What IPOs Can Tell Us About The Medical Market

Last week, Third Harmonic Bio announced a healthy debut on the stock market, becoming one of few companies in the health space to do so in 2022.

Overall, around 25 biotech and health care companies have gone public so far in 2022 (per Crunchbase data), a low that hasn’t been seen since 2010 when the market began to recover from the worst economic downturn since the Great Depression.

This year’s dip comes after an unprecedented 187 companies debuted on the stock market in 2021 thanks to a generous pool of pandemic-fueled funding to biotech, which was further fueled by how quickly the sector was able to develop COVID-19 vaccines.

But as we all now know by this stage, the U.S. has tumbled into a murky economic position that has caused venture firms to cut back on funding.

Cambridge, Massachusetts-based Third Harmonic Bio joined fellow sector IPOs by Seattle-based Know Labs and Texas-based BioAffinity Technologies in September, which is a rather small group compared to the September prior.

Not to make much ado over nothing, the recent IPO does offer clues about what we can see next in the space.

How well is the medical market doing?

First, let’s delineate between biotech and health care—both of which I group under the term “medical market” for purposes of this article.

Biotech companies in Crunchbase broadly refer to startups making therapeutics and other products that utilize the body.

Health care companies are more or less everything else: telehealth services, surgery robots and diagnostics platforms. Biotech companies are arguably health care companies, but not all health care companies are biotech companies.

Biotech is largely insulated from the flux of the markets. There are a few reasons for that: First, it takes roughly 10 years to bring a drug to market (a lot has changed between 2012 and now), and the National Institutes of Health, paid for by taxpayers, foots the bill of early research and discovery. People also need health care. Simply put, people get cancer at the same rate during a recession and during times of expansion.

However, people lose their jobs during a recession, which affects access to health insurance. It’s a trend we saw in 2022 when companies began laying off employees to extend their runway to prevent a downround and preserve their higher valuation. So far, layoffs peaked in July when tech companies let go of 9,600 employees.

“In those situations, a lot of people stop taking their drugs and stop filling their prescriptions. It tends to be for those disease areas that are not ‘urgent’, like blood pressure,” said Dr. Christiana Bardon, co-managing partner at MPM BioImpact Capital, which invests in cancer therapeutics.

Health-focused companies are different. While it’s hard to negotiate a life-saving drug, some people may discontinue physical therapy or put off surgery during times of economic distress.

We see that in the IPO numbers.

In 2009, when the U.S. was grappling with the Great Recession, 90% of health-related IPOs were biotech—companies making drugs and therapeutics. Conversely, in 2021, only 76% of IPOs were biotech, which means a larger share of public market debuts were healthtech companies.

Some, like Talkspace, thrived during the pandemic as teletherapy grew. Diagnostic companies like Lumos Diagnostics went public at a time when public health realized that updating diagnostic infrastructure was necessary to quelling COVID-19.

Signs of a revival

We may start to see a resurgence of IPOs.

The Wall Street Journal recently reported merger and acquisition activity picking up in biotech, and publicly traded companies selling more stock after promising clinical trial data.

That tracks. Biotech startups right now are advised to keep their heads down in research and development, focus on the most promising use cases for their therapeutics, and barrel through the drug-development pipeline. Many early-stage startups still in infancy can’t do anything except research and development anyway, and they haven’t been hit as hard by the venture funding shortage.

According to the WSJ report, share prices in the public markets have dropped, which may pique investor interest and lead to more IPOs. But it may take some time.

Regardless, it’s unlikely we’ll see pandemic-era IPOs where nearly 300 startups launched themselves into the public market. After all, investors don’t want to see higher-than-normal valuations.

Illustration: Dom Guzman