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The Market for Life Sciences IPOs: Crunching the Numbers

Posted on June 27th, 2018. Posted by

Life Cycle IPOs

We are regularly asked to characterize the market backdrop for potential life sciences IPOs. While biotech ETF performance can offer a glimpse at current conditions, we dug deeper and analyzed recent biopharma index strength, IPO activity and follow-on offerings, among other metrics.

Our analysis indicates the market remains strong, albeit with some signs of moderation.

Biopharma Index Performance vs. The Overall Market

Two major sector indices tell essentially the same story: biopharma has meaningfully and fairly consistently outperformed the broader market since 2011.

  • The XBI (“SPDR S&P Biotech ETF”), a broad U.S. biopharma ETF encompassing small-cap players, outperformed the Russell 2000 Growth Index by an average of 11.4% from 2011-2017.
  • The IBB (“iShares Nasdaq Biotechnology ETF”), which focuses exposure on larger cap biopharma names, outperformed the S&P 500 by 7.9% during the same period.
  • Both indices underperformed during the 2016 election cycle, in part due to growing concerns over potential drug price reform.
  • YTD through the end of May, small-cap bio shares have outperformed their larger cap peers, driven by increased M&A activity in the sector and major competitive concerns weighing on large-cap bios.

Recent IPO Activity; Pricings Occur Within Expected Ranges

IPO activity remains healthy, with 16 biopharma IPOs priced YTD through May raising $1.5B on average deal value of $102M. Transactions YTD are on pace to exceed 2017’s deal count, and a disproportionate percentage of recent IPOs have priced within or above their proposed ranges.

  • 94% of 2018 IPOs have priced within or above their initial ranges in 2018, compared to 91% in 2017, with both years comfortably above the 55% rate in 2016.
  • This year’s biopharma IPOs are pricing at the approximate midpoint of their initial ranges, versus approximate discounts of 4%, 14% and 8% in 2017, 2016 and 2015, respectively.

Recent IPO Stock Performance

As the luster of a successful IPO begins to fade, the reality of operating as a publicly traded company sets in. Comparing the stock performance of newly public companies relative to the sector from 2014 through May 2018, we found that, on balance, biopharma companies are doing well post-IPO.

In addition, we note that several recent IPOs have already been acquired, including Armo (2018 IPO), Avexis (2016) and Colucid (2015).

  • On an absolute basis, biopharma companies that went public in 2014, 2015, 2016, 2017 and 2018 returned an average of 15.6% in the three months following the IPO, 19.2% over six months, and 28.0% over 12 months. The average three-, six- and 12-month outperformance versus the XBI for 2014-2018 IPOs was +10.2%, +7.3% and +3.8%, respectively.
  • Looking at median IPO returns, however, the data for three, six and 12 months were more modest, at +5.3%, 4.8%, and -0.3%, indicating that a few outsized winners meaningfully skewed average returns.
  • As for the IPO class of 2018, performance has been mixed from month to month, with some softness in May and a strong rebound in June. The six 2018 IPOs with three-month data have generated a median return of -18.0% (versus the XBI’s average return of -8.1% during the same period.
  • Moreover, three of the five biopharma IPOs from May trade below their offering price, compared with only two of nine in June. And these nine recent June IPOs already trade at an average 24% premium to their offering price.

While these time frames admittedly amount to a short lens for viewing a group that may have catalysts beyond 12 months, many investors carry investment horizons of no more than a year and constantly compare the performance of their holdings against industry benchmarks.

Follow-on Offerings; Heavy Activity in 2018, but Greater Discounting

Follow-on public offerings may also provide an indication of company and market health. Through the end of May, biotech firms have executed 105 follow-on offerings – more than six times the number of IPOs – a pace set to exceed the level of follow-on activity each year from 2015 to 2017.

  • Companies have raised more than $12B YTD, implying an average annual deal value exceeding $117M.
  • The average discount on follow-ons has increased this year. Through the first five months of 2018, the typical discount versus the prior day’s closing price approached 13%, compared with roughly 9% in 2017, 12% in 2016, and 8% in 2015.


Despite some recent moderation in mid-Q2 (followed by a strong rebound in June), the biopharma market in general maintains its multi-year trend of healthy stock performance and capital-raising activity.

Publicly traded small-cap bios have performed well YTD versus the market, and IPOs generally have priced within or above their initial ranges. At the time of writing, the early 2018 IPOs, however, struggled a bit compared with biopharma three-month post-IPO performance over the last few years, and there’s deeper follow-on discounting so far this year. At the same time, we note the robust performance across a heavy flow of June IPOs.

While the market will value individual IPOs according to many factors – company leadership, clinical value proposition, potential commercial upside, time to market, competition level, differentiation –   management teams should be cognizant of the broader market dynamics that can influence the appetite for life sciences IPOs.

The Westwicke team brings more than 300 years of Wall Street experience combined to our life sciences clients. To learn more about IPOs, download our “Insider’s Guide to Going Public.” Wondering how we can best position your company for success with investors? Get in touch.

Constantine Davides

Constantine Davides is a Managing Director on Westwicke's life sciences, healthcare services, and healthcare technology teams. He has extensive sell-side, buy-side, and industry experience. He has a BA from Wesleyan University and an MBA from Carnegie Mellon.

View full bio   |   Other posts by Constantine Davides

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