Newly optimistic, biotech investors weigh lessons of sector’s downturn

Newly optimistic, biotech investors weigh lessons of sector’s downturn

  15 Jan 2024

The J.P. Morgan Healthcare Conference, a yearly temperature taker for the biotechnology industry, had a different feel in 2024.

For the first time in awhile, young drugmakers and their backers were optimistic the sector’s downturn might finally be over. An improving macroeconomic picture, combined with a recent run of dealmaking, has led many to hope investors may again see biotech as a worthy bet.

“This event is always the canary in the coal mine for the year,” said Andreesen Horowitz general partner Jorge Conde. “This year, we have a happy canary.”

Yet underneath the optimism remain concerns the rebound may be short lived. Private funding rounds and initial public offerings are still difficult for biotech companies to pull off. Early technologies aren’t getting the same support they were three years ago. Among nearly a dozen investors and executives interviewed by BioPharma Dive, all expect changes in how biotechs are built and that industry layoffs, which regularly made headlines last year, will continue.

An election and geopolitical conflict could also bring uncertainty for a sector already defending itself against drug pricing legislation and an aggressive Federal Trade Commission. The Federal Reserve, which has signaled interest rate cuts, may still surprise markets, too.

”There’s a lot of stuff going on in the world that no one in this room really can control,” said Kristina Burow, a managing director at Arch Venture Partners. “2024 is probably going to be a roller coaster.”

The new funding climate

Investors interviewed at the meeting were hesitant to make predictions on biotech initial public offerings, which have dropped dramatically since their 2021 peak, according to BioPharma Dive data. While there were some signs of market momentum last year, each spurt of IPO activity quickly lapsed into longer dry spells.

There were a few big winners in 2023. Radiopharmaceuticals developer RayzeBio went public and was quickly acquired by Bristol Myers Squibb. Companies with drug candidates in testing, like Neumora Therapeutics and Structure Therapeutics, were rewarded with lucrative offerings and a climbing share price.

Overall, however, performance was mixed and IPOs were few. Public investor demand appears limited to more advanced companies, making the road to an IPO for earlier-stage startups harder.

“We’re still optimistic on companies, but the trading dynamic hasn’t been great,” said Carlo Rizzuto, a managing director at Versant Ventures, which invested in RayzeBio.

Private investors also appeared to shy away from backing so-called drugmaking platforms, which saw large drops in funding totals. And later funding rounds were harder for companies that raised Series A rounds but hadn’t hit key milestones yet. Gone are the days of a quick pivot from a Series A to a “crossover” round and subsequent IPO.

“People with a platform that is five years away from the clinic, that’s just not going to fly in this environment whatsoever,” said Christiana Bardon, a co-managing director of MPM BioImpact. “But if you have a Phase 2 asset that’s coming into the clinic for a great indication, you’re going to do fine.”

Building differently

Platform companies will still exist and win investor backing, of course. But they’re now being more tailored to the moment, investors say.

During the height of biotech’s bull run a few years ago, billions of dollars were going to companies built with such broad ambitions. They were staffed with high-powered management teams and hired hundreds of employees to build out technology they claimed could support many drugs across many diseases. “That’s because things were frothy,” says former Alnylam Pharmaceuticals CEO John Maraganore, now a consultant and adviser to startups. “Companies got overbuilt.”

That frothy environment led investors to provide what a16z’s Conde described as “R&D funding with public capital.”

“You’re putting your phone on ‘Do Not Disturb’” and saying “you’re not going to hear from me for awhile,” he added. In the meantime, share prices — and the broader market — deteriorated.

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