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Biotech Financing Midyear Review

BioTech Financing

2022 has been a tough year for the markets. But Biotech has been hit especially hard. Funding decreased by almost 60% from its 2021 peak. And things will probably get worse before they get better. With recession expectations high among C-suite executives, and more interest rate increases expected in July, the financing environment for the rest of the year will be tough. While market fundamentals are still intact, Biotech startups must compete harder for funding and devise new strategies to manage risk. 

I recently sat down with Richard Murphey from Bay Bridge Bio, to have a closer look at the market and what the new environment means for Biotech companies and their financial strategy this year. We also dive into what Biotech companies can do right now to emerge stronger after this downturn. 

The following is an excerpt from my conversation. You can watch the full interview here.

Juergen Utess: 
2022 has been very interesting so far. We just hit bear market territory. The Dow is back under 30,000. So, the year has been rough for the whole market, but let's look at Biotech specifically.  

Last year, we saw 149 IPOs, with over $30 billion in capital raised. Halfway through this year, we're at 25 IPOs and a little over $3 billion raised. So, things aren't looking as good as they did last year. Richard, what happened in the market? 

Richard Murphey: 
2022 has seen a reversal from at least the first half of 2021. I think the public markets have been the first to be impacted, and the IPO market in Biotech, especially for startups, has almost ground to a halt compared to 2021 – which was the busiest year on record.  

On the venture side, there has been a 50-60% decrease in venture funding in the biopharma startups year over year. However, the good news is that 2022 is still on track to be the third-biggest year on record for biotech VC investment. So, the monthly levels of investment in biopharma companies are still higher than in 2018 and prior.  

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 The challenge, though, is that because so much venture capital was invested in startups in 2020 and 2021, many companies are competing for a decreasing pool of capital. So, there is money out there, but it's just a little bit harder to access it, and you're seeing a little bit of increased selectivity on the side of investors, some valuation pressure, and things like that.  

M&A is a potential bright spot. We've only seen a handful of deals this year, but today the news is that Merck may buy Seagen for about $30 billion, and the market's XPI's up about 7% on that. So, M&A hasn't quite materialized the way investors have hoped, but there is certainly potential that M&A can be a stabilizing force going forward. 

Juergen Utess: 
What has caused the crash in Biotech? Is it just part of that larger downturn in the economy? And do you see M&A as a way out of it? 

Richard Murphey: 
What drove the crash is what caused the boom in the first place, and that's fundamentally the expansion of monetary policy that the Fed and rest of the world have embarked on over the last decade. And it accelerated through COVID. It appears that to get back to 2021 levels, we would need just that broader macroeconomic shift or for the Fed to reverse course a little bit on monetary policy.  

M&A will help. As I said, the XBI's up about 7% today on the news of the potential Seagen acquisition, which would be the biggest acquisition in about a year-and-a-half or two years. In addition, the NASDAQ's up about a percent, so there is some support from M&A. 

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However, based on what we've seen, M&A volume would need to increase dramatically to get us back to 2021 levels. So, we view M&A as more of a stabilizing force rather than something that can bring us back to COVID levels. But maybe some of the silver lining is that this crash isn't due to biotech fundamentals. It's just the change in risk tolerance in the global financial system. And to underscore how interesting and unique this time is: there has never before been this amount of fiscal or monetary stimulus for such a long time in a large, developed economy, and we see that unwind now, and no one really knows what's going on. 

 So, you saw prices of assets of all types, from Biotech and crypto to government bonds, balloon in value over the last decade, and that's really driven by monetary policy. As that policy reverses, all of these assets are dropping. Biotech happened to be the first asset class to fall to the XPI peak last February. The NASDAQ and crypto indexes peaked around November of last year, and then we saw the S&P peak this January. So, it's just a broad reduction of risk tolerance in markets, and unfortunately, Biotech as a risk asset is swept up in that. 

Juergen Utess: 
Well, something I can imagine didn't help was that many outside investors put money into the Biotech market and then came to find out that, much like software startups, Biotechs fail. So it's not a given that you invest in Biotech and get your returns. But who is still investing in Biotech now?  

Richard Murphey: 
Yes, many new investors came in or expanded their allocations to Biotech, especially early-stage Biotech, within their portfolio. So, you saw groups like Fidelity, BlackRock, and Vanguard, the major trillion-dollar asset managers of the world, put a lot of money into early-stage Biotech over the last five or so years. However, they have decreased their allocations dramatically since early last year, although some are investing.  

I think that this year, BlackRock is a net buyer of Biotech. Some of those others are net buyers, although it's a small fraction of their AUM. So, the generalist investors are still putting money in, albeit at a slower pace. And when you look at the specialists who drive the market, those groups are still investing now.  

They're just investing at a much slower pace, so groups like RA Capital, Casdin Capital, and OrbiMed, they're still the most active late-stage private and public crossover investors. Still, they're just doing 30%, 40%, 50%, 60% fewer deals than they were doing a year prior. So, long story short, for the crossover market, it's the same players just doing less.  

On the Series A side, it hasn't been hit as hard as the Series B market yet, but we have seen a big shift in who the most active Series A investors are. The Series A and B seats that were most active during the boom are no longer as active this year, and we're seeing newer entrants to the Series A space or even crossover funds seeking shelter in Series A deals.  

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Groups like RA Capital, Casdin Capital, they're crossovers which have moved into the A space. Then there are groups like Samsara and Northpond, which are experienced biotech groups with fairly new funds and are being pretty active in the Series A market now.  

So, there's a shift in the Series A market. It's held up so far; the crossover landscape has taken the brunt of the pain. 

Juergen Utess: 
It's probably hard to predict what the economy will do, but looking at Biotech and taking a historical perspective, where do you see things going for the rest of this year? 

Richard Murphey: 
I can walk through various scenarios, but it's pretty tricky, and I think most of the investors and companies I talk to are also in somewhat uncharted territories.  

There hasn't been a market event like this since the dot-com bust. Even in the 2008 financial crisis, there just weren't any many early-stage public companies as there are now, and there wasn't a lot of venture funding back then. So, you really have to go back to 2000 to find a precedent market.  

So, here are a couple of scenarios: 

We could have the status quo, see things recover, or things continue to deteriorate. I don't know which of those is more likely, but it seems like the Fed will ultimately decide which way we go. 

If the Fed decides to protect the economy from recession instead of fighting inflation, we will probably see a turnaround in risk appetite. If the Fed provides even more clarity on the markets, there will be some volatility for a time while investors digest the new normal, but then we may see stability and growth from there.  

So, I think there is potential for a market turnaround, depending on what happens with the macroeconomic situation. That's not my line of work. I'm not a macroeconomist, so I can't predict how likely that is, but that's what I'll be looking for. I think things like the CPI prints and the FOMC meetings will be more significant market movers for Biotech. 

M&A as well could be big. However, it seems that this year the Fed has outweighed M&A's impact on the market, so the biggest acquisition thus far as a biotech startup was Biohaven. I think the XBI traded up about 5% the day that was announced, and then the next day, it gave up all of those gains because of concerns about inflation and the higher interest rates. If there are bigger deals, it could provide more support and change things. So, as I said today, there's about a $30 billion acquisition of Seagen by Merck that folks are talking about. The XBI is up 7%, despite some of the roughest three or four days on record around the last FOMC meeting. 

So, that's the good scenario. If the Fed decides to go easier on interest rates, things could turn around, or if we see much more aggressive M&A, more on the 5x to 10x historical levels, that would move the market more than a 20% or 30% increase in historical M&A levels. But it would need to be a big change in M&A. But that's the upside scenario.  

In the status quo scenario, we are seeing the IPO market kind of at a level it was in 2016, after the last big biotech crash. So, the IPO market could stabilize and remain open for quality companies. And public market investors could return to the market after recalibrating their portfolios. So, if there is some stabilization, we will see markets become healthier and more predictable again – although it will mean some pain in the near term as there's a little bit of restructuring. 

Then on the downside scenario, if you take a pessimistic view, the drawdown from peak to trough in the dot-com bust was about an 80%. We're sitting around 60% right now, and some data indicates that the biotech market in 2021 was even hotter than the biotech market during the dot-com boom of 2000. So, we could see further deterioration in the market moving forward in the downside case.  

So, it's a big range of outcomes. It's a very uncertain time, and I wish I could have a better read on this.  

But I think the way to navigate it is to focus on fundamental value, manage your cash prudently, and if you have the right assets, markets will turn around, and you will be fine on the other end. 

Juergen Utess:
What specifically can companies do to emerge stronger from this downturn? If you are a CFO or finance leader, what can you do right now? 

Richard Murphey: 
So, the first thing is to get a handle on your burn rate, spending, and financing. This volatility and poor financial market conditions could last another six months, 12 months. After that, no one knows, but it will be tough for a little bit longer. So, you have to make sure you can survive the downturn, and that means having enough money to keep the lights on and fund your core R&D for at least 12-18 months plus.  

Second, if you look historically, you can't just survive. You also have to keep creating value. If you look at the companies that emerged strongest after the dot-com bust and after the financial crisis, the companies that are the big winners are the ones that have first-in-class or best-in-class products. That means indications with a severe, unmet need, i.e., products with fundamental value that are differentiated from the competition. 

If you imagine the market going forward would be more reliant on M&A for exits than IPOs, which seems to be the case and look back at the 500-plus IPOs since 2010 of the biotech IPO boom, there were 30 acquisitions of over a billion dollars. All but one of those acquisitions has either had an approved product, a product with an NDA or a BLA filed, or a product in pivotal studies. So, Big Pharma pays for high-quality derisked assets, and the closer you get to that, the more valuable your company will be.  

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So, if you can't maintain your financial stability, raise money however you can, even on terms you may not have thought acceptable a year ago. Tighten your ties to your pharma partners on some non-core programs and bring in non-dilutive funding. Do whatever you can do to stay afloat. And then put as much R&D capital as you can into getting a first-in-class or best-in-class product as far down the clinical development path as possible. 

That may mean decreasing or shifting resources from platform development or second or third-stage assets. If you have a me-too product you're developing to validate your platform, it may be prudent to shift those resources into something that will be a real blockbuster potential product. It's those companies that will emerge out of the downturn strongest.  

It also gives you a chance to consolidate once things clear out and establish yourself as a leader amongst biotech companies in an increasingly challenging market that has fewer companies than it does today. 

Juergen Utess: 
Thank you, those are great suggestions. And of course, from our perspective here at Sage Intacct, we do financial management and project accounting software. One of the reasons why we think this is valuable is because, as Richard mentioned, you got to understand how much money you're spending on programs.  

You might want to be able to shift around budgets, but all that requires is understanding where exactly your allocations are right now and how your company's faring. Whether you're trying to raise the next round or be acquired, having a financial management and accounting system that can supply all this data very easily and quickly is very helpful, so look at sageintacct.com/biotech. We have more information for you there and more resources. With that, I want to thank you, Richard, for joining us again today.  

Richard Murphey: 
Thanks for having me. Hopefully, in six months things are much better and we'll have a much different conversation but appreciate you having me.

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