Financial markets are notoriously difficult to predict. However, armed with decades of Wall Street experience, our investor relations professionals know what can create a strong IPO market — and what can close that window of opportunity.
As we enter the new year, there are several factors to consider for companies that may be considering an IPO. Based on our experience, here are our predictions for the life sciences IPO market in 2020.
1. More IPO Activity in the First Half of the Year
We recently looked back on IPO activity in the life sciences sector since 2007, and found that during presidential election years, there were an average of 12 life sciences IPOs per year, versus an average of 30 in a non-election year. With that in mind, we expect that if companies do pursue an IPO in 2020, they will do so in the first half of the year:
I predict we’ll see a flurry of IPO activity in the first two quarters (especially in healthcare), followed by a slowing in the third quarter, when we may have more political uncertainty. I expect in the noise around the election, companies will be weary of raising equity due to potential large market fluctuations.
Senior Vice President
From our point of view, the IPO pipeline looks weighted to the first half of the year in an effort to avoid the noise around the presidential election.
2. Focus on Insider Participation
When a company’s existing shareholders put in more money, they express confidence in the company’s ability to deliver results. Insider support and participation has been an important attribute in years past, and will continue to be critical in 2020:
For the biotech IPO market specifically, it is likely that investment bankers will continue to require a significant amount of insider participation in the IPO before they will kick off the process. This has been true for the last couple of years, and we don’t expect a change any time soon. If companies don’t have insiders that will participate, they need to consider another round ahead of an IPO.
3. Potential for the IPO Market to Remain Robust
Despite uncertainty around the presidential election, there are other factors that can indicate the potential for a strong year for IPOs. Based on those factors, there is the potential for the IPO market to remain robust this year:
I believe a prediction about which way the IPO market heads for 2020 requires some sort of forecast on which way the election goes. And since an early mentor of mine once told me, “Forecasting is futile and should be avoided,” I won’t make any wild predictions.
What I do strongly believe is that an IPO “window” requires a number of key factors to exist, which include companies demonstrating continued success in the clinic, as well as reasonable valuation expectations, a favorable regulatory environment, outside interest in the smaller cap companies (M&A and licensing), broad interest from both healthcare specialists and generalist investors, and a low VIX, or stock market volatility.
With many of these factors in place today and likely to persist heading into the new year, barring any dramatic changes to the political landscape, there is every reason to believe that it could be another good year for biotechnology IPOs.
With the U.S. economy poised for another year of solid, albeit not spectacular growth, the IPO market should have the underpinning it needs to remain robust. High quality companies will continue to successfully make the transition from private to public, but they will be subject to a discerning attitude among investors.
As we enter the year, it seems everyone is expressing caution about the election and its potential effects, and urging companies to complete their fundraising in the first half. It could be that cautionary note has already been discounted and nearly fully reflected in current valuations. If anything happens to slow earnings growth meaningfully as we look out to the second half of the year and into 2021, that would be the signal to look for tightening in IPO activity.
While there may be uncertainty, there is also opportunity for high quality companies to pursue an IPO in 2020. To learn more about what it takes to complete a successful IPO, download the eBook, “Westwicke Insider’s Guide to Going Public.” And for a deeper conversation about the potential of the 2020 IPO market, reach out.