If the trend persists, it could discourage venture capital firms and initial public offering investors from backing young life sciences companies. Shareholders of these companies typically fare much better when they are able to shepherd their drug pipeline to fruition prior to a sale.
Although more small companies are expected to go on the auction block in the coming weeks, the flurry of deal making could unravel were stock prices suddenly to return to last year’s highs, according to bankers and investors interviewed by Reuters.
Last week, two biotech companies—BeiGene and Editas Medicine—completed initial public offerings, marking the first successful IPOs of 2016. Both firms obtained valuations within their target price ranges.
This week, two more biotech firms successfully priced their IPOs, AveXis Inc. and Proteostasis Therapeutics Inc. To be sure, all relied primarily on the companies’ existing base of investors, rather than attracting broader interest.
However, if more biotech IPOs launch successfully in the coming weeks, this could help restore confidence in capital markets, both for investors and companies.
“The bottom line is that [BioGene and Editas] got it done,” one of the bankers said. “It shows that if you have got quality assets, investors will step up to the plate.”
For cash-poor companies that cannot or will not sell, the other option in a down market is to license a drug to a larger competitor, giving up some future earnings in exchange for cash today, according to Ross’ Gordon.