There were a few bright spots for biotech as 2023 closed out. The XBI was more than 30% off its lows by year end, and the Fed signaled potential for 3 rate cuts in 2024. M&A is picking up, with the acquisitions of RayzeBio and Karuna Therapeutics, just two examples. But questions remain about the sustainability of the rebound.
At an industry salon hosted by Demy-Colton, “Extending the Runway,” Gabe Cavazos, Senior Managing Director at Leerink Partners, expressed optimism for 2024, anticipating positive momentum and deal-making. “While I don’t have a crystal ball, the sentiment has been at an all-time low, and it can only go up from here. Seeing new funds raised and strong balance sheets in pharma and midcap biotech indicates more deal-making and capital infusion into the sector,” Cavazos said.
Moderated by Virginia Amann, CEO of ENTENTE Network, the salon focused on addressing the challenges biotech CEOs face in the wake of a slow IPO market, prolonged private financing rounds and overall industry uncertainty. Gabe Cavazos was joined by Marian Nakada, PhD, Vice President, Venture Investments JJDC, Johnson & Johnson, Dennis Purcell, Founder, Aisling Capital, and Brad Sitko, Chief Investment Officer, XOMA.
Sitko shared Cavazos’ optimism. “We’re closer to the end of this long biotech winter. It’s like a game of musical chairs– the music is slowing, but the exciting games lie ahead for those left standing. Optimism for 2024 prevails, though specifics remain uncertain.”
The recovery might not be evident, but there are
Marian Nakada, PhD, Vice President, Venture Investments JJDC, Johnson & Johnson
well-capitalized companies in stealth mode, making positive strides. While some challenges persist, there’s unreported activity contributing to the industry’s resilience.
Nakada added, “The recovery might not be evident, but there are well-capitalized companies in stealth mode, making positive strides. While some challenges persist, there’s unreported activity contributing to the industry’s resilience.”
Purcell offered a historical perspective, noting the industry’s ability to operate on sentiment rather than fundamentals and emphasizing the rapid shifts in perception over the years. “Sentiment can change on a dime. We saw that in the obesity market with Lilly and Novo, for example, an explosion in their stock prices reflects the sentiment now on obesity drugs. So, when it changes, it can change fast.”
Purcell added, “The industry undergoes cycles, and we’re at a point where science is outpacing valuations. The end of this challenging period is on the horizon.”
Highlights from the Discussion
BRAD SITKO: “Alternative financing is gaining popularity, especially as we move away from relying solely on equity. Companies are getting creative, exploring options like out-licensing in non-core geographies, trial financing, or royalty financing. For royalty financing, a high-quality partner on the other end is crucial. Trial financing or synthetic royalties often require visibility into taking the program to market or finding a partner. The key is for companies to maintain discipline, spend judiciously, and adopt an investor-friendly mindset. Prioritizing pipelines, limiting spending, and making tough decisions, such as resizing companies, are critical in this challenging market. Companies that have planned ahead, adopted creative financing, and ensured strong capitalization are better positioned to weather the storm.”
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MARIAN NAKADA: “Extending runway to a value creation point is essential, as it often becomes a critical decision point for business development. However, the challenge arises for seed funding, where companies may struggle to generate data to catalyze Series A investments, potentially impacting innovation in the coming years. Currently, our sweet spot is companies with a 12 to 18-month plan to an important milestone. We prefer those close to having a development candidate, aiming for early phase one data. While we might consider earlier stages, this approach aligns with our strategic goals. Other investors I’ve spoken to share a similar perspective. Pipeline prioritization has evolved. Being a single-asset company isn’t as negative now, provided you have a strong asset with near-term data potential. Strategic alternatives, while necessary for some, may not earn recognition in a market where planning, creative financing, and a focus on robust assets are crucial.”
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GABE CAVAZOS: “Many of my clients are currently focused on survival. They’re cutting costs and reducing expenses to weather the tough times. Public companies, especially, are cautious about spending on early-stage projects that the market doesn’t value. We’re in an environment where everyone is trying to reduce costs, making it challenging to think about scaling up. For those with promising products, the challenge is raising capital when stock prices are low. Partnering with Pharma companies becomes crucial for risk-sharing and obtaining non-dilutive capital. We recommend having a runway extending into 2026, with two to three years being even more secure. Deals are taking longer, especially confidentially marketed ones, indicating investor caution. Private companies should aim for at least a year of cushion, given the extended timelines and decreased urgency from investors.”
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DENNIS PURCELL: “In 2024, we might see a shakeout in the Venture and hedge fund community, healthy for the sector. The R&D return for Big Pharma is zero, signaling the need for them to step up. We’re closer to the end than the beginning, and whether it’s in 2024 or 2025 remains uncertain. We’re undergoing a transformation, and the lack of discipline in valuations in recent years has led to significant issues. The IPOs, with about 90% of them trading below their initial prices, highlight the magnitude of the problem. Boards need to introspect, with hundreds of companies trading under cash, questioning how they allowed this to happen. The industry will likely look different, given the numerous companies that have disappeared through mergers, bankruptcy, or liquidation. We all need to contribute to making the industry viable and reducing the volatility we’ve witnessed.”