Top biotech VCs reveal how they plan to take advantage of a record IPO market, as biotechs go public earlier than ever

  • The drug industry is shattering capital-raising records in 2020, as investors funnel money into pharmaceutical and biotech companies. 
  • Business Insider spoke with top venture capitalists about why this is happening and how they plan to take advantage. 
  • Several VCs said they are advising biotechs that are now considering going public earlier than expected because of the booming public market. 
  • Biotech is still a risky gambit, VCs say, but money has flowed into the space as other industries, clobbered by the pandemic, appear shakier than usual.
  • For more stories like this, sign up here for our healthcare newsletter, Dispensed.

The drug business is booming.

In the middle of the coronavirus pandemic, pharmaceutical and biotech companies have been sheltered from many of the outbreak's worst impacts, and have subsequently enjoyed record-breaking levels of capital.

"Biotech is smoking hot," Kevin Kinsella, founder and partner at Avalon Ventures, told Business Insider. "For the foreseeable future, being in biotech is a great place to be. People continue to need the products of this industry, and the capital to fund them is available in copious quantities because it's not going anywhere else."

Bruce Booth, a partner at Atlas Venture, in July described the first half of 2020 as a "funding tsunami" for biotech. Public and private markets are setting records, with biotechs raising $24 billion just in the months of April, May and June.

There's been more than 40 biotech IPOs this year, and nearly half are now trading at valuations above $1 billion. US-listed biotechs have raised about $9.4 billion in IPOs this year, smashing the previous yearly record of $6.5 billion in 2018, according to Dealogic data cited by The Wall Street Journal. And there's still more than four months to go in the year.

These biotechs haven't just made it out but have enjoyed an average first-day trading jump of 34%, The Journal reported in August.

Partners at several top biotech venture capital firms told Business Insider the pandemic has led to more visibility to the industry as a whole. And investor interest has skyrocketed as people look to move capital away from hard-hit sectors. As more companies look to make their public-market debut earlier, it's both an exciting time for venture investors and a risky one.

Read more: Meet the 21 biotech startups that top VCs say are poised to take off in the next 12 months

"We have not changed the fundamentals of the industry," Graziano Seghezzi, a managing partner at Sofinnova Partners, a European VC firm, said. "What has changed is everything around us, so people perceive our industry as less risky. But the inherent risk of our industry is the same." 

Biotechs are going public earlier than ever in a booming IPO market 

Many companies are going public while still early on in process of developing a new drug.

About one-quarter of the year's IPOs have been biotech companies that haven't started human trials, 5AM Venture managing partner Kush Parmar estimated.

Parmar said he's seen investors paying more attention to the public markets, leading to an enticing opportunity to go public.

"Because of that mismatch between private and public valuations and interest in capital, companies are deciding to go public earlier," Parmar said.

5AM Ventures Managing Partner Kush Parmar5AM

That was the case with with Akouos, a gene therapy company that closed a $105 million Series B round in early March, just as the viral outbreak was starting to command the world's attention. 

"If you asked me then when the company would be considering going public, my answer would have been 2021, as we advance closer to the clinic," said Parmar, a board member of the biotech, adding Akouos is about a year out from starting to test its gene therapies in humans. 

Instead, Akouos went public this June, amid a flurry of biotechs that took advantage of the public market's renewed appetite for drug developers. The Boston biotech raised nearly $250 million more in its public offering.

Going public earlier carries risks, VCs warn

Seghezzi, a longtime European biotech VC, said he is advising some companies he works with to at least contemplate going public earlier than they may have planned.

"In biotech, cash is king," he said.

He did acknowledge going public earlier does bring more risk, as many public investors have less patience for the first failures or setbacks that are common for any emerging biotech.

Sofinnova Investments general partner James Healy highlighted the advantages to staying private when a biotech is in its first stages of drug discovery. (Although similarly named, Healy's Sofinnova Investments and Seghezzi's Sofinnova Partners are independent firms.) 

"Most companies are better off working through their preclinical development plans and interacting with regulatory agencies, such as the FDA or EMA, while they are still private," Healy said, referencing the US Food and Drug Administration and the European Medicines Agency. "So if there are any surprises, you can deal with those before you have market volatility with a shareholder base that may be as patient as the original venture investors."

It remains to be seen if the influx of capital pays off in new treatments

VCs are astonished with how well the year has played out for biotech companies.

"In mid-April, when the Dow was going down 2,000 a day, I thought for sure this was going to lead to a biotech funding drought," said Ali Behbahani, a general partner at New Enterprise Associates.

"From my perspective, I am shocked but I also think it's awesome," Behbahani said on the current funding environment. "It's made a lot of our companies that were thinking maybe we'll go public in two or three years, but if there's appetite to do it now and invest in a preclinical company or something that's just going into the clinic, companies are very well going to take advantage of that."

The next few years will decide if this period is a boom or a bubble for the industry. An abundance of capital allows "less robust ideas and weaker therapeutic concepts to proceed," Atlas Ventures' Booth warned in his July blog.

"Only in hindsight will we know whether this tidal wave of capital hitting the sector was put to good use or not," Booth wrote.

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