$100 million for Rapport Therapeutics. $112 million for Noema Pharma. $108 million for Bicara Therapeutics. The megaround has come roaring back in the past few weeks, but is biotech really healing?
Not quite, say executives from venture capital and biotech incubator firms. Series A rounds are an easy sell at the moment, according to Leaps By Bayer Head Jürgen Eckhardt, M.D., although fewer of them overall are getting done and the ones that are, are smaller. What’s continuing to hamper biotech is the series Bs, Cs and crossover rounds that set up an IPO. That’s where Flagship Pioneering Senior Partner Bernie Cooney needs to see more action to have confidence that biotech is making a comeback.
“Watching the bear market the last two years, I think you take any green shoots that you can,” Cooney said in an interview.
2022 was defined by aggressive rate hikes from the Federal Reserve, which correlated with a downturn for publicly listed biotechs, according to Cooney. That trend broke around July when biotech stocks started actually rising on good news, rather than trending downward with the larger market. Investors began to support companies that were able to put up solid data again.
But IPOs were few and far between. The companies that did make a jump for the public markets saw their share prices tumble. In 2023, few are making the leap.
“Nobody knows how long this sort of nuclear winter or however you want to call it in terms of biotech financing is going to last, right? We all hope it's gonna recover quickly, but, you know, we've seen these situations last for more than just a couple of years,” Eckhardt said.
Still, the number of $100 million financings are a good start to what Cooney and Eckhardt hope will be a better second half.
“The signal to the market—I hope it's a positive signal—is that biotech is not dead,” Eckhardt said. “Science is not stopping because there is a down market.”
However, “if you look a little bit below the surface,” generalist investors have not come back to the sector, according to Cooney.
Public equity market investors have been less willing to put their money into illiquid, long-term assets. This means the crossover rounds, where an investor buys into a company as it leads up to an IPO filing, have been extremely scarce in biotech. Typically, an investor could cash out at IPO, take the money—gains, hopefully—and invest back into the market so the cycle repeats.
But that system has been completely backed up. Cooney said the IPO window needs to open up to really see healing in the sector. VCs have plenty of dry powder, and that’s what Cooney thinks is mostly going into the latest megarounds. He said raises from Cargo Therapeutics ($200 million series A), Metagenomi ($100 million series B extension) and Aera Therapeutics ($193 million series A and B) are “great to see.”
“It's certainly better than not getting done at all but I'd still like to see further participation from those public market investors,” Cooney said.
'A rough ride' to come
In this market, Eckhardt says a company has to have three things: a “strong protagonist” (or people leading the company), good science and a strong syndicate of investors. These investors have to be willing to stay involved for the long haul, otherwise this will be a tough era to survive. He spoke to Fierce Biotech as his firm revealed the $100 million financing of bat biology biotech Paratus.
“If you have syndicates that can't fund these companies by themselves, they need new outside investors. Things can be [tough] in such a market. Why? Because then it's unclear how quickly we'll be able to IPO and exit,” Eckhardt said of financial-focused VCs.
Both Leaps and Flagship are in the company creation business, meaning they launch companies or invest early in emerging science and stick around. Cooney and Eckhardt said the market situation has not shaken either firm from that core belief.
“I think it would be a mistake to say, here's the current zeitgeist in the market. If we could just repackage our companies to maybe look like what you're looking at—that's a mistake,” Cooney said.
A big focus among investors that are dipping into the sector is companies that have de-risked assets. That’s not Flagship’s thing, but Cooney sees why traditional venture capital firms might prefer “sailing a little bit closer to shore” with companies that have assets in the clinic or nearing the pivotal stage.
“Given the lack of broad interest and generalists’ interest, and the public investors willing to get involved because many of them are structurally handcuffed right now, that creates a dislocation—which is a massive opportunity,” Cooney said.
It’s impossible to predict the future, but Cooney does think the market will open up later this year.
“Look, it's probably gonna be a rough ride, probably right until the summer,” he said.
He points to Prime Medicine’s $175 million IPO, which closed in October, as a sign of good things to come. Arch Venture Partners, F-Prime Capital, Google Ventures and Newpath Partners backed both the series A and B rounds in 2021, which collectively totaled $315 million.
“It had all the hallmarks of the things that are really hard to do right now,” Cooney said. The gene-editing-focused biotech was not in the clinic, not de-risked, but did have what he calls “a cool, interesting, big platform idea.”
“Now that barely got out the door. Investors who bought it knew it wasn't going to trade well,” he said. “The fact that that did get done, that was an interesting sign that maybe we're starting to see some green shoots.”
Prime debuted at $15.76 on Oct. 17, 2022, and, despite reaching as high as $21 in November and again in February, the stock had dropped to $12.90 by market close on March 20, 2023.
When the IPO markets do open up again, Cooney doesn't expect the same gold rush that defined 2021. Layoffs, Nasdaq delistings, company closures and a bevy of companies trying to offload surplus assets has been the story in 2023 so far.
With so many companies currently trading below cash, “the market’s telling you something.”
“A lot of those me-too platforms didn't necessarily deserve to be on the public market—unless the market was wide open and really robust,” Cooney said. “A retrenchment like this is probably healthy to shake out some of this oversupply.”
Another thing not helping? Bank collapses. The failure of biotech's preferred institution Silicon Valley Bank on March 10 sent shock waves across the industry, sparking fears of contagion and a wider financial collapse. But for now, the biotech investing ecosystem seems to be intact, and Cooney said his outlook remains the same.
Funding is going to be harder to get this year, but the best science will rise to the top. Cooney said companies will need to have a near-term value catalyst to point to, “really good shareholders” and a handful of clinical development partnerships in the works to make a real go of the public markets. What we likely won’t see is really early-stage companies going public at the rate they were in 2021.
One thing you can count on is a few more companies emerging from the Flagship shop with $100 million or more fundraises this year in addition to the more than five they worked on in 2022. Cooney said to expect at least two to three large financing announcements in the next two to three months alone.
Eckhardt, on the other hand, says Leaps has been affected by the general slow down of fundraisings, but he’s confident his firm will contribute to more this year in the realm of the $100 million Paratus series A. He expects fewer than last year, however.
For companies that can’t convince investors to shell out $100 million or more, Eckhardt said executives need to work with what they’ve got. Accept smaller rounds while building a detailed business and development plan that shows how you will reach critical milestones.
Cooney advises biotechs to have “an absolute bloodless and ruthless focus on costs” and spend every dollar on de-risking. And don’t wait for the Big Pharmas to come knocking for a buyout—it just might not happen, no matter how many billions of dollars they have to deploy right now. Eckhardt has been surprised by the lack of deals, given conventional wisdom would suggest this downturn is a great time to buy a biotech.
“I don't necessarily think that M&A can bail us out,” Cooney said. “There should be some M&A … but if you're counting on that, if you're hanging your hat on that, it's really tricky.”