Executives in the life sciences industry had high hopes that the moribund market for initial public offerings would rebound this year.
But with the first quarter complete, the results have not lived up to expectations.
Fewer than 10 biopharma companies completed IPOs in the first quarter—hardly the splash that was expected.
After several moribund years of initial public offerings in the life sciences industry, executives and investors had high hopes when the year started, as they expected a friendlier climate on interest rates, taxes and regulation.
But with the first quarter now complete, the results have not lived up to the expectations. Fewer than 10 biopharma companies have completed IPOs. This pace slightly exceeds the figure for the first quarter of last year but is hardly the splash that the life sciences industry was hoping for.
What’s more, those IPOs that are going to market are later-stage companies that have built up more of a track record and have more robust historical financial backing. The rising appetite for risk that many executives were hoping for has simply not materialized, cooled by a pervasive sense of uncertainty that has rattled markets.
Rising economic skepticism, market volatility related to federal government policy decisions and Treasury yields reaching their highest point in over a decade have all tempered investor interest in an inherently risky industry.
The 10-year Treasury yield has exceeded 3.5% since 2023, with no indicators that that rate will decrease meaningfully in the near term. This level of return on low-risk assets is likely to drive near-term investment appetite away from biopharma IPOs. With policy uncertainty still high, executives and their potential investors continue to take a wait-and-see approach.
But capital investment is still critical to the life sciences ecosystem. Our analysis of IPO data from Evaluate Pharma and public filings shows that biopharma IPO activity has recently moved away from preclinical and Phase I companies and back to firms with later-stage assets. During the pandemic boom, preclinical and Phase I companies were able to complete successful IPOs. But recently investors have not had an appetite for the level of risk associated with early-stage companies, regardless of their market potential.
Now, a company beginning the IPO process is expected to have, at a minimum, positive safety study results, an adequately enrolled efficacy trial and a sufficient capital runway. With that in mind, we expect nearly all 2025 IPOs to be biopharma companies in Phase II or III.
In addition, there has not been an IPO of a commercialized biopharma company since 2021. This is because most companies with strong enough clinical results to reach commercialization would have already had the opportunity to go public, or to be acquired by a large pharmaceutical company. We expect this trend to continue. As an aside, the average period from completion of research and development to commercialization is 7.5 years, according to Federal Trade Commission data.
Biopharma companies should evaluate their current position to determine whether they are a candidate for an IPO when an opening in the market does occur. To help ensure they can move quickly when a window opens, IPO readiness efforts should include audits that comply with Public Company Accounting Oversight Board standards; internal controls evaluations; and Internal Revenue Code section 382 studies.
Additionally, companies that may not fit the profile for a successful IPO should explore the possibility of a drug licensing transaction, which involves negotiating a contract with a large commercial pharmaceutical company. Generally, a significant amount of cash is provided upfront with additional funds available upon the achievement of milestones.
The payments are in exchange for distribution rights or royalties to the large pharmaceutical company upon commercialization. These arrangements provide early-stage biopharma companies with cash to fund clinical progress without diluting existing investors.
As shown below, preclinical companies have received the bulk of this type of funding. We expect continued activity in this area, as large pharmaceutical companies face an approximately $350 billion patent cliff, according to Forbes, and will be seeking opportunities to add to their pipeline to recover revenue lost to generics and biosimilars.
While the biopharma IPO market has been sluggish, there may be a shift in the marketplace later this year, particularly for later-stage biopharma companies. Companies must take action now, however, in order to be ready when that window of opportunity presents itself.
