The closed IPO window forced many private biotech companies to achieve significant clinical milestones, like Phase 2 proof-of-concept, while still private. This has created an unusual cohort of well-seasoned, de-risked companies with attractive valuations, poised to be highly appealing to public investors.
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The 2020-2021 biotech "bubble" pushed very early-stage companies into public markets prematurely. The subsequent correction, though painful, has been a healthy reset. It has forced the sector back toward a more suitable, long-duration private funding model where companies can mature before facing public market pressures.
During market downturns, biotech companies lose the ability to raise capital simply when it's convenient. Financing becomes tied to specific events. The key is timing a fundraise immediately before or after the release of significant clinical data that de-risks the company and attracts new investors.
When the IPO window opens, nearly every stakeholder—from bankers and lawyers to VCs and management—is financially motivated to go public. This collective "irrational exuberance" can lead to a rush of mixed-quality companies, perpetuating the industry's historical boom-bust IPO cycles.
Unlike the 2020-2022 bubble, the expected wave of biotech IPOs features mid-to-late-stage companies with de-risked assets. The market's recent discipline, forced by a tough funding environment, has created a backlog of high-quality private companies that are better prepared for public markets than their predecessors.
While staying private can offer strategic advantages, particularly for future M&A, the biotech industry lacks a mature private growth capital market. Companies needing hundreds of millions for late-stage trials have no choice but to go public, unlike their tech counterparts.
The reopening of the biotech IPO market is fragile. A key risk identified by investors is a series of failed IPOs, which could halt the sector's positive momentum. Consequently, there is intense pressure on bankers and VCs to exhibit "quality discipline," ensuring that only the most mature and high-potential companies go public first to build a track record of success.
After the 2007-2013 biotech IPO drought, Portola Pharmaceuticals successfully went public by setting reasonable expectations. The goal wasn't a sky-high valuation but to gain liquidity and access to capital, recognizing the IPO is a starting line, not a finish line, for value creation.
As the IPO window reopens, the initial companies going public are likely those that couldn't get out during choppier markets. Venture investors with "surefire winners" are probably waiting, meaning the highest quality IPO candidates are yet to come, posing a risk for early investors jumping back in.
Non-specialist "generalist" investors are re-entering the biotech sector, attracted to a new wave of companies with commercial products and sales data. These are easier to analyze and project than high-risk, preclinical assets. This shift provides crucial capital and signals broader market confidence, as evidenced by their willingness to buy entire follow-on offering deals.
The profile of a company prepared to go public has matured significantly. Unlike the 2020 boom where IND acceptance was a key milestone, today's IPO candidates typically need Phase 2 or even Phase 3 data, raising the quality bar but shrinking the potential pool of companies.