Biotech Capital Markets: IPOs, Follow-Ons, PIPEs, and Convertibles

Introduction

Clinical-stage biotech companies burn cash for years before generating revenue, which means their survival depends entirely on the capital markets. A biotech that cannot raise equity capital must either find a partner, sell the company, or shut down. This makes capital markets strategy one of the most important functions in biotech management, and biotech equity offerings one of the highest-volume product areas in healthcare banking. The healthcare ECM (equity capital markets) desk at a major bank may execute 50-100+ biotech transactions per year across IPOs, follow-ons, PIPEs, and convertibles.

Biotech IPOs are among the most cyclical capital markets products in investment banking. IPO windows open during bull markets (2020-2021 saw record biotech IPO volume with 100+ biotechs going public) and effectively close during bear markets (2022 saw IPO activity drop by 75%+, with many companies postponing or canceling their offerings entirely). This cyclicality creates a unique dynamic: companies founded during bull markets may not be able to go public until the next window opens, potentially years later, forcing reliance on private capital that is more expensive and dilutive.

Crossover Round

A late-stage private financing round (typically Series B or C) that includes both venture capital investors and public market investors (mutual funds, hedge funds). Crossover rounds signal IPO readiness because the participation of public market investors validates the company's story for a public audience and builds a "book" of institutional investors who will participate in the IPO. They also provide price discovery: the crossover round valuation often serves as a reference point for IPO pricing. Companies that complete crossover rounds typically price their IPOs within 3-6 months. The crossover round has become essentially a prerequisite for biotech IPOs; companies that attempt to go public without crossover investor participation face significantly higher execution risk.

Typical Biotech IPO Economics

A typical biotech IPO raises $150-300 million at a valuation of $500M-1.5 billion (post-money). The underwriter discount is 7% for offerings under $250 million and 5-6% for larger offerings. The lock-up period (during which insiders cannot sell shares) is typically 180 days. The proceeds are expected to fund the company's pipeline through one or two major catalyst events (typically 18-24 months of cash runway), giving the company time to generate data that either supports a follow-on offering at a higher price or attracts an acquirer.

Post-IPO, biotechs raise additional equity through several mechanisms, each with distinct advantages and trade-offs:

Public follow-on offerings are traditional registered secondary offerings marketed to institutional investors over 1-2 days. They provide the largest capital raises (typically $200-500 million+) but require favorable market windows and involve underwriter fees (typically 3-5%). The "overnight" follow-on (priced after market close and settled within 48 hours) has become the standard format, minimizing the market risk of a multi-day marketing period.

PIPEs (Private Investment in Public Equity) have become the dominant biotech follow-on vehicle. In PIPEs, the company sells shares directly to a small group of institutional investors (typically 3-10 investors) at a negotiated price (typically at a discount to market). PIPEs are faster (can close in days rather than weeks), have lower transaction costs, and can be executed regardless of market conditions because the investors have already committed before the deal is announced.

ATM (at-the-market) programs allow the company to sell shares into the open market over time at prevailing market prices, rather than in a single large transaction. ATMs minimize market impact and allow the company to raise capital opportunistically (selling more when the stock is high, less when it is low). However, ATMs are limited in the amount that can be raised (typically 5-15% of market cap over the life of the program) and signal ongoing dilution to the market, which can create a persistent drag on the stock price.

Shelf Registration (S-3)

A type of SEC registration that allows a public company to register securities in advance and issue them at any time over a three-year period without filing a new registration statement. Biotech companies maintain active shelf registrations so they can raise capital quickly when the window opens. Without a shelf, filing a new registration statement takes weeks and requires SEC review, potentially causing the company to miss a favorable market window. To file an S-3, the company must have been public for at least 12 months and meet minimum public float requirements. Companies that cannot use an S-3 (typically recent IPOs or micro-cap biotechs) must use an S-1, which is slower and more expensive.

Convertible notes have surged in biotech, reaching a record $7.37 billion in 2025. These instruments provide debt-like financing (interest payments, maturity date) with equity conversion features (convert to stock at a predetermined price). Convertibles are primarily used by commercial-stage biotechs that have some revenue to service the interest payments and want to minimize equity dilution while maintaining financial flexibility.

Biotechs also access non-dilutive capital sources that do not require issuing equity, preserving shareholder value:

The next article covers how biotech companies get acquired, which is the most common exit path for successful biotechs.