🔒Capital Crunch: Lack of IPO activity slows growth of CT’s bioscience, tech industries

A tiny flurry of Connecticut IPO activity in June of this year — as Branford-based biotech Azitra raised $7.5 million, and Westport’s Intensity Therapeutics sold shares worth $16 million — only served to highlight how quiet the markets have been so far in 2023.

Last year saw a similar drought of state bioscience and tech company IPOs, mirroring a nationwide trend.

In fact, Azitra and Intensity Therapeutics are the only two Connecticut companies to go public since December 2021, according to data provided by Crunchbase.

Across the U.S., there were 52 IPOs during the first half of this year that raised $8.9 billion, well below the more than 200 IPOs that took place during that same time period in 2021, according to Stamford-based Renaissance Capital.

“The IPO market is basically closed for the moment,” said Matt McCooe, CEO of Connecticut Innovations, the state’s quasi-public venture capital investor.

He said a number of factors have played into the lackluster IPO activity, including the lengthy bear market and high interest rates. It’s also a reaction to the frothy pandemic market of 2021, which was dominated by the financial innovation of achieving a speedy IPO through a so-called SPAC, or special purpose acquisition company, which he dubbed “an unmitigated disaster.”

“That was a complete and utter wreckage for the public market investors who invested in those deals,” he said. “And the truth is, those companies shouldn’t have been going public anyway. They just weren’t ready.”

Several Connecticut companies that went public via SPAC merger in 2021 have seen their stock prices and market valuations decline significantly since that time.

That includes Stamford-based genetic testing company Sema4, which changed its name in January to GeneDx after a tumultuous year-plus, during which it laid off hundreds of workers and closed its Connecticut lab operations.

Overall, nine Connecticut-headquartered companies completed IPOs in 2021, according to Crunchbase.

‘Under siege’

For those companies that went public prior to the market downturn, current conditions are also challenging.

“The data for the last three or four years for bioscience IPOs — the vast majority of those, two, three, four years out — they’re underwater,” McCooe said.

He sees tech and software companies doing better, but describes bioscience firms as “under siege.”

New Haven-based Arvinas undertook its IPO in 2018. It subsequently achieved a strategic partnership with Pfizer, and currently has a number of cancer drugs in clinical trials.

“It was, quite frankly, a good time to go public,” said Arvinas Chief Financial Officer Sean Cassidy. Interest rates remained low and capital cheap through 2021, but as the Fed raised rates last year in response to inflation, market conditions changed drastically.

“Any long-duration assets where there’s a very long development time before you actually have revenue and profits — when interest rates go up, discount rates go up, which means valuations go down,” said Cassidy.

Arvinas, which saw its stock price reach past $100 in 2021, was trading at around $22 in late July, which was still above its $16 public offering price.

Less risky bets

The dearth of readily available capital has taken its toll in Connecticut, with companies cutting head count and scaling back programs.

“Emerging companies are really trying to focus on stretching cash and minimizing expenses,” said Frank Milone, co-founding partner of Glastonbury-based accounting and advisory firm FML. “(Companies are) finding ways to focus on really critical path-related activities to get them to as many of the strategic goals or milestones that they’re really looking to accomplish.”

Arvinas’ Cassidy said in biotech, the scarcity of capital has also driven more M&A and strategic partnership activity.

“The typical kind of decision-making process is, ‘can I go out and get a partnership?’” he said. “And that usually brings in capital or reduces future costs. That’s an obvious lever to pull in difficult times.”

Meanwhile, private money that is still in play tends to go to shorter-horizon, less risky bets.

“Those are real predictable, cash-flow generating companies that are much easier to measure in an uncertain interest rate environment,” said Cassidy. “So obviously, there has been a real IPO drought, not only in this industry, but in many industries and across the country.”

Josh Geballe, senior associate provost for entrepreneurship and innovation at Yale, sees the same trend.

Geballe’s job is to help launch new startups from Yale research.

“We did have a run of five years in a row where one of our spinout companies did IPO. And that ended last year,” he said. “So, I think generally speaking, the sense is that the IPO window has been relatively closed.”

The venture capital market is similarly cautious. Geballe said it’s not that the money isn’t out there, but a lot of it is essentially sitting on the sidelines.

“It’s certainly more challenging for entrepreneurs to raise venture capital today than it was two years ago,” he said. “Although it’s taking longer and it is more challenging, good companies are still getting funded.”

In fact, Geballe said Yale saw a slight bump in the number of spinout companies that received VC funding in the fiscal year that just closed. But he said it’s more important than ever for a company’s fundamentals and executive team to be strong.

Prime the pump

Geballe, a former tech executive and chief operating officer in Gov. Ned Lamont’s first administration, said Connecticut has actually weathered this market downturn relatively well, compared to the rest of the country.

Milone agrees, adding the state is still well positioned in terms of innovation and early-stage activity to jump back into any market rebound.

And there are signs of hope. Renaissance Capital in July said “the backlog appears brimming with solid IPO candidates,” and it expects a steady rise in listings in the second half of this year.

“These are normal ebbs and flows of the market,” Milone said. “And I think Connecticut is continuously developing itself to support these companies. So, the overall investment is going to make our companies able to recover probably quicker.”

It can take months to properly prep for an IPO, and Arvinas’ Cassidy — who’s predicting at least a smoothing out of the recent volatility in the near term — said companies that have held off on a public offering waiting for better conditions, should do the necessary groundwork to take advantage of any upswing.

“You always need to be in a state of readiness to some extent,” Cassidy said. “... Always be ready to potentially pull the trigger.”

He’d like to see the state of Connecticut prime the pump through tax credits, leveling the playing field with neighboring Massachusetts and New York, which have more generous programs.

A proposed expansion of the research and development tax credit program to smaller pass-through entities was an idea that failed to pass during the recent legislative session.

McCooe counsels patience with the markets, saying, particularly in biotech, returns often have to be measured in decades, so a few months of poor conditions shouldn’t spook those who are in it for the long haul.

He also sees hope in the amount of public cash that’s still supporting innovation around the country, and in Connecticut.

“The federal government is still pumping massive amounts of money into the universities and the National Institutes of Health and Mental Health,” he said. “And so, the biggest funder of innovation in America is the federal government.”