Are we in a biotech IPO bubble? Two things have clearly happened over the past few years within this sector. First, pre-money valuation has gone way up, roughly a 130% increase from the 2012-14 period which was a comparably active period to today. Secondly, a larger percentage of companies are Phase II or earlier. That means they are further away from generating revenue and in fact may never even have a product that is approved by the FDA. For an even more in-depth take a look at the particulars of the current IPO market check out this recent article in Forbes.
The similarities are easy to draw between the period we have now and the dot.com bubble. Let’s take a look:
- Both periods had companies going public with no revenue. I understand this is how biotech works, it is very capital intensive to move a drug forward, but a parallel could still be drawn since the biotech companies going public now are further away from the point of generating revenue.
- A lot of similar companies are going public based on some common theme. In 2000 it was e-commerce sites, think pets.com or any other product.com you can think of. Today, many of the biotech companies are oncology companies. Can there be room for all of them?
- People are clamoring to get invest in these companies. Look at the size of the rounds biotechs are raising before going public and then look at the day one pricing of the dot-com companies. I would argue that VC money was not nearly as plentiful in the late 90’s so a connection between the two can be made.
There are definitely differences as well. First, a biotech is a much different type of company and the founders understand it is a long and difficult process with the chance of becoming rich not necessarily their driving force. I think it could be said that many dot-com companies were founded on the hopes of getting rich. Biotech companies objective is to help people by curing a disease or at least making it more tolerable. Finally, we are not seeing the market caps of established companies continue to rise at the pace we did of the dot-com companies like we did in 2000 where you could throw a dart and any tech company you happened to hit would make you money.
I could go on about the similarities and differences but I do believe this is a bubble. I hope it turns out I am wrong and this is the new normal. Biotech companies need money to continue to develop their product and the public market is a great way to raise money. If the public market closes it makes it harder to continue moving a product forward and also can make it tougher to raise money in the private market. Investors in the private market like knowing there is a way to exit and an IPO can be one of those ways outside of an acquisition.
I would love to hear what other people think. Is this a bubble? Why or why not? Are we simply seeing the glut of IPOs because investors in the private companies see a way to monetize their earlier investments? Let me know your thoughts.