Biotechs likely to flood IPO market ahead of 2020 election

Flood of IPOs likely in 4Q19 as specialists navigate continued sector underperformance

Buysiders and bankers expect a flood of IPOs and a stock picker's market in 4Q19 amid a continued run of sector underperformance that is only expected to get worse in 2020.

As macro pressures continue to ramp up -- chief among them political rhetoric about drug pricing in the 2020 presidential campaign -- the expectation is that healthcare stocks will continue to lose favor.

Biotechs are pre-emptively accelerating their fund-raising timelines before political headwinds slam the window shut next year.

While the markets remain receptive to later-stage companies, which account for most of the NASDAQ IPO queue, preclinical biotechs will need to ensure their data catalysts come quickly after pricing, as buysiders say investor patience for holding preclinical companies isn’t what it once was.

“I think people are accelerating their plans into 2019 from what they might have been because of not just concerns, but fear around this election cycle,” Stifel’s Peter Reikes told BioCentury.

Buysider opinions are all across the spectrum on whether the sector is undervalued. Some funds that invest both publicly and privately see more value in the private markets. But even there, crossover investors may encounter difficulties as valuation step-ups for IPOs in 2019 have shrunk relative to years past.

For long-only specialist investors who have been driving the market for several years now, the only route to capturing returns in an underperforming market is picking the right stocks.

In some cases that may involve searching for fallen angels. In others, investors are taking a more cautious approach and increasing their cash position or rebalancing their portfolio toward larger, commercial-stage names.

“Given the experience people had in the fourth quarter of ‘18, I think investors are going to be a lot more picky,” E Squared Capital Management’s Les Funtleyder told BioCentury (see "Seeking Bright Spots in 4Q19").

Improving IPOs

The pricing of IPOs so far this year has been largely well-judged, with 93% of NASDAQ IPOs pricing within or above the proposed range.

“The quality of the IPOs has increased,” Medical Strategy AG’s Mario Linimeier told BioCentury. “This situation is now better than one

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