the new market conditions. Norris said: “The cross-over investors have been fairly consistent the last two years. How long will this go on with the volatile financial markets we have experienced in the last few weeks? We are very focused on the type of financing we will see towards the end of Q3. We will see if the cross-over investors continue to be supportive. They are a big reason why there was such an upswing in the IPO markets, as the cross-over investors have taken big pieces in the IPOs of their portfolio.”
Given the robust IPO pipeline, corporate acquirers have been extremely active in scouting for young companies. Norris added: “The levels of investment are forcing acquirers to add to their pipelines earlier than they would have liked. It is a function of the market. In M&A, 60% of the deals we have tracked were pre-clinical stage. This is the way that the cycle is pushing things right now. Three years ago there was much more M&A activity at phase two and later stage.”
With the robust market, corporate venturing activity, which had been extremely important for the sector in the aftermath of the financial crisis, now is not so significant at the later stage, although it is still one of the most significant sources of funding for developing young companies. Norris said: “The corporates continue to be active, but they are being over-shadowed by the cross-over activity. Corporate venture remains a main part of early stage company formation.”