Biotech stocks reached new highs in the early days of the pandemic, but have since fallen into a bear market, with top-traded life sciences funds notching double-digit losses, and one-time market high flyers dropping steeply. The challenges faced by life sciences companies reflect the struggles of the broader financial markets, which have been roiled by inflation, initial and anticipated interest rate hikes, supply chain bottlenecks and Russia’s invasion of Ukraine.

While there is still a long line of privately held life sciences companies preparing for public market debuts via the traditional IPO route, the pace of new offerings has slowed dramatically. The first quarter of 2022 saw the slowest pace of biotech IPOs in three years with only nine market debuts, compared to 33 the first quarter of last year. In total last year, there were 66 life sciences IPOs in the first half of the year and 48 in the second half.

However, the majority of life sciences investors and executives surveyed by Fenwick in January 2022 say the market has brighter days ahead, even if a full rebound takes as long as five years. Survey results were published, alongside our full-year analysis of technology and life sciences companies that went public last year, in Fenwick’s “Going Public Report: IPOs, SPACs and Direct Listings Facing Headwinds in 2022 After Record Year.”

In our survey of 300 C-suite decision-makers and public- and private-market investors, life sciences leaders shared their impressions of how long the current downturn will last and how regulation, de-SPAC transactions and environmental, social and governance (ESG) initiatives are shaping the market.

A Range of Challenges

In our survey, life sciences investors and executives say a confluence of factors led to the IPO slowdown in life sciences last year, with COVID-19’s impact on investor enthusiasm, supply chain problems, inflation, decreased liquidity and uncertainty over interest rates cited as the top causes.

Among executives, COVID-19’s impacts were named as the top challenge to the market’s health. But investors put rising inflation at the top of the list. Investors also differed from executives on the impacts of regulation and the drying up of liquidity, with far more investors naming these among the top contributors to the downturn.

But whatever external forces exerted the most influence, investors and executives agree that today’s anemic exit markets will at some point change for the better.

While 25% of life sciences executives and 40% of investors said they expect a rebound this year, 51% of executives and 48% of investors say a turnaround is likely within the next two to five years.

The SPAC Outlook

De-SPAC transactions, or going public via “blank-check companies,” more than doubled last year from the year before, which prompted many respondents to Fenwick’s 2020 survey to say the SPAC market was in a bubble. The SPAC market has since cooled considerably.

This year, life sciences executives and investors generally agreed that the creation of new SPACs has likely reached its peak, but there was less agreement on whether or not the SPAC bubble has already popped. Nearly one-third of the sector’s executives and 40% of investors neither agreed nor disagreed with the statement that the SPAC bubble had burst.

About 32% of executives and nearly half of investors said the bubble has popped, while 36% of executives and just 10% of investors disagreed with that statement.

The disappointing performance of many SPACs from the last two years is one of the major headwinds that the SPAC market faces. SEC scrutiny, increased redemption rates and challenges in the PIPE market are also contributing to the slowdown of de-SPAC transactions.

Regulation and ESG

A new presidential administration last year brought tighter regulations, including moves to lower the price of pharmaceuticals. While most technology executives and investors are unconcerned by the effects of new regulations on the IPO market, the sentiment is different in the life sciences sector. While the majority of life sciences investors feel positive or neutral about regulatory changes, 49% of executives in the space say the changes have had a negative or very negative effect on the market.

Corporate social responsibility has also had an impact on company valuations and the IPO landscape, though life sciences leaders are slightly less inclined than their counterparts in the technology industry to say the impact will be major going forward.

Within life sciences—where a Fenwick biotech and ESG survey published in February 2022 showed that many ESG initiatives have been slow to take off—executives are far more focused on ESG than investors are, with 70% of executives surveyed calling ESG initiatives a very high or somewhat high priority, compared with just half of investors who said ESG was very or moderately important in their 2021 IPO valuations.

Investors and executives generally agreed that ESG considerations will affect valuations and IPOs in their sector going forward, with just 16% of life sciences executives and 15% of investors saying ESG matters will become less important.

Our survey also found that while lock-up periods for stockholder shares have become more flexible in the tech sector, the traditional 180-day period is still the norm in life sciences.

Investors and executives are facing a dramatically different IPO landscape today than they were last year and the year before. Many of the headwinds facing the market, including war, inflation and higher interest rates are likely to keep blowing for some time.

Markets are cyclical, and investors and executives generally believe the current bear market will follow the same pattern it has in the past, with the bar much higher for companies seeking to access the public markets during this time.

Learn more about what tech and life sciences leaders told us about factors influencing the capital markets outlook, trends around key IPO terms and 2021 IPO data by viewing our full report.

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