ARTICLE | August 24, 2023

Access to capital remains challenging in the biopharma sector. The market for initial public offerings, as well as private equity and venture capital, is sluggish; however, there has been some positive movement that could signal the beginning of the end of the challenging cycle. 

IPO deal flow and capital raises remain far below the bullish days of 2019 through early 2021.

However, upward of $1.5 billion was raised in biopharma IPOs in the first two quarters of 2023, with several additional deals expected to close by the end of the third quarter. Through June 30, 11 offerings have closed, with an average raise of $137 million.

According to Bloomberg, 2023 volume is trending down, with a total of 11 IPOs in the first six months compared to 16 during the same period in 2022 and 29 for the full 2022 calendar year. However, total capital raised in 2022 was $1.8 billion, which is likely to be easily surpassed in 2023. Further, 61% of 2022 IPOs raised less than $25 million, and the average capital raised was $63 million.

The majority of the biopharma IPOs that closed during 2022 were done for the purpose of obtaining a public listing with the goal of seeking major financing in follow-on offerings. Aspiring registrants understood that the public markets would be receptive to a fundraising IPO; but they hoped to clear the procedural hurdles of going public so that they would be in a position to quickly close on financing transactions once the markets opened.

Activity in the early part of 2023 signaled a return to traditional capital-raising IPOs and stronger public market interest in the biopharma space. Private biopharma companies should carefully watch the IPO market in the near term and evaluate whether IPO readiness campaigns, which may currently be on hold, should begin or restart.

Another bellwether of public market appetite for biopharma is the market for secondary offerings. While some existing companies report difficulty closing such transactions, the market has returned to pre-pandemic levels over the last few quarters. Secondary offerings of public shares—made subsequent to IPOs—are the primary vehicles for public biopharma companies with insufficient (or non-existent) commercial revenue to raise capital to sustain operations.  

This secondary market is better positioned for a quick rebound than the IPO market because companies raising money are already public and do not need to undertake the costly and time-consuming IPO process. The upticks in both deal flow and capital invested should invoke some cautious optimism in the sector, as they are a clear indicator of decreased hesitancy from Wall Street.

Some secondaries are being initiated by companies that recently completed reverse merger transactions. A reverse merger takes place when an existing public company looks to wind down operations and a private company desires a public listing; the private company effectuates a reverse merger with the public company, taking over the exchange listing in a process that is more efficient and cost-effective than a traditional IPO. Often, a major financing will take place at the time of the merger or immediately thereafter.

Reverse mergers have doubled over the past three years due to fundraising challenges for many public companies, a trend set to continue well into 2024. This presents an opportunity for private companies to enter the public company domain before the traditional IPO market fully returns.

Private deals remain sluggish

For private companies not yet able or willing to venture into the public markets, private equity and venture capital transactions are still slow, as reflected in deal flow and invested capital. Private equity and venture capital funds have raised significant capital over the past three years. According to PitchBook, 160 U.S. funds invested in a biopharma company over the 180-day period ended June 30. Those funds have approximately $28 billion of dry powder. However, deployment is still trending at only about 50% of pre-pandemic levels, largely based on concern that funds’ current portfolio companies will need additional capital infusions due to the dormancy of the public markets. To the extent that IPO activity sees a resurgence, conservatism among private investors may be tempered, driving a spike through private deals.

The takeaway

While some positive trends are beginning to surface, funding will remain a major challenge for biopharma companies through the remainder of 2023 and perhaps beyond. Companies will need to carefully manage cash balances and seek opportunities for financing that may differ from their original plans.

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