The stock market had a rough year in 2016, and companies that wanted to go public had to deal with a steep selloff. The first quarter of 2016 was particularly tough, as the steep selloff froze out many companies that were preparing to go public. In June, Brexit shook investors, and the U.S. presidential election also caused a major market meltdown. As a result, many companies that went public in 2016 did so at a discount. They either lowered the price range in their proposed prospectus or priced their shares below the publicly traded peers.
Life sciences IPOs
Life sciences IPOs in 2016 had lower median offering sizes than tech companies. There were no blockbuster deals, and the average deal size was only $35 million to $250 million. These companies are also increasingly turning to insiders to purchase shares. In fact, 75 percent of all life sciences IPOs had insider participation, compared to only half of tech IPOs.
The average life sciences IPO closed at or above its IPO price on the first day of trading. This is much higher than the average non-life sciences IPO. The average life sciences IPO rose 18% on its first day of trading, compared to 16.8% for non-life sciences IPOs.
As a result, many emerging biotechs may choose to partner with large pharmaceutical companies. These deals could be a valuable source of cash and validation for young biotechs. This trend could spur a new wave of dealmaking for the life sciences industry. Although the market is currently in a bear market, investors should not let that deter them from pursuing a new IPO.
Unlike the recent boom in technology companies, life sciences IPOs this year may be a good opportunity to buy a share in a promising biotech. Unlike tech companies, life science companies are pre-revenue and have a long regulatory path to get their products to market. As a result, they don’t need an IPO to raise cash.
The number of life sciences IPOs is down from the first half of 2015 and the first two years of 2014, which was the most active time for the sector. This number is still higher than the five-year average. In fact, this year has seen the lowest number of pharma and biotech IPOs since 2012, but it is still below the level seen in the first half of the year.
Cyber security IPOs
There have been few IPOs in the tech space in recent years, but the security industry has been getting a lot of attention this year. For example, SecureWorks Corp., a computer security company owned by Dell Inc., is planning to go public next month. It is expected to trade under the symbol SCWZ. A few other cybersecurity companies are in the process of filing for an IPO.
While fewer cybersecurity startups are going public, there is a growing trend towards big companies buying smaller ones. In 2016, there were six cybersecurity startups that were valued at $1 billion or more. Companies from every sector bought these companies. Some of these companies included Adobe Systems, Carbon Black, Heartland Payment Systems, and Symantec.
Companies that go public should consider cybersecurity as an important part of their due diligence process. Cyberattacks are a growing business risk. According to some estimates, the number of attacks against businesses could increase by 50% by 2021. As a result, cybersecurity is now a key part of due diligence and regulatory reporting processes. Additionally, the U.S. Securities and Exchange Commission is considering requiring companies to submit periodic reviews of their cyber risk management policies.
While some cybersecurity startups are undergoing an IPO, only a handful will come to market in 2016. Currently, the IPO market is at its lowest level since the financial crisis in 2008-2009. Renaissance Capital says the market is not yet ready for tech deals. SecureWorks is planning to raise less than $2 billion through its IPO. However, a successful IPO could result in a market cap of $150 billion or more.
Argus Cyber Security, which was the market leader in protecting connected cars, was acquired by Continental AG. Argus raised $30M from OurCrowd. Another acquisition, Nanorep, was acquired by LogMeIn for $50M, less than a year after OurCrowd’s investment. And Oracle acquired Crosswise, a company specializing in cross-device identification mapping.
Median annual revenue of IPO companies
The median annual revenue of IPO companies in 2016 was $62.9 million, more than two-thirds higher than the median for the five years prior. In addition, the percentage of profitable IPOs increased to 36% from 35% a year earlier. In particular, life sciences companies had the highest annual revenue, at $197.3 million.
In the US, there were 79 IPOs in 2016, down from 89 in 2015. Of these, fifty-four percent of them were VC-backed. Median offering sizes for VC-backed IPOs decreased by more than 4% from 2015 to 2016, but their median revenue jumped nearly 30% from the offering price through year-end.
The pace of new offerings slowed from its peak in 2014 to a steady pace during the first quarter of 2016. In the second and third quarters, IPO companies filed fewer offerings. That means fewer companies were priced for a higher valuation. While there were fewer new IPOs last year, the number of companies went up and grew by nearly 20%.
As with any IPO, there are some risks associated with its success. Among them is the risk of a broken deal. A broken IPO is one that fails to meet its offering price. Life sciences IPOs have a higher risk of being broken. They were two-thirds more likely to close below the offering price than non-life sciences IPOs. Fortunately, four-fifths of 2016 IPOs closed at or above their initial offering price.
While IPO valuations are dependent on many factors, the most important one is the revenue level of a company. A firm should reach at least $50 million annually to reach the ideal IPO valuation. However, it should also be profitable and growing consistently.
Average price of IPOs
In 2016, an average of 24% of IPOs were broken, meaning that the shares closed lower than the offering price on their first day of trading. This figure was even higher for life sciences companies, which were more likely to be broken than their non-life sciences counterparts. Overall, 44% of IPOs were above their offering prices.
The first-day pop of an IPO typically fades away six months after the IPO, due in part to a lock-up period that prevents insiders from selling their assets too early. In fact, the average six-month return of IPOs is only six percent, which is actually a negative return. Despite this, the first-day gain of an IPO is 18 percent.
Investors have been reluctant to invest in IPOs this year. The recent market turmoil has caused investors to shy away from European IPOs, as the Eurostoxx 50 fell over 400 points before rallying again. Moreover, the performance of hedge funds, which often represent the marginal buyers in an IPO, has been mixed over the past year.
Although IPO prices are generally high, the market is becoming increasingly tight. Companies planning to list in the US or elsewhere are being forced to cut their expectations or postpone their flotations. The tighter valuations are also pushing vendors to consider other options.
Conclusion
As an example, the first-day performance of VC-backed tech IPOs was mixed, with two companies trading at below-market prices. However, the year-end performance of companies that had their IPOs in 2016 was strong.
