The Life Sciences Investment Climate
During the period of Covid-related anxiety in which the industry received unprecedented media coverage, governments pitched extensive resources into combatting the spread of the virus. The ensuing ‘lockdowns’ meant that people had more time at home, and more time therefore to spend on online trading platforms, and much attention was drawn towards biotech. Zero interest rates also helped ensure that huge amounts of capital flowed into high-risk technology. Furthermore, according to Pitchbook data, venture capital firms invested record amounts of capital in the biotech industry over the past two years – US$12.6 billion in 2020 and US$16.1 billion in 2021. Overall, IPOs pulled in almost three times more than in previous years. Over half of these were for preclinical or phase 1 companies.
The frenzy has now ended, however, and the pendulum has swung far – arguably too far, according to some observers – in the other direction. In early 2022 the Financial Times reported that 83% of recently listed US biotech and pharma stocks were trading below their IPO price in what they called a “stock market bloodbath.” Yet there is a Wall Street adage that in a strong wind even turkeys can fly, meaning that in a booming market it is nearly impossible to distinguish the winners from the losers.
Christiana Bardon, co-managing partner of MPM’s BioImpact Capital and portfolio manager of BioImpact Equities and Oncology Impact Funds, believes this period of dramatic correction is currently close to the bottom, given that many biotech companies are trading at cash balances. From Bardon’s perspective, the extreme market corrections have been largely appropriate. “Many of these corrections are appropriate, because a lot of credit was given to companies that had exciting technologies or platforms but were still far from developing a real drug that would enter a clinical trial, receive regulatory approval, and ultimately help patients,” said Bardon. “Not all companies deserve to have their assets taken forward. Having a more stringent funding environment is not negative; it just means that companies must generate clinically meaningful data to deserve their valuations.”
Chris Garabedian, chairman and CEO of the life sciences accelerator Xontogeny, views the market corrections from a similar perspective. “After record years of private investment, facilitating crossover rounds and taking companies through IPOs, people are realizing that our sector may need to be more discerning in deciding which companies are worthy and mature enough to bring to the public markets,” said Garabedian. “Tough times can scare off newer investors and entrepreneurs, which is not all bad. These cycles help to screen out those investors and entrepreneurs who are not as committed to creating and reaching a long-term goal.”
While it may appear that companies with good technology are being indiscriminately punished just as they had been indiscriminately rewarded earlier in the pandemic, the shift has been an important one in remembering the fundamentals of the industry: no matter how sexy a particular company’s technology or platform is, the end goal must remain to provide products that help patients live healthier, longer lives.
“Tough times can scare off newer investors and entrepreneurs, which is not all bad. These cycles help to screen out those investors and entrepreneurs who are not as committed to creating and reaching a long-term goal.”
Chris Garabedian, Chairman and CEO, Xontogeny
More M&A activity?
What remains uncertain is the extent to which the cooling down of the market will trigger increased M&A activity. Some believe that large pharmaceutical companies like Pfizer and Merck that had been observing over-valuations from the sidelines may find the current climate more suitable for action.
EisnerAmper, one of the largest accounting, tax and business advisory firms in the US, helps life sciences companies going through IPO or secondary offerings. John Pennett, partner-in-charge of the national technology and life sciences group, revealed that the company is increasingly busy with new company formations, with four clients going public in Q4 of 2021 alone. While this is in many ways a testament to the perennial dynamism of the industry, it does not serve as a litmus test for the current state of the life sciences financial climate.
According to Lori Hu, managing director of Vertex Ventures HC, the industry is currently experiencing a temporary “hangover” effect and the market will soon bounce back. “Expectations to finance for the long term are again receiving priority,” explained Hu. “The M&A market has been relatively slow over the past year, as pharma executives wait on the sidelines for the valuation correction to play out, but I believe that we will see M&A activities increase in this coming year.”
For others, this shift may not happen quite so definitively. James Gale, founding partner and managing director of Signet Healthcare Partners, commented: “As the capital market valuations fall back and exits via the public markets become less viable or attractive, sellers may pause. At the same time, buyers may be affected by rising interest rates and the change in the market to dig in on lower pricing. We could thus see a protracted period of lessened activity before we see the M&A markets start to build again.”
The conviction that lower valuations will lead to more M&A activity is not shared by all industry stakeholders. MPM Capital’s Bardon believes the level of activity will remain consistent despite the market turbulence, as pharmaceutical companies are constantly on the hunt for new and innovative drugs to incorporate into their distribution pipelines after undertaking thorough due diligence. “M&A is like picking apples – you only want to eat the apple when it is ripe. No one wants to eat an unripe apple, even if its 50% off. Similarly, M&A occurs when companies meet their proof of concepts and have de-risked their assets such that the drug looks promising to be successful in future clinical trials,” said Bardon. “The question that remains is which companies are ripe and ready for the picking.”
Overall, the health of the life sciences investment climate is expected to return to the trajectory it had been on pre-pandemic. “We are excited about the health and the growth of the industry and the pace at which it has continued to evolve over the last 20 years,” commented Ryan Meany, managing partner of Edgewater Capital Partners. “The hallmark for us is its malleability to consumer needs, which has manifested in important therapies and broad adaptability to the business model and cycle.”
The past two years have brought about unprecedented levels of interest and investment and reshaped the way the broader world interacts with life sciences companies, particularly in biotech, and this bodes well for the financial support it will attract in the years to come.
“We are excited about the health and the growth of the industry and the pace at which it has continued to evolve over the last 20 years. The hallmark for us is its malleability to consumer needs, which has manifested in important therapies and broad adaptability to the business model and cycle.”
Ryan Meany, Managing Partner, Edgewater Capital Partners
“The M&A market has been relatively slow over the past year, as pharma executives wait on the sidelines for the valuation correction to play out, but I believe that we will see M&A activities increase in this coming year.”
Lori Hu, Managing Director, Vertex Ventures HC
Image courtesy of Syngene