Shift in Public Market Investments Signal Growth for Biopharma Industry
Mark Bruso
Investment in the biopharma industry surged in the first quarter of 2024, surpassing previous statistics from 2020 and 2021.
IPO investment increased by 254 percent compared to the previous year, with 13 companies going public in Q1, compared to 28 in 2023.
90 companies received an influx of $8.7 billion through secondary offerings at the beginning of 2024, nearly five times the investment seen in Q1 2023. Only four of these companies, however, are currently profitable, suggesting a need for funding.
Venture capital flows have slowed in the industry, sitting at 35 percent lower in Q1 compared to the quarterly average of both 2021 and 2022.
With the NASDAQ Biotechnology Index rising by 8.7 percent over the past six months, strength is predicted in both the stock market and the biopharma industry.
To understand this growth further, Lab Design spoke to Mark Bruso, the research director of Boston & U.S/ Life Sciences at JLL. Mark leads the Boston research team and is the director of life sciences research for JLL nationally.
Q: Why did public investment in the biopharma industry grow tremendously in Q1 2024?
A: It was a confluence of a few factors. Growth capital in the form of venture funding is still difficult to come by. For a brief moment in time, biotech equity values soared as sector indices like the XBI grew over 50% from late October into late February. Additionally, a range of pre-revenue publicly traded drug discovery startups saw an opportunity for the first time in a long time to tap public markets for much-needed funding.
Q: What factors influenced a spike in companies going public in Q1? Is this projected to increase more?
A: There has been a queue of companies who have been hoping to take the next step in their life cycle by going public. But for over 24 months the reception from public markets for all types of risky, long-term growth sectors was standoffish at best. The brief rise in the equity values that coincided with the then-market consensus of three rate cuts in 2024 led to a moment in time where market dynamics allowed for these biotechs to debut at higher valuations than they would have in 2022 or 2023. So, we saw nine companies debut in Q2, eight of which did so by mid-February.
Q: What factors influenced only 28 companies to go public in all of 2023?
A: The biotech sector is certainly at an interesting crossroads. Frosty public markets have meant that companies with promising science and/or impressive clinical data have been reticent to graduate from private capital markets and debut. When the markets were hotter, we saw well over 100 biotechs debut just two years prior. While there were certainly instances of irrational exuberance then – where preclinical companies that should have stayed private went public too early – today, we see a more discerning public investor base that requires a great deal of confidence in the fundamental science and a clear and visible path to commercialization to warrant investment.
Q: Likewise, why is private growth capital, namely venture capital, slowing across the industry?
A: While by most metrics we see record dry powder on the sidelines today, investment has been slow to follow. Like public markets, VCs have been much more interested in seeing later-stage companies strongly supported with later-stage clinical data. This has manifested itself in the market with markedly fewer rounds but many larger deals as VCs place big bets on science they really believe in. And VCs are always looking to see what their path to an exit would be, which has been quite cloudy as public equities have been up and down in the past two years. So, they have been charting a cautious course.
Q: Why is there more strength in the stock market now?
A: First was impressive clinical data and record FDA approvals showing the underlying growth case for biotech. But also, strong macroeconomic indicators and the belief at the outset of 2024 that there would be three rate cuts in 2024 led many investors to believe in high-growth sectors (like biotech) again. The XBI ran over 50% in 90 days until receding in late February and March as rate expectations shifted. And today the XBI is 15% below its Q1 peak.
Q: How would an increase in public markets limit space givebacks and even possibly lead to space expansions?
A: An ecosystem more flush with growth capital would lessen the belt-tightening mode that many biotechs have been living through in the past two years, which, in turn, would lower the need for them to stretch their runway by reducing headcount or find ways to lower their lease obligations through subleasing and early terminations.
