George Gaprindashvili April 16, 2014
The IPO environment for venture capital-backed companies in the United States is absolutely thriving. More U.S.-based, VC-backed companies went public last year (85) than any other year since 2000, PitchBook data show. And 2014 has already seen 43 VC-backed IPOs (as of April 16), with an astounding 37 of those occurring in the first quarter alone (the most for any quarter in nearly 14 years). Looking at IPOs so far in 2014, more than 53% have been for companies in the pharmaceuticals & biotechnology space—an interesting statistic considering the fact that in the decade leading up to this year, that number was 28%. But just as interesting as how many companies have been going public lately is how many companies haven’t. Let’s explore the IPO landscape to see what’s behind these trends.
Pharmaceuticals & Biotechnology
Let’s put things in perspective. There were 109 U.S.-based VC-backed biotech IPOs in the 10 years from 2003 to 2012—an average of about 11 per year. 2014 has already more than doubled that average, but while the numbers have been impressive, the spike in 1Q 2014 isn’t all that surprising. Biotech IPOs in 2013 finished with a strong second half, as the cumulative valuation at IPO for biotech hit $6.2 billion, compared to $3.7 billion in the first half. The question now is will the number of pharma & biotech IPOs continue to surge, or is the window for these companies closing?
Before tackling that question, let’s first consider why there’s been an outpouring of biotech IPOs. Pharma & biotech companies that have gone public in recent years have generally performed very well on the market. Some have seen doubling or even tripling of their stock prices, tempting some pharmaceuticals companies and their VC backers to join the party. Soaring valuations have also played their part, making the last year or so an opportune time for VC-backed biotech companies to go public. Here are some select well-performing U.S.-based VC-backed pharma & biotech companies that have gone public this year:
But it’s not just rising stock prices. Many investors are putting their money into companies that are in advanced clinical trials, which investors deem as lower-risk investments than pre-trial pharmaceuticals companies. This, among other things, has opened the door for a number of VCs—particularly ones that have otherwise been apprehensive in recent years—to invest in the space. With more VC firms investing in pharma & biotech companies (the number of deals in the space has increased every year since 2011), there are more companies with the potential to go public—and that’s just what many are doing.
Answering whether the upward trend will continue or if it will begin to decline isn’t easy, but it’s likely that we’ll start to see a dip in the number of biotech companies going public throughout the rest of 2014. The market has started to pull back, bringing public-market valuations for many biotech companies back down slightly. And as we covered on the PitchBook Blog before, an increasing number of IPOs are pricing below their expected range, which could discourage biotech companies from going public in the near future.
What about the tech space?
For an industry that usually leads the way as far as IPOs go, the tech space has been very quiet in the last year. In the five years from 2008 to 2012, the information technology industry accounted for a larger portion of completed IPOs than any other industry. But early in 2012, the IT space started to see its share of quarterly IPOs decline, falling from 73% in 2Q 2012 to 13% in 4Q 2013. Where tech has lost ground, pharma & biotech companies have filled the void, growing its share of IPOs each quarter in the same 2Q 2012 to 4Q 2013 timeframe from 18% to 57%. What gives? Simply put, U.S.-based tech companies have been raising such massive rounds with likewise massive valuations from VC investors that there is little reason to rush to the public markets.
In 2013, 71 VC-backed IT companies landed financings of $50 million or more. That’s far and away more than any other year in over a decade. And 26 VC-backed IT companies have already completed such deals in 2014, putting the year on pace to best 2013’s total. In addition, at least 23 VC-backed IT companies have garnered a valuation of $1 billion or more since the beginning of 2013, and while some of them are going public, many of them are content with staying private, for now. Some of the IT companies that have received massive rounds and valuations and have yet to go public include Dropbox ($10.4 billion valuation after last financing), Palantir Technologies ($9.1 billion), Cloudera ($4.1 billion), Uber ($3.7 billion) and Box ($2.4 billion).
Whether we’re talking about pharma & biotech companies that are flying to the public markets or IT companies that are staying patient (and private), the current IPO landscape looks much different now than it did several years prior. Going forward, we can expect the biotech IPO spree to cool off. But a number of IT companies that have been loading their cannons with colossal funding rounds are surely due to explode onto the public markets very soon.