Analysis: Biotech IPOs to bloom with spotlight on startups with human trial data

Tenaya Therapeutics

13/02/2023 13:54

By Amruta Khandekar and Bhanvi Satija
       Feb 13 (Reuters) - Initial public offerings by small
private biotech companies are poised to stage a comeback later
in 2023 as the pace of interest rate hikes slows, but tougher
economic conditions will make investors more inclined to pick
firms which have drugs in human trials.
    Globally, IPOs across all sectors nosedived last year after
a blockbuster 2021, as aggressive interest rate hikes by central
banks to curb inflation put an end to the era of cheap money.
     In the biotech sector, there were only 47 IPOs last year
that raised a total of about $4 billion, compared with 152
offerings in 2021 that had raised over $25 billion. 
    However, more biotech companies are expected to tap the U.S.
IPO market this year as the Federal Reserve dials down the size
of its rate hikes and private investment rounds fail to raise
adequate capital to fund expensive clinical trials, industry
experts told Reuters.
    Still, companies that have not yet tested their drugs on
humans may find it hard to attract equity investors' attention
given tighter financial conditions and a slew of disappointments
from preclinical companies that went public during the IPO boom
of 2021.
    "The pattern of the past few years has been to come to the
market with almost anything, no matter how substantial the
validation," said David Pinniger, fund manager of the Biotech
fund at Polar Capital. 
    "In these more discerning days, the weight of clinical
evidence is probably going to have to be that much greater,"
Pinniger added.
        Several preclinical-stage biotechs that went public in
2021 are now trading well below their IPO price, including Sana
Biotechnology  SANA.O , Tenaya Therapeutics  TNYA.O  and Virpax
Pharmaceuticals  VRPX.O .
    Along with challenging macro conditions, a string of
disappointing clinical data and a dearth of large acquisitions
had also sapped investor interest in the biotech sector in the
first half of 2022, hammering company valuations.
    Small drug developers without any approved products on the
market were forced to cut costs by dropping some drug study
programs and implementing layoffs as funding dried up.
    Sentiment started to rebound late in 2022 and has continued
into this year, with the SPDR S&P Biotech ETF  XBI , considered
a yardstick for the performance of small-cap biotech firms,
having risen about 3% so far this year after posting its biggest
annual loss last year.
    While the XBI is still trading 50% below its February 2021
closing high, analysts believe the downturn in biotech has
bottomed out. They also believe the outlook for the rest of the
year is much brighter given the likelihood of multi-billion
dollar acquisitions and innovations such as genome editing and
targeted cancer drug developments.
    Biopharma companies held more than $1.4 trillion in
dealmaking capacity at the beginning of December 2022, according
to a report by EY, with pharmaceutical giants facing patent
expiries for their key drugs on the hunt for new promising
assets.
    "There was this dam holding back all this capital," said
Sean Sun, portfolio manager at Thornburg Investment Management. 
    "Now we're in this sweet spot where you're seeing signs of
disinflation, you're seeing risk appetite improve. All we need
is one or two biotech IPOs to get good interest and the
floodgates will open."
    Analysts have pointed to developmental obesity treatments,
Alzheimer's disease drugs, cell and gene therapies, and the
breakthrough messenger-RNA technology among areas attracting
investor interest.
    The second half of 2023 is more likely to see a significant
step-up in biotech IPOs instead of the first half, as markets
await further clarity on potential rate cuts, analysts said. 
    Along with robust clinical data, investors will be looking
for companies with management teams that are capable of steering
them to success after their stock market listings.
       "A silver lining in the biotech downturn is that
companies realize that they're not necessarily entitled to great
valuations because they have some interesting science," SMBC
Nikko Securities America analyst David Hoang said.
  
        "The way private companies are messaging their story and
thinking about pushing their pipelines forward has improved
compared to the last two years," Hoang added.
  
        A few biotech firms have already filed for an IPO this
year, with clinical-stage drug developers Mineralys Therapeutics
 MLYS.O  and Structure Therapeutics  GPCR.O  having successful
market debuts following their offerings.
  
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Biotech firms' initial and secondary issues    https://tmsnrt.rs/3Idp2bp
Biotech firms raise lesser capital in 2022    https://tmsnrt.rs/3lqLtAZ
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 (Reporting by Amruta Khandekar and Bhanvi Satija; Editing by
Alden Bentley)
 ((Amruta.Khandekar@thomsonreuters.com;))