How Long Can the PIPE Success Story Keep Running?

The first quarter of 2024 has seen biotech’s funding drought broken, largely through private investment in public equity (PIPE) deals. In this episode of Pathfinders in Biopharma, three members of RBC’s biotech investment banking team look at the impact of PIPEs’ success on the sector and consider how long it can last – and why it has not been universally welcomed.

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Hosted by Joseph Coletti
Featuring Timothy Chung, Richard Hsieh & Alex Lim
Published April 5, 2024 | 2 min read
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Key Points

  • PIPE deals have been flourishing in biotech, raising big investments followed by strong aftermarket performance.
  • This deal structure is working well for capital-hungry companies whose data risks being ignored by the market in traditional fundraising exercises.
  • However, PIPEs’ use of unregistered shares excludes many investors.
  • A continuing improvement in the market is likely to see a return to more conventional equity-raising methods.

PIPEs keep the capital flowing into biotech

Among the biotech equity-raising deals this year so far, one tool has stood out for its popularity. A dozen PIPEs (private investments in public equity) have been issued in the first quarter of 2024.

PIPEs provide unregistered shares to investors, who get early access to company information. The latest deals have been priced at a premium, raising at least $50m – more than the total volume in the previous two years, says Tim Chung, Director of Biotech Investment Banking.

In the past, PIPEs were used for companies whose data required time for investors to digest, and included sweeteners such as free warrants. Now the market has changed, Chung notes, with PIPE deals being priced at a premium in response to strong investor demand.

“Most of the deals have performed fairly well. The aftermarket performance on these PIPEs over the past three months have been up 20-plus percent,” he says.

As the market improves, PIPEs are also enabling some opportunistic deals: “We’re seeing companies start to tap the markets and doing smaller PIPEs, in order to shore up the balance sheet and diversify the shareholder base,” Chung adds.

PIPEs are also being used in reverse mergers, to fund the company created when a public shell merges into a private entity. Less commonly, they are also associated with the creation of special purpose acquisition companies (SPACs).

“Companies are doing smaller PIPEs to shore up the balance sheet and diversify the shareholder base”

Tim Chung, Director of Biotech Investment Banking


Success creates excitement in the market

The result of this activity is an influx of capital to a sector sorely deprived of funds of late.

“Everyone seems to be benefiting here,” notes Richard Hseih, Managing Director of Biopharmaceuticals. “Investors are getting their allocations and access to asymmetric information to help drive returns; companies are getting the funding that they need.”

PIPEs are creating a stir for good reasons. “When you’re announcing good data alongside a financing that funds the business for the long term, you can imagine why the market would be excited, especially when there’s validation from some top-tier investors,” says Alex Lim, Managing Director Biopharmaceuticals.

“PIPEs may not be the right tool for companies with the potential to push up their valuation by releasing their data publicly,” Lim adds. However, they do overcome the recent phenomenon in which company data released on the market “gets swallowed up” with no significant impact.

“You can imagine why the market is excited, especially when there’s validation from some top-tier investors”

Alex Lim, Managing Director, Biopharmaceuticals


The investors left out of the PIPE action

PIPEs come with one big drawback: the lack of fair opportunities to invest. Only those investors eligible to purchase unregistered shares can take part.

The current mix of PIPE investors includes venture funds, dedicated hedge funds and fundamental investors, says Hseih.

“Some investors are being excluded, which can be frustrating,” he says. In some cases, existing investors in a company end up unable to take part in its PIPE. And, as Lim points out, the non-participants include “some of the largest and most important funds in our business”.

“Some investors are being excluded, which can be frustrating”

Richard Hseih, Managing Director, Biopharmaceuticals


How long will PIPEs’ run last?

This inequity of access partly explains the biotech market’s ambivalence towards PIPEs. There is also an awareness that a healthier market would make such mechanisms unnecessary.

Lim says: “I think it would be important for companies to feel that they don’t need to come with a PIPE transaction to get a deal done, but that they would have the flexibility of being able to share data, get the maximum amount of attention and increased valuation from what they present.”

PIPEs’ moment may be short-lived in any case, according to Hsieh. “Ultimately, as market sentiment continues to improve, we’ll see a shift back to deals marketed in the more regular way, or confidentially marketed public offerings,” he says.

“In the near term, it’s good to see capital flow into the biotech sector.”

“As market sentiment continues to improve, we’ll see a shift back to deals marketed in the more regular way”

Richard Hseih, Managing Director, Biopharma Investment Banking

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