Investors attracted to startups with human trials
2023.02.13 13:37
Investors attracted to startups with human trials
By Kristina Sobol
Budrigannews.com – Small private biotech companies’ initial public offerings are expected to rebound in 2023 as the rate of interest rate increases slows. However, investors will be more likely to choose businesses that have drugs in human trials in tougher economic times.
After a record-breaking 2021, aggressive interest rate hikes by central banks to curb inflation ended the era of cheap money, and as a result, IPOs worldwide plunged last year.
Only 47 initial public offerings (IPOs) raised approximately $4 billion last year in the biotech industry, compared to 152 offerings that raised over $25 billion in 2021.
However, as the Federal Reserve reduces the size of its rate hikes and private investment rounds fail to raise sufficient capital to fund costly clinical trials, industry experts told Reuters, more biotech companies are anticipated to enter the U.S. IPO market this year.
Nevertheless, tighter financial conditions and a slew of disappointments from preclinical companies that went public during the IPO boom of 2021 may make it difficult for companies that have not yet tested their drugs on humans to attract the attention of equity investors.
According to Polar Capital’s Biotech fund manager, David Pinniger, “the pattern of the past few years has been to come to the market with almost anything, no matter how substantial the validation,”
Pinniger added, “The weight of clinical evidence is probably going to have to be that much greater in these more discerning days.”
Sana Biotechnology (SANA.O), Tenaya Therapeutics (TNYA.O), and Virpax Pharmaceuticals (VRPX.O) are three preclinical-stage biotechs that went public in 2021 and are currently trading well below their IPO prices.
In the first half of 2022, in addition to challenging macro conditions, a string of disappointing clinical data and a lack of significant acquisitions had also stifled investor interest in the biotech sector, driving up company valuations.
Due to a lack of funding, small drug developers had to cut costs by eliminating some drug study programs and employing layoffs. There were no approved products on the market at the time.
The SPDR S&P Biotech ETF, which is regarded as a benchmark for the performance of small-cap biotech firms, has risen approximately 3% so far this year after posting its largest annual loss last year. Sentiment has continued to improve into this year.
Analysts believe that the biotech market has reached its bottom, even though the XBI is still trading 50% below its closing high from February 2021. Due to the likelihood of multi-billion dollar acquisitions and innovations like genome editing and targeted cancer drug development, they also believe the outlook for the remainder of the year is much brighter.
According to a report by EY, biopharma companies had the capacity to make deals worth more than $1.4 trillion at the beginning of December 2022. This comes at a time when pharmaceutical giants are looking for new promising assets as the patents on their most important drugs are about to expire.
Sean Sun, a portfolio manager at Thornburg Investment Management, stated, “There was this dam holding back all this capital.”
“Now we are in this sweet spot where you are seeing signs of inflation dissipating and an increase in risk appetite.” The floodgates will open as soon as one or two biotech IPOs attract sufficient interest.
Treatments for developmental obesity, drugs for Alzheimer’s disease, cell and gene therapies, and the revolutionary messenger-RNA technology are among the areas that are attracting investor interest, according to analysts.
According to analysts, as markets wait for additional clarity on potential rate cuts, the second half of 2023 is more likely to see a significant increase in biotech IPOs than the first half.
Investors will be looking for companies with management teams that can lead them to success after their stock market listings, in addition to solid clinical data.
According to SMBC Nikko Securities America analyst David Hoang, “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.”
Hoang added, “Compared to the last two years, the way private companies are messaging their story and thinking about pushing their pipelines forward has improved.”
This year, a few biotech companies have already filed for an initial public offering (IPO). Following their offerings, clinical-stage drug developers Mineralys Therapeutics (MLYS.O) and Structure Therapeutics (GPCR.O) had successful market debuts.
