Monica Karpinski, Author at Labiotech.eu

Biotech IPO activity in the US has spiked for the second time this year, following an initial boost in Q1 2024. Largely driven by the Federal Reserve’s decision to cut interest rates, the lift has been met with cautious optimism that the sector is rebounding after a challenging few years. In a rare triple-header event, Bicara Therapeutics, Zenas BioPharma, and MBX Biosciences all hit Nasdaq on the same Friday in September—raising over $700 million in total. Kairos Pharma and BioAge Labs followed suit later in the month, going public at $6.2 and $198 million respectively. Per our biotech funding tracker, that brings the total raised in Q3 to almost $1.1 billion. While this is just shy of the roughly $1.2 billion raised in Q1, this year’s sums already surpass totals for 2022 and 2023. Could this be a sign that the market is finally thawing? Here, we take a closer look at what this uptick in activity means for the biotech sector. Behind the 2024 biotech IPO boom: the impact of interest rates The Fed rate cut was the primary driving factor behind the rise in biotech IPOs in 2024, says Managing Director of investment firm Stifel’s Global Healthcare Group, Tim Opler. “I think everyone knew that the Fed was going to cut rates. And so there was a sense that after Labor Day in the US, it would be a good time to hit the market.” High interest rates mean a high cost of capital, making investments more expensive and putting a squeeze on future profits. This also makes fundraising tougher for startups. So when rates come down, those investments suddenly become more appealing—and investors may be more inclined to open their wallets. This is great news for both capital markets and biotech startups, which are risky bets at the best of times. It can take years and cost billions for a drug startup to develop and take a medicine to market, and most of the time, they fail. “The benefit of lower interest rates is [that] it makes the long-term and high-risk cash flows of the biotech sector more attractive,” Opler explains. “When interest rates are high, it’s very difficult to get excited about taking on, say, a potential payoff 10 years from now. Lower rates mean more value on those long-term bets.” As the interest rate environment improves, investors may also be more willing to make those bets as they look to get higher returns. Lowered interest rates reduce the yield on investments considered “safe”, which typically offer fixed interest payments. For instance, investing in a large, established company with a good track record of profitability versus an early-stage startup. So, investors could look to younger companies instead, which may be riskier bets in comparison but offer the chance of better payouts. The perception of how risky a bet is can sometimes be described in terms of the risk premium. This is the expected difference in returns between safe versus risky investments. A low risk premium is a sign of investor confidence and willingness to take on more risk. “The fact that those IPOs came and went well is a sign of [lowered] risk premium. And I do expect the risk premium to continue to improve in 2025 and 2026,” says Opler. Yet while the cut of half a percentage point to 4.75-5% marks the first loosening of interest rates since March 2020, it’s nowhere near pre-pandemic lows of 2.25-2.5%. Still, the promise of lowered interest was enough to explain both spikes in biotech IPOs seen in 2024. What we saw in Q1 was brought on by the expectation that rates would drop, explains Global Head of Life Science and Healthcare Thought Leadership at Clarivate, Mike Ward. “But when it transpired that the Fed wasn’t actually going to reduce interest rates anytime soon, we then saw everything go quiet.” That is, until September. It’s expected that cuts will continue in the US through to next year. Rates set by the Bank of England and the European Central Bank are also forecast to fall by the end of 2025. The bigger picture: what does the biotech IPO spike mean for the market? In biotech, companies typically go public to raise large sums to develop their assets. This way, they can access a deep pool of global funds, whilst the move from private to public also means a transition to lower cost capital.“The public markets are deeper and cheaper than the private markets, and so as more companies are able to access that capital, that means there’s going to be more investment in biotech,” says Opler. “That’s fundamentally a good thing, as long as you think biotech is a good thing…the entire ecosystem really benefits from an improved IPO market.” For instance, the inflow of funds might spur more spending on research, hiring of staff, or an expansion of real estate—essentially, anything necessary for a company’s growth. Increased IPO activity also has knock-on effects on private markets—and not just in the States. “VCs are all driven by the IPO market on Nasdaq, it allows them to price deals better. So it’s going to drive up venture capital activity in the UK, just like it will in the US,” says Associate Director of Policy, Public Affairs and Investors Relations at the BioIndustry Association (BIA), Martin Turner. “I think that’s really positive.” Plus, an IPO window in the US opens the door for UK biotechs looking to hit Nasdaq. This is increasingly their preferred location to list rather than the London Stock Exchange, because there’s more appetite from investors and access to greater capital, Turner adds. However, it’s important to put all of this activity in perspective. More money is being raised via IPOs this year than in the two prior, but we’ve really just got back to the volume of deals being done before the Covid-19 pandemic, says Ward. During the heights of 2020-21, 131 and 154 biotech IPOs were completed respectively, compared to 17 by the end of Q3 2024. There’s still an air of caution about today’s market. Back in those peak times, companies with preclinical assets were able to float. This isn’t the case anymore, Ward explains. “It’s more likely that companies [who IPO] are going to have phase two or phase three assets…people are now actually waiting until there is solid data, and are willing to miss some of the upside, because at least they have de-risked their opportunity.” More companies may then stay private for longer, having to raise additional rounds to get to IPO stage. For preclinical startups, who already face funding challenges, this means a longer and tougher road to getting the capital they need. Is the downturn over? “It’s not like someone has flicked a switch and we’re kind of back in the game,” says David Buller, managing partner at European digital health VC firm KELES. “But [increased biotech IPO activity is] definitely a positive sign of things moving back in the right direction.” After all, the health of a market isn’t just measured in the number of IPOs or amounts they’ve raised, he adds. Nor do those measures exist in a vacuum. VC and M&A activity has also been on the rise, fuelling funding rounds that may eventually lead to future IPOs. In Q1 of this year, there was a 46% increase in total deal value in venture financing compared to Q4 of 2023. There was an uptick in larger funding rounds, too, signaling increasing investor confidence. Plus, thanks to venture funds who were able to raise substantial amounts during the pandemic, there’s been more investment into portfolio assets to get them to a point of critical mass, says Ward. “It means that these companies don’t necessarily have to go public. There’s enough dry powder within the venture capitalists to actually support their portfolio companies.” With this in mind, a more useful measure of the sector’s rebound might be total amounts raised on all deals versus IPO activity, Ward adds. In any case, it will take time for factors like interest rate cuts and increased IPO activity to have their full effect. “Markets recover slowly,” says Opler. “It’s a gradual process of easing that one will see.” But there’s plenty to be optimistic about: deals are getting done, interest rates are looking to drop further, and the IPO market seems to be perking up. Stifel reports that we’re on track to see a total of $130 billion raised this year from public equity, venture equity, and private debt, up from $90 billion last year. Over in the UK, work is underway to revitalize the public markets. “London hasn’t been the preferred market for quite a long time now,” says Turner. “There’s been a lot of work to change listing rules and improve that.” For instance, a new initiative called PISCES allows private companies to trade their shares at set times in the year with public market investors, to introduce those companies to public markets in a more gentle and controlled way. And given how challenging the market has been, companies who have been waiting for funding availability or the chance to get the right valuation might now take their next step, says Buller. “There’s a huge backlog of IPO-ready biotechs or biotechs that are ready for the next funding round, whether it’s VC or IPO.” “Hopefully, the worst of everything is behind us,” he adds. “We should see some very good signs of recovery in 2025.”