In December 2022, two white whales of science were finally captured: fusion ignition being one, and the other was Moderna and partner Merck & Co.’s success with a personalized mRNA cancer vaccine—at least according to Flagship Pioneering CEO and Moderna co-founder Noubar Afeyan, Ph.D.
These two achievements underscore that good science takes time—and for biotech, unfortunately, time is not on the side of the many great companies on the cusp of great achievements in the years to come. The markets battered biotech in 2022, even those companies that had the backing of Moderna's venture capital firm, Afeyan wrote Monday morning in a more than 3,000-word, flowery message to shareholders, which started and ended with a Sir Francis Drake poem and included plenty of ship and storm metaphors in between.
“The prevailing storm in capital markets has been a challenge to navigate over the past year,” Afeyan admitted. “Capital markets convulsed with uncertainty over how the economy would transition from a global pandemic and its once-in-a-generation effects. The subsequent downturn clouded the path for emerging biotechs and sank many promising early-stage companies, including some founded by Flagship.”
Afeyan did not name the Flagship companies that fell specifically, but Kaleido Biosciences closed shop in April 2022, and Repertoire Immune Medicines began an overhaul in November 2022 that meant half of its staff were sent packing. Flagship, the venture capital firm that raised $3.4 billion in June 2021, did, however, have some major successes in the year—beyond all that Moderna accomplished in its post-COVID honeymoon phase—like the $121 million series C raised by Cellarity. Raises of that size were few and far between in 2022, but another Flagship-founded company, Tessera Therapeutics raised $300 million also in a series C round in April.
But now, the entire business community is waiting with bated breath to see whether the economy will plunge into a recession in 2023. Interest rates are rising, which pressures growth companies and restricts them from entering the public markets, Afeyan said. Just nine initial public offerings were conducted in biotech in 2022, down from 74 in 2021.
“However disquieting this storm of uncertainty might be, it is vital to remember that it is unrelated to the opportunity, promise, and value of biotechnology,” Afeyan wrote. Which is to say, just because a biotech fails doesn’t mean its science isn’t sound.
Afeyan believes that recent valuations are not reflective of the science, technology and many opportunities in the sector. After the pandemic attracted all kinds of investors, Afeyan notes that those from the mainstream have left—for now.
In order to manage what Afeyan calls the “choppy” near-term capital markets, Flagship and its companies have had to aggressively manage cash burn rates, increase pharma alliances and reduce or redirect development programs. All of these measures are in line with the industry playbook; there were myriad Big Pharma partnerships throughout the year, little M&A and plenty of small biotechs executing tough pipeline re-prioritizations and staff cuts to extend their cash runways. Flagship also “selectively increased ownership” of its public companies through follow-on offerings, Afeyan noted.
All these dramatic company-saving measures belie the scientific breakthroughs that have been happening in biotech. Afeyan points to, of course, Flagship star Moderna and the Merck-partnered cancer vaccine. But he also gave props to Eli Lilly’s Mounjaro and Novo Nordisk’s Ozempic, which he said provided “big, increasingly scaled breakthroughs in treating diabetes and obesity.”
The nature of biotech is that companies launch and grind for years before their breakthroughs begin creating value. Afeyan went on to urge Flagship shareholders to stay the course.
“By nature, disruptive platform companies have long-term biases—and valuations can be disconnected from reality due to the short-term bias of capital markets,” Afeyan said. “Truly world-changing innovation carries unknown variables and uncertainties that do not fit readily into standard investor frameworks of near-term risk.”
The key is for companies to identify opportunities to hedge that risk, such as by being open to pharma partnerships, which became an increasingly common strategy over 2022. Afeyan said that large, “deep-pocketed” pharmaceutical companies see emerging biotech as a way to bolster their pipelines. These big companies have $620 billion in cash kicking around for deals with public or private biotechs, he said.
“Recent deals and positive clinical trial data releases have shown how this kind of activity can have a rapid ripple effect throughout the sector,” Afeyan said of pharma-biotech deals.
This is all happening as technology such as cell and gene therapy, mRNA, protein degraders, multispecific antibodies and antibody-drug conjugates are “coming of age.” ADCs have been a particularly hot area, with Big Pharmas such as Amgen, Merck & Co. and Merck KGaA signing massive, back-loaded licensing deals with small biotechs in recent months.
The pharma, biotech and healthcare worlds will assemble this week in San Francisco for the J.P. Morgan Healthcare Conference, the in-person return of the famed business development meet-up that sets the course for the year. Last year’s conference started with Pfizer announcing a $1.35 billion licensing deal with gene editing biotech Beam Therapeutics. But in past years, mega blockbuster deals, like Bristol Myers Squibb’s 2019 buyout of Celgene that had an equity value of $74 billion, have been the headliners.
A deal like that to start off J.P. Morgan—and 2023—could send the kind of ripples through the industry that Afeyan was talking about.
The CEO ended his letter waxing poetic about risk, surviving uncertain times and staying the course.
“Navigating uncharted waters suddenly makes those waters charted, navigable, and valuable,” he wrote. “I can think of no better ingredients for creating enormous value for years to come, through change and through storm … See you on the seas.”