The Investment Climate

Standing out from the pack

The plunge in IPO numbers in 2022 left most biotechs unable to raise capital from public offerings. In 2022, 47 biotech IPOs raised US$4 billion. A far cry from the US$25 billion raised by the 152 offerings in 2021. From West to East Coast (the San Francisco/Bay Area led VC funding with over US$12 billion, seconded by the Boston area with US$8 billion), cash-strapped firms at the end of their runway are presented with closed public markets and a highly competitive environment in which to attract capital, almost enforcing deal-making as the only recourse to bring their candidates over the finished line.

Raising money will remain a challenge for early-stage firms with no late-stage clinical assets. Indeed, in this macroeconomic environment, investors have shifted their stance towards de-risked assets as opposed to a trend observed pre-pandemic of capitalizing on technologies before significant value inflection points. As initial seed and Series A investment dollars become a sought-after commodity, generating data and reaching milestones in the clinic and with the FDA will be crucial for firms seeking venture capital. Tellus Therapeutics, a neonatal care company focusing on the development of treatments for the unmet needs of newborns, secured a US$35 million Series A investment in December 2022. CEO Jason Kralic detailed what prompted Xontogeny Perceptive Venture Fund to pull the trigger: “The financing was triggered by reaching nonclinical development and regulatory milestones that increased our confidence in the clinical development path for the treatment of pre-term infants.”

Many of the inexperienced investors that tagged along during the pandemic have now turned around and fled, thus dropping share prices for publicly traded companies. That cycle damaged a lot of relatively low-cap, publicly traded biotech companies, which saw their promising technologies falling out of favor. As specialist funds regain most demand for shares, capital allocation will become ever so selective, according to James Gale, founding partner, and managing director at Signet Healthcare Partners: “There is sufficient capital capacity among venture firms but there may be a slowdown in future commitments to these funds in the mid-term. New capital will be infused selectively and could reflect tightening capital market conditions.”

The year ahead: health equity, clinical data, and RWE

For revenue-generating firms, ESG and health equity are no longer merely buzzwords. For the life sciences industry, incorporating ESG strategies starts with health equity and patient access to healthcare. The past years have shown that ESG is gradually being embedded in business operations and more central in the context of third-party engagement, which is vital in reinforcing the improving public perception of the industry, as mistrust remains a growth challenge for pharma. Detailing J&J’s “Our Race to Health Equity” initiative – put in place to address access to care and quality of outcomes to everyone – Tyrone Brewer explained: “I would be shocked if you could pick up any corporate report that does not talk about an ESG commitment. It is all about increasing awareness in education and access to clinical trials for underrepresented ethnic communities.”

Early-stage firms seeking investment will have to face increased due diligence from VCs after the “sugar high” experienced in 2020-2021, when several companies went public too soon and without a well-thought-out strategy. Today these firms must focus on finding partners to develop their assets or find them a different home. This makes life harder for pre-revenue life sciences firms that do not yet have clinical data. Christina Bardon, co-managing partner at MPM | BioImpact Capital explained: “In 2020, several companies invested in platforms without necessarily paying attention to reaching clinical milestones. Investors are now more parsimonious and looking for clinical-stage assets and tangible value creation. 2023 is a time to focus on clinical data.”

With unique access to the biotech ecosystem in Massachusetts, Kendalle O'Connell, CEO and president at MassBio, shared investors’ analysis: “Companies will have to be able to give more clinical data to investors to create confidence in their ideas and raise funding in future rounds.”

Indeed, for biotech companies running out of cash, the silver lining could be pushing to that later stage onto their next clinical data readout. Firms that can provide real-world evidence (the combination of real-world data and analytics) will have a competitive edge moving forward. The FDA uses RWE (Real World Evidence) to make regulatory decisions, and the latter is being used to strengthen clinical trial designs and observational studies to create new treatment options for patients. This impacts FDA approvals and accelerates the drug development process, which saves late-stage firms and drugmakers time and cash. Denise Juliano, who leads the life sciences division at Premier Inc., a leading healthcare improvement company, said: “The RWD (Real World Data) and RWE market is expected to reach US$2.3 billion by 2026, up from US$1.2 billion in 2021. RWE is the future.”

The life sciences story in 2023 should unfold with a stronger investor appetite, particularly for de-risked projects. Emerging technologies and early-stage firms will likely continue to face headwinds to prove the long-term value of their candidates in a market where de-risking is key, while steady valuations for companies that are well established are likely. Both public and capital markets will likely continue to reward firms that survived the translational gap (or “valley of death”) stage from discovery to translation into effective proof-of-concept, (including Phase 2 clinical development), pushing more firms to be in the clinic before their IPO.