In January 2024, we attended the 2024 J.P. Morgan Healthcare Conference, and as we spoke with leading audit firms, attorneys, and industry executives, several key themes emerged that will inform the market outlook for the rest of 2024.

In the financial landscape of 2024, cautious optimism pervades, while heightened scrutiny from the SEC introduces notable challenges for sector companies in more dire situations. Still, the prevailing sentiment suggests that this year may be poised to witness a substantial surge in M&A and an IPO market that stands to open up in comparison to the barren IPO landscape of 2023 and 2022.

1. Continued uncertainty is constricting capital markets.

The looming election and the Fed’s interest rate hikes have contributed to uncertainty across the life science and biotech sectors. This is constricting capital markets, but the anticipated drop in interest rates and clarity in a post-election landscape could loosen up the market.

Ultimately, many view 2024 with cautious optimism, with the outlook expanding positively into 2025 once election uncertainties settle.

2. Companies are gearing up for IPOs and M&A.

Many companies are gearing up for potential liquidity events in 2024 and 2025. In many cases, companies pursuing IPOs are also exploring potential acquisitions, creating a dual path strategy. This approach involves a bit of strategic maneuvering, as companies negotiate between going public or being acquired outright.

The prevailing theme seems to be that M&A will be more active in this space compared to IPOs, which will make a comeback to some extent, but nothing like the transaction volumes of 2020 and 2021. Additionally, many large pharmaceutical companies have publicly stated that they’re focusing their development pipelines on acquiring younger-stage biotech firms to better supplement what’s being developed internally. This is expected to drive M&A activity with Big Pharma as a very active buyer set this year and the following.

Creative Methods for Going Public

In response to challenging market conditions, companies are actively exploring creative methods to go public, such as reverse mergers and the less traditional sign and close transaction. This approach, akin to a reverse merger but with added complexities, has seen increased adoption, especially in 2023, as companies seek alternatives to traditional IPOs. The surge in reverse takeover-type deals is driven by companies’ desire or necessity to go public while facing less favorable traditional IPO conditions.

Major Transactions

Several companies underwent IPO and M&A transactions leading up to, during, and after the JP Morgan Conference. Three long-time Stout clients made major headlines to close 2023 and open 2024: RayzeBio, Inc.; Axonics, Inc.; and Ambrx Biopharma, Inc.

RayzeBio, Inc. announced its acquisition by Bristol-Myers Squibb Company for $4.2 billion in the last week of December. On the opening day of the JP Morgan Healthcare Conference, Axonics, Inc. announced a deal with Boston Scientific Corporation, and Ambrx Biopharma, Inc. announced its acquisition by Johnson & Johnson for $2 billion. These transactions partially represented some of the asset classes most in favor and talked about at JP Morgan: radiopharmaceuticals, antibody drug conjugates, and obesity drugs.

In late January and February, a batch of biotech IPOs debuted, with people closely monitoring these offerings to see how they perform. If they maintain or increase their value, it might encourage more companies to consider going public, potentially leading to a resurgence in IPO activity in the coming months. Notable IPOs included:

• CG Oncology, Inc. has been the bell of the biotech IPO ball thus far in 2024. With a Phase 3 asset and a path to regulatory approval, CG Oncology debuted well above its offering guidance range, and its stock has continued an upward ride since. The company has gained almost a billion dollars of market capitalization since its Day One public close.
• Kyverna Therapeutics, Inc., a Car T company focused on autoimmune diseases, overshot IPO expectations as well. The company repeatedly raised offering guidance and closed pricing on day one of trading approximately 35% above its debut price. Its stock has stayed consistent since.
• ArriVent BioPharma, Inc., a clinical-stage company dedicated to accelerating the global development of innovative biopharmaceutical therapeutics, priced an upsized IPO in late January, and their shares have remained above the IPO price of $18.00.
• Fractyl Health, Inc. and Metagenomi, Inc. priced below or at the low-end of the offering price range guidance and have since traded down from the IPO price. Onlooker consensus has been that these two are case studies that the public markets in 2024 may not have the same appetite for preclinical asset companies as was displayed in 2020 and 2021.

3. The SEC is increasing scrutiny on non-traditional ways of going public.

In addition to their oversight of IPOs, the SEC has intensified its focus on similar financial transactions, including reverse mergers, special purpose acquisition companies (SPACs), and parallel strategies. Specifically, the SEC has adopted a more cautious approach in their interpretation of reverse mergers, particularly in the context of subsequent capital offerings.

In a reverse merger, a privately held company merges with a publicly traded company that may have had prior operations but now primarily serves as a public shell. Following this merger, the newly public entity typically seeks to raise additional capital by issuing securities. The preferred method for this subsequent funding has traditionally been the use of an S-3 registration, a streamlined and expedited registration document that does not necessitate a thorough SEC review.

However, within the last six to eight months, possibly influenced by a subdued market environment, the SEC has raised concerns regarding whether the newly public company should still be classified as a shell company.

Consequently, these companies have been mandated to opt for an S-1 registration statement instead of the quicker S-3 registration. The significant implication of this shift lies in the introduction of delays, as the SEC now has the authority to review these registrations, pose inquiries, and initiate a comment letter response process.

This development has become a cause for concern among companies operating in challenging capital markets. They are now confronted with additional regulatory obstacles that further hinder their ability to execute a transaction and secure funding quickly. The regulators requiring these capital constrained companies to essentially move slower in their alternative transaction process could potentially create the proverbial “nail in the coffin” for companies out of better options and with very short cash runways.

Remaining Informed and Adaptable for 2024

The events of Q1 of 2024 in the Life Sciences industry have shaped the market’s outlook for the remainder of the year and beyond. The overarching sentiment that we’ve heard has been one of cautious optimism, with market players feeling relatively confident that 2024 will, at a minimum, look better than 2023 and 2022 for this industry.

Additionally, Big Pharma M&A is expected to continue to make headlines. And early IPO activity has surprised many, with a number of companies’ offerings oversubscribed and the stocks showing resiliency thereafter. This IPO trend has some companies gearing up quickly again to be public-ready before the window of opportunity closes.

Despite some positive signs, key variables such as interest rates, the election, and SEC scrutiny make 2024 still somewhat uncertain. With such a dynamic landscape, professionals working with companies in this industry must stay informed and adaptable to navigate the evolving market in 2024 and beyond.