A 'painful reset' for biotech investing brings smaller checks but some green shoots: SVB

Early-stage investments in biopharma are speeding up this year after a tough 2022 but valuations have come way down. Investors are looking for proven leadership teams and an exit strategy that does not involve waiting for the IPO window to magically open up, according to a new H1 analysis by Silicon Valley Bank.

“After a major drop in 2022, investment dollars and pace have remained relatively flat for the last three quarters, signaling the dawn of a new market cycle marked by corrected valuations (focused on fundamentals like clinical assets and paths to cash flow operations), smaller check sizes and more concentrated cohorts of investors,” wrote SVB, now a division of First Citizens Bank, in the new report.

Fundraising for the first quarter was $6.8 billion and $6.9 billion for the second across the healthcare market, for a total of $13.7 billion. This compares to $21.8 billion for the full year 2022, suggesting a slight rebound is in the works. 

"If this pace were maintained, 2023’s life-science-focused fundraising would near 2021’s record pace," SVB said. 

In order to confidently write a check, investors are looking for name recognition in the C-suite—a trend we see with many Big Pharma executives taking the CEO chair at smaller biotechs over the past year. They also want human or proof of concept data in hand, a proven modality and “compelling stories at 2023 market prices” before inking their signatures, SVB said.

Another key consideration is a good exit strategy that doesn’t rely on an IPO being possible in the next 12 to 18 months. Pre-IPO rounds for later-stage companies have been in single-digit pace each quarter of the half, which SVB attributes to investors being more selective and the general market performance of biotechs being negative.

The IPO window is, however, showing signs of opening. SVB noted that the few biopharmas that have gone public this year are performing well so far. Six out of the eight companies are in positive territory. Three companies priced offerings in July, raising a total of $465 million.

Venture capital firms have about $35 billion in fresh funding raised over the past 18 months to deploy in new healthcare companies. There are signs that the biopharma sector is becoming healthier, including a couple of nice-sized acquisitions (See Pfizer and Seagen or Novartis and Chinook) and some key data readouts.

“We believe we’re firmly in a new phase defined by focus on valuation and 'fundamentals' like clinical assets and paths to cash flow operations. While a painful reset, the spring is loaded with ample capital and a golden age of science,” the report said.

The most active investors in biopharma for the period of 2022 through the first half of 2023 are Alexandria Venture Investments with 21 deals, RA Capital with 18 and ARCH Venture Partners with 15. Pfizer Ventures tied in the seventh slot with nine deals.

“Surprising no one, platform and oncology companies continue to capture the most investment while respiratory indications have seen steep declines during 2023,” the report said.

Platform companies collected $964 million in 32 deals in the first half, while oncology saw $507 million in 48 deals. The largest early-stage or seed rounds included ReNAgade Therapeutics’ $300 million raise and $100 million for Paratus Sciences.

Investments in device companies for the half are down 8% compared to the same period a year ago; however, early-stage investments climbed 44%. Many top companies made their cash in 2022, which means there have been fewer $100 million or more rounds in the device space this year. Supply-chain issues and a decline in elective procedures continues to plague the device industry.

As for diagnostic tools, investment for the half was similar to the same period a year ago for series A rounds but particularly busy in the first quarter. There were no IPOs for diagnostics makers in the first half.

“Public markets remain closed for new entrants, and all indicators point toward a higher bar for IPO hopefuls, both in terms of revenue run rate and ability to generate cash flow,” SVB said of the diagnostics space.

The IPO window will likely remain closed through 2023 as the market watches entrants from 2020 and 2021 for a rebound. As of now, 33 out of 38 of those companies are trading negatively. Meanwhile, private companies with unicorn valuations will need to wait until 2024 for the possibility of an M&A exit.