Biopharma VC activity slipped last year—but 'buoyant' molecular glue market holds hope: PitchBook

Venture capital investment in biopharma underwent a significant correction in 2023 from the “explosive growth” during the pandemic, with $29.9 billion spent across 920 transactions compared to $36.7 billion in the previous year, according to a new analysis from PitchBook.

The trend continued into the final quarter of 2023, which saw venture funding slip to $6.3 billion from a third-quarter level of $7.8 billion, which PitchBook attributed to a “modest" decline in deal activity.

Despite the post-pandemic recalibration, biopharma exits—via 55 IPOs and 39 company acquisitions—still totaled $18.3 billion in 2023, which the report's authors suggested “illustrat[ed] a strategic patience and selective investment ethos that pervaded the year.”

“Venture capital funding trends indicated a cautious yet discerning investment approach, with an increased median interval between funding rounds, underscoring a preference for companies showcasing mature clinical data,” the authors added.

The analysis pointed to Roche's entry into the obesity market with its $2.9 billion acquisition of Carmot Therapeutics and Bristol Myers Squibb's $4.1 billion play for radiopharmaceutical company RayzeBio as proof of the “strategic pivot toward quality and clinical validation.”

By deal count, RA Capital Management was the top VC biopharma investor for 2023, closing 28 deals. Alexandria Investment Ventures received silver with 25 deals, followed by Arch Venture Partners at 22 deals.

Despite rocky market conditions, investor excitement has persisted, particularly for early-stage biotechs incorporating AI, a trend exemplified by Alphabet’s Isomorphic Labs. At the beginning of this year, the AI platform company forged new partnerships with Eli Lilly and Novartis that are collectively worth nearly $3 billion.

The pacts underscore a renewed interest in the next generation of computational drug discovery as early efforts continue to progress through the clinic, according to PitchBook. The analysts touted Isomorphic as “the bellwether for future AI biotech startup funding,” citing peers like EvolutionaryScale and Inceptive Bio as companies that may see similar early success securing high-value collaborations.  

That being said, PitchBook did concede that drug developers have been slow to adopt AI and highlighted the need for a long-term investment vision to channel the technology's full potential in biopharma.

Looking forward, the market analysts identified molecular glue degraders, epigenetic editing and macrocyclic peptides as three pockets of opportunity in 2024 and beyond.

The market trajectory for molecular glue degraders is “buoyant,” according to the report's authors. Current front-runners in the space include Monte Rosa Therapeutics, a biotech that has raised $450.8 million to date and nabbed a pact with Roche, as well as Triana Biomedicines, which has snagged $126 million.

While molecular glue technology offers a new way to target disease-associated proteins, creating the glues is an arduous process. What’s more, attempts to produce glues tailored for any disease target is considered “ambitious” by PitchBook, with many well-funded companies in the space stuck in early R&D phases.  

Meanwhile, epigenetic editing has “an optimistic short-term outlook” with an initial focus on diseases that have well-understood mechanisms, such as certain cancers, according to PitchBook.

Confidence in the gene therapy tech was recently bolstered by FDA approval of the first CRISPR therapy: CRISPR Therapeutics and Vertex’s Casgevy, which received approval in both beta thalassemia and sickle cell disease. As epigenetic editing advances, the tech’s application is expected to expand to potentially transform treatments for complex diseases influenced by multiple genes.

While PitchBook expects regulatory frameworks to evolve and address the unique challenges presented by epigenetic editing—such as ensuring safety, efficacy and monitoring long-term effects—financing, adoption and cost to patients remain a major obstacle.

Last on PitchBook's list is the macrocyclic peptide sector, a mostly preclinical space that is currently focused on demonstrating oral bioavailability and efficacy. The clinical success of drugs like Merck & Co.’s MK-0616, a PCSK9 inhibitor being tested in a phase 3 hypercholesterolemia trial, could prompt an uptake in adoption of the tech, according to PitchBook.

The space’s trajectory is also positively influenced by sizable biomanufacturing investments in peptides, a move driven by the blockbuster success of peptide-based obesity treatments Mounjaro and Wegovy from Eli Lilly and Novo Nordisk, respectively.