Sana Biotechnology Inc. (SANA, Financial) and Lyel Immunopharma Inc. (LYEL, Financial) are poster children for what’s happening in the biotech initial public offering market. The two companies raised a combined total of $1 billion in 2021 and at one point had valuations exceeding a combined $5 billion. That figure has been sliced by just about half.
Investors have become wary of companies like Sana and Lyel that have drugs only in the pre-clinical stage. At that point in the development process, plans for clinical trials and submitting for approval are just being readied. The risk of treatments getting approved is great. Ninety percent of drugs being developed fail to make it to the market and those that do often cost nearly a billion dollars to get there, according to STAT.
Given the steep odds for success, it’s no wonder the rapid pace of biotech IPOs has slowed to a snail’s pace, most prominently during the second half of 2021. Almost 50 biotechs had priced at least a $50 million stock offering by the end of last June, according to an article in BioPharma Dive. In the third quarter, that number dropped to 18 and slipped to 10 in the final three months of the year.
In the middle of last year, more than half of the companies that had gone public in 2021 were trading under their offering price. By December, that number had climbed to 80% and the trend has continued into this year.
Caption: Sanya Biotechnology and Lyel Immunopharma have seen share prices crater since their IPOs.
The abundance of early biotechs going public at higher valuations created a “disconnect" between their market capitalizations and their actual worth, said Todd Foley, a managing director at MPM Capital. Companies with "cool technologies and ideas" that were far away from clinical testing were getting billion-dollar-plus valuations, far greater than those companies with products on the market, he pointed out.
In notes to clients, Jefferies analyst Michael Yee described investors as "fatigued" by the high values of companies "trying to outdo each other to get the highest valuation." Investors who bought into IPOs have suffered because the stock prices of new biotechs were out of sync with the potential of the companies, Yee told BioPharma Dive. Many like Sana and Lyel hadn't even begun human testing of their drugs, making their valuations less justifiable as the market softened.
So where do we go from here? Biotechs ready to pull the IPO trigger need to be more realistic, Jerel Davis, a managing director at Versant Ventures, said in a January interview. He emphasized that the financing of companies of this ilk are being looked at carefully in advance of a public offering and the newbies are unlikely to get the big value boost they had hoped for.
"We need ... great teams to develop great products for patients, not to just push out companies," Otello Stampacchia, founder of the investment firm Omega Funds, said. "Across the board, it's time to retrench a little bit and reflect."
MPM’s Foley offered a somewhat sanguine view. "I don't think this is going to be a nuclear winter," he said, suggesting what we are likely to see is a more selective investment mindset and fewer high-priced, preclinical stock offerings.
