Early-stage biotech funding at risk from drying well

Funding streams for early-stage biopharma and med tech research dwindled in 2015, as investors shifted their support to bigger companies--potentially cutting off the lifeblood for future life sciences R&D.

This is according to the annual Pharma & Biotech 2015 in Review and Medtech 2015 in Review reports by EP Vantage, which were published this week.

Its state-of-the-industry analysis showed that 2015 was something of a complicated picture: one of both positives and negatives, with the outlook for 2016 and beyond depending on how one interprets the level and limits of the volatility of those 12 months.

As a prime example, EP Vantage points to Californian oncology biotech NantKwest ($NK), which managed to float in July of last year and raised $223 million. It then promptly saw a 39% share price jump on its first day of trading, bumping its market cap up to $2.6 billion.

Great, you'd think: But then, despite the fairy-tale beginning, the happily-ever-after proved more elusive, as the shares were more than 50% below their IPO price three months after the IPO. In November, the group was forced to undertake a $50 million share buyback program--highly unusual for a loss-making biotech--to shore up its flagging stock price.

On the bigger scale, things weren't great: Macroeconomic headwinds remained the primary point of funding resistance last year, notably in the latter half with falling global oil prices, a downturn in China and the lingering threat of a global recession all putting off investors who became--notably in the second half of the year--much more risk averse.

There was also a unique political element to this icy front in the form of drug pricing: First in the spotlight was Valeant Pharmaceuticals ($VRX), which drew criticism for the price hikes for the heart drugs Nitropress and Isuprel, but 2015 will perhaps be best remembered for Martin Shkreli and his 5,000% price increase for the generic toxoplasmosis drug Daraprim.

The first big fall in the market came in mid-September after the U.S. presidential hopeful Hillary Clinton vowed to take on this sort of price-gouging in the industry. In fact, the now famous (or infamous depending on your view) tweet from Clinton criticizing biopharma's "price gouging tactics" knocked nearly one-fifth off the value of the Nasdaq biotechnology index in just one week.

There also remained a trend for larger VC rounds going to fewer recipients--raising fears that the lack of funding for the industry's smaller players could choke off innovation.

A shift toward megarounds was evident in 2015, with the top-10, triple-digit raises taking up nearly one-quarter of all the funds available for development-stage biotechs. The marked drop in VC rounds coupled with a rise in amount raised can clearly be seen as the top three rounds, led by the much-hyped Moderna Therapeutics' massive $450 million series D, totaled more than $1.1 billion.

As a sign of how VC was distributed at the trough and the peak of the biotech market, the $9.6 billion total of 2015 was double that of 2008--but only 8 more rounds were completed.

EP notes that it was always going to be hard to beat 2014 for IPOs--a year that will be remembered not only for the IPO window remaining open, but for expanding this to the size of a bi-fold door. As such, while flotations were lower in 2015, they did at least manage to get away--right up until the fourth quarter when things slowed significantly as political tweets, China and oil took their toll.

Genghis Lloyd-Harris, a partner at Abingworth, believes that getting IPOs away in 2016 will remain tough: "Although the IPO window is not hermetically sealed, you better have outstanding insider support to get an IPO away in the U.S.," he said.

For those that did manage to float in 2015, their time on the public markets has not been easy, with many now trading below their offer price. The report's analysts said that rather than finding their exits through IPO in 2016, venture investors might want to turn to the cleaner exit route of sales.

Summing up, the report's authors said: "Since the end of 2015, the volatility in the market has left the industry falling into two distinct camps: those who believe that fundamentals remain strong and that the markets will recover, driven by the need for new medicines, aging western populations and the development of paradigm shifting treatments.

"Then there are the bears, who see the current woes as the beginning of a larger shift in the industry, where outside pricing pressure and over-stretched valuations are finally coming home to roost, and believe that at best 2016 will remain an uncharacteristically quiet year, with valuations falling even further as macro-economic factors weigh on global markets.

"Certainly, companies like Axovant ($AXON) and Agios Pharmaceuticals ($AGIO) now look like a market operating at the height of folly. As such the current conditions could be the start of a shakeout of biotech unicorns."

- read the full Pharma & Biotech 2015 in Review report (PDF)

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