We recently discussed the continuing decline of VC-backed tech IPOs, noting that tech companies are garnering larger valuations in the private markets and therefore feeling less inclined to go public, for now. But while the exploding size of private tech valuations has led to much conversation about a “tech bubble,” there’s another trend that may be signaling a healthcare bubble (and its potential burst). For some time now, the IPO environment for VC-backed U.S. healthcare companies (primarily biotechs) has been robust. 28 such companies went public in the first quarter of 2014, according to PitchBook’s database, setting an all-time record. After an understandable drop in IPO count the following quarter, the numbers rose again for the next two quarters to finish the year.
The recent outburst of biotech IPOs in particular has been intriguing, mainly because many of the companies going public have drugs that are either in preclinical trials or in very early stages of human testing. Traditionally, most products at this stage are destined to fail. However, confidence in these companies has remained high. Two possible reasons: The approval rate of the U.S. Food and Drug Administration is on the rise, with 41 new medical entities approved in 2014 marking the highest total in nearly 20 years; and the process of getting through clinical trials is getting simpler.
Given all this momentum, the healthcare IPO party came to a bit of a halt in the first quarter of 2015, with only 11 healthcare companies going public, the lowest amount in a quarter in almost two years. Is the bubble about to burst? As biotech stocks continue to perform well on the public markets, it will be interesting to see if the decline of healthcare IPOs continues in 2Q.
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