Biotech may soon be defined by the 'haves and have-nots' as investors look for less risky bets

A brutal year for biotech has private investors eyeing bets with less risk and more emphasis on single assets over drug discovery engines, but there's plenty of optimism to go around in the opening weeks of 2023. 

“It's gonna be a story of haves and have-nots,” said Arjun Goyal, M.D, co-founder of Vida Ventures. 

Investment data from last year show that there are plenty of "haves" out there. Silicon Valley Bank’s annual report on trends in the healthcare industry found that early-stage venture funding in biopharma fell nearly 24% in 2022 compared to a record high in 2021. But the more than $29 billion invested in 2022 exceeds the $27.4 billion notched for 2020. The data suggest a concerned but durable market that’s remained dutifully committed to potential game-changing medicines. Sofinnova’s managing partner Antoine Papiernik used this year’s J.P. Morgan Healthcare Conference to hammer this point home. 

“The VC world in general has raised a lot of cash that will allow for sustaining those companies,” Papiernik told Fierce Biotech on the sidelines of the conference.  “If you have enough resources, you're not going to die in the middle of the river.”


Not all companies have been able to keep momentum going, however. Platform companies—jargon for technology that can quickly and more efficiently identify therapeutic candidates—took one of the largest early investment hits. Seed and series A funding fell $1.2 billion in annual investment in 2022, from $3.5 billion in 2021 to $2.3 billion. 

“There’s less investor appetite around that unless it’s truly transformational,” Goyal said in an interview. 

Some platform companies nonetheless raked in more early financing money than any other kind of biotech. Eikon Therapeutics, Tessera Therapeutics and Treeline Biosciences all saw financing rounds north of $200 million in 2022. In Eikon's case, it was a series B that closed at more than half a billion dollars.

While Goyal elevates stability, others say it’s time to double down. That’s Nan Li’s plan, a former managing director at Obvious Ventures who’s finalizing the launch of a new fund that’ll focus on the intersection of tech and the life sciences. 

“It wasn't that long ago where the tone of the industry—at least in the investment community—was the total opposite, which was, ‘go big, go for long-term growth,’” he said. “Investors, or especially founders and operators, they can't live, year on year with these wild swings of different strategies.” 

Vineeta Agarwala, M.D., Ph.D., general partner at venture capital firm a16z, is similarly not backing away from platform companies. In fact, she says their progress is cause for excitement. 

“The fact that biotech is facing this enormous tsunami of interesting innovation that's ready for translation, the fact that platform companies are persistently and continuously now starting to lay eggs repeatedly where the second egg is just a little bit easier to lay than the first egg,” Agarwala said during Fierce Biotech’s capital market panel at JPM. “Those are some of the trends that I find super, super exciting as a biotech investor."

M&A 'staring contest'

While the entire industry is experiencing a dearth of M&A deals—and IPOs are down significantly—platform companies could be especially resistant to joining forces with a larger pharma. Lee Cooper, a senior director at Bayer’s venture arm, Leaps By Bayer, noted that platform-based companies are “less amenable” to small M&A deals because they often have a high ceiling. Plucking individual assets, however, is cheaper. 

“It's less expensive to pay for the assets that were a part of the platform, that are coming from the core engine,” he said. Instead, licensing deals are the name of the game, with larger pharmas plucking potential therapies rather than whole companies. That’s also reflected in Silicon Valley Bank’s data, which showed 79 deals involving platform-focused companies, more than any other deal type.

Agreements for larger takeovers have been few and far between, however. Li says it’s persisted as pharmas flush with cash wait to see how desperate smaller biotechs get. Meanwhile, well-financed biotechs refuse to sell too low. 

“My feeling from the last week was that there's essentially this sort of massive staring contest going on across the industry at multiple levels,” he said.

In the meantime, smaller companies have decided to join forces, merging in an effort to stave off financial ruin and pool resources to elevate one or two promising assets. Most recently, Sun Pharma scooped up Concert Pharmaceuticals, offering a lifeline to push Concert’s alopecia treatment through the clinic. A week earlier, Leap Therapeutics bought Flame Biosciences for $86 million to fortify itself as a player in the development of GI cancer treatments. 

Helen Liang, founder of FoundersX, isn’t too keen to make that a recommendation to the biotechs that she’s invested in. Instead, her focus is on partnering with pharma giants because “you have [a] much bigger exit there.” She also said that shields companies from having to fight against market behemoths, a David versus Goliath story that can often run companies into the ground. 

The instability of the public market paired with inconsistent M&A has put an even greater emphasis on adding cement to companies’ runways, but Cooper says what makes a sufficient runway is changing. 

“There's kind of two ways to think about time in biotech: there's calendar time and there's value-inflection time,” he said. “[A]nd the calendar time seems to matter a little bit more than it did in the past because we just don't know how long the uncertainty in the public markets is gonna last.” 

That’s consistent with the larger industry mindset on dealmaking, according to Li, who says, “It seems like what everyone has is time.”

But hope is also an abundant currency. Liang is betting that in the next year, more deals will materialize between the Big Pharma and synthetic biology companies she’s invested. Li said the combination of private investors’ “dry power” combined with pharma’s cash reserves sets the stage for an electric year.

“I feel like the buildup of that potential energy will come to a head at some point. And I really think that's going to be 2023.”

Gabrielle Masson contributed to this report.