Don’t Go Public in Biotech Right Now

• A top biotech venture-capital firm is advising its portfolio firms not to go public right now.
• While a record number of biotechs had IPOs last year, the public market has soured on the sector.
• Omega Funds founder Otello Stampacchia said going public now was “insane.”

After an initial COVID-19-fueled boom for drugmakers in 2020, the biotech market has cooled off in the past year, and at least one top venture capitalist is advising his companies to wait on going public. 

Biotech investors were already jittery heading into 2022, as the SPDR S&P Biotech ETF (XBI), a leading

index fund

tracking biotech, fell 21% in 2021, a year when the S&P 500 soared 27%. The first few weeks of 2022 have not broken the slump. That index fund has dropped another 19%. All told, the XBI is down 46% since peaking in February.

Dismal market conditions have Otello Stampacchia, a cofounder and managing director of the Boston venture-capital firm Omega Funds, telling the firm’s biotech portfolio companies to not go public in the middle of this downturn. 

“We’re looking at what I would call fairly close to rock-bottom sentiment,” Stampacchia said in a January 19 interview with Insider. “In that scenario, going public, in my mind, is completely suicidal, unless you are an incredible company, maybe doing something super cool in COVID. Otherwise, we tell all of our companies at the moment that this is insane, don’t even think about it.”

Omega Funds was founded in 2004, right as biotech-focused venture capital was hitting its stride. The XBI launched on Nasdaq two years later.

Over the years, Omega has invested in gene-editing companies like Beam Therapeutics and Editas Medicine, as well as cancer startups like Juno Therapeutics, which was acquired by Celgene in 2018 for $9 billion. All told, Omega has invested in dozens of companies that have gone public or been acquired, which has led to 46 commercialized products. Omega has roughly $2 billion in assets under management, according to the firm.

Biotech stocks have been climbing for several years, stirring concerns about a bubble

Stampacchia’s comments come as the industry watches and waits to see how biotech fares in 2022 and what impact that could have on valuations and returns.

The sheer number of biotechs going public has skyrocketed in the past few years. Forty-nine biotechs went public in 2019, followed by 81 in 2020, according to SVB Leerink analysts. More than 90 drug companies completed initial public offerings last year — and that doesn’t count the dozens of biotechs that went public via special-purpose acquisition companies, or SPACs. Stampacchia said he had been waiting four to five years for the market to return to a baseline in biotech.

Two Omega-backed companies went public in 2021: Ikena Oncology and Imago BioSciences, according to data collected by Insider from corporate filings. Their stock-market performance has been mixed. Ikena stock is down 30% from its launch price, while Imago shares are trading relatively flat from its starting price.

Returns were down by 15% on average for last year’s class of biotech IPOs, according to Jefferies analysts. Brad Loncar, a biotech investor, wrote in December that biotech stocks were thrust into the spotlight with the pandemic in 2020 and too much money flooded the sector, which ballooned valuations. Last year, biotech stocks were tested by regulatory setbacks and underwhelming data readouts, combined with an abundance of public biotechs and a lack of big takeovers because of high valuations.

Cheaper biotechs could fuel more M&A and SPAC activity

If there’s a silver lining in biotech, it’s that depressed valuations could entice pharma buyers, which are willing to pay premiums to acquire biotechs. Stampacchia said he expected an uptick in dealmaking this year, driven by pharma’s well-padded balance sheets and a need to grow through external acquisitions. 

“M&A continues to be the wild card here,” Stampacchia said. “We expect a lot of activity starting probably February and into March. All it takes, sometimes, is one or two pharmas really making meaningful moves for the rest to follow.”

Lower valuations could also open more options for SPACs that are still looking to acquire privately held biotechs and bring them public. Omega falls in that boat, having launched its own SPAC in January 2021 as the excitement over a new way of bringing biotechs public hit its zenith.

Stampacchia said Omega’s

SPAC

had looked into a few business combinations but walked away because of rich valuations. The next few months will be a good time to revisit some of those companies with new offers or look into new options, he added.