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December 18, 2023
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Biotechs end with mystery: What’s IPO-capable in today’s market?

  • 2023 has been a challenging year for the biotech industry with more than 180 biotechs and pharmas laying off thousands of people, private financing dropping significantly and increased regulation from the federal government.
  • The dip in the market affected mostly small to mid-cap biotechs with stocks of 154 biotechs and pharmas, ranging from $200 million in market cap to $10 billion, losing at least 20% of their value.
  • However, new treatments for PTSD and schizophrenia were submitted and Eli Lilly’s donanemab rivalled Eisai and Biogen in Alzheimer’s disease.
  • Depreciated valuations have made the launch of IPOs difficult and M&A deals harder to execute. This has resulted in fewer investors for the riskier, earlier-stage biotech companies.
  • Despite a tough year, the Federal Reserve has stopped raising interest rates and there has been a 19% increase in the S&P XBI which is an index of smaller public biotechs in the last month.
  • This gives rise to cautious optimism as lower valuations give room for better performance and the opportunity for companies to “breathe and perform”. Lower valuations are advantageous for pharmaceutical companies looking for deals and acquisitions.
  • FTI Consulting’s survey of healthcare and life science leaders shows that 2 out of 3 respondents expect M&A activity to increase in 2024.
  • Last year’s challenging environment could provide a unique opportunity for selected, smart investments.

2023 has been marked by layoffs, reduced private financing and increased government regulation. However, amidst the challenges, new treatments for various diseases were developed and submitted for approval, providing glimmers of hope. The Federal Reserve’s decision to stop raising interest rates, combined with an increase in the S&P XBI index of smaller public biotechs, offers a silver lining for the industry. While IPO launches were difficult and funding for riskier, early-stage companies dwindled, there is cautious optimism as the “window might be opening for IPOs”. The year also concluded with industry leaders exhibiting optimism for an increase in M&A activity in 2024.

Despite the surge in layoffs and a crunch in the market, certain biotech advancements have provided some relief. “A return of the IPO market (or more reverse merger activity) will help relieve this backlog—but also likely spur more later-stage private financings, as investors can once again see a path to liquidity in those investments,” say Leerink researchers. There has been a note of cautious optimism with professionals expecting better performance off low base valuations and an increase in M&A activity in the coming year.

Overall, while 2023 was harsh on the biotech industry, it has also opened up windows of opportunity. It remains important for the industry to recalibrate, gain investor trust, and focus on smart investments to leverage the “downside-protected” market in order to pave the way for better performance and future growth.

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