There has been no better time for U.S. VC-backed companies to go public than in the last year and a half, as public market indexes have reached all-time highs and valuations (both public and private) have been soaring in recent quarters. VC firms are no doubt looking for liquidity in this bull market and companies can access plenty of cash with an IPO. And sure enough, 2013 was the best year for VC-backed IPO counts in more than a decade, with 2014 already on pace to surpass last year.
But cracks have emerged. Tech stocks have wavered and several IPOs have dropped below their target price after the first day of trading. While these may help contribute to a drop in IPO counts over the next few quarters, the single biggest indicator that we may be seeing the IPO boom fizzle is that fewer pharmaceuticals & biotechnology companies are registering to go public.
As you can see in the chart above, there have been at least 25 VC-backed IPOs in the United States the last five quarters, with pharma & biotech companies making up a bulk (35%-58%) of the public offerings. Even a moderate shift in biotech IPO counts could push overall public offering counts down to levels not seen since 1Q 2013, prior to the recent run-up in stock prices.
Registrations are important because they are a reliable indicator of future IPO activity. The average time from registration to IPO for U.S.-based VC-backed companies is 4.2 months, according to PitchBook Data, and of the 35 VC-backed companies currently in IPO registration, 16 are in the pharma & biotech industry. This means that we’re likely to see most of these 16 biotech companies—as well as most of the 19 other non-pharma companies—go public by the end of the year. But beyond that, not many more. If all 35 companies, and no others, go public before the end of the year, the third and fourth quarters of 2014 would average 17.5 IPOs each, much lower than the near-30 posted from 2Q 2013 to 2Q 2014. An average of eight VC-backed pharma & biotech IPOs in the remaining two quarters of the year also represents a drop from 14 from 2Q 2013 to 2Q 2014.
While this means that the third and fourth quarters are shaping up to see fewer IPOs, it doesn’t necessarily spell doom for the VC-backed IPO market. But if this boom is to continue, either more biotech companies will have to enter IPO registration in the coming months or non-pharma companies will need to pick up the slack—an unlikely scenario givenrecent troubles with software and tech IPOs.