Is the market for biotechnology companies getting overheated? Investors might want to be somewhat cautious about the industry, especially initial public offerings.
For now, biotechs are flying high. Public and investor awareness of the companies has been raised to new levels thanks to the industry's work on solutions to the Covid-19 pandemic. The National Biotechnology Index is at a five-year high, up more than 27% in the past year. The boost has been aided in great part by a record year in IPOs. Throughout 2020, very early-stage companies managed to float at substantial valuations, with many offerings upsized, according to a report from Evaluate Pharma.
Every IPO in Evaluate's report went public at or above the initial valuation, a remarkable accomplishment and a good sign that the trend will continue into 2021 as investors vie to join the party while the good times last.
While there are no signs that cashflow for IPOs and venture financing is drying up, investors might want to keep an eye on potential developments that could cloud the biotech picture. They include the full impact of the pandemic on economies and renewed discussions about drug pricing, especially given high unemployment and government debt mounting in many countries. In the U.S., biotech investors could be impacted by the health policies of the new Biden administration.
Investors don't have to look too far back to see a time when the market for biotech IPOs was far less rosy. Just a few years ago, investors were more skeptical about the ability of companies to bring drugs to market before they ran out of cash. Evaluate points out that the median return from biopharma companies that floated in 2016, 2017 and 2018 is negative, as of last month. "A couple of big blow-ups at newly minted public biotechs could remind less specialized investors of the sector's failure rate," the report noted.
Evaluate warned that in some cases the ride down might be just as fast as the ride up, saying, "When a preclinical or very early-stage company can float with a market cap in excess of $1 billion, setbacks will prove equally spectacular." The market is supporting these prices for now, with several outliers even generating significant returns. But the IPO class of 2020 has some huge expectations to live up to.
The report aslo said progress of special purpose acquisition companies will be a major theme for 2021. A huge number of these so-called blank check companies offer private biotechs an alternative path to the stock market. But they may not be successful in attracting customers since the IPO route seems to be a better deal for the companies and their investors.
Business Insider reported that SPACS will be much more popular in facilitating mergers and acquisitions. According to Goldman Sachs Group Inc. (GS, Financial), companies looking to merge with or acquire another company could drive $300 billion in merger and acquisitions activity over the next two years.
Disclosure: The author has no position in any of the companies mentioned in this article.
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