Hosted by Joseph Coletti
Published October 31, 2023 | 4 min read
Key Points
- Despite a volatile year for biotech, with constrained investor activity, a number of recent clinical milestones point towards a robust end to the year.
- Therapeutic innovation is creating tailwinds that can be favorable in the coming months and into the start of 2024.
- Biotech is experiencing a partial shift away from traditional indicators to focus on emerging developments in the treatment of a wider range of new therapeutics.
- In response to more unpredictable market dynamics, sector participants are turning towards more creative financing solutions that tap into a healthy flow of capital that’s currently available.
In an often-volatile equity landscape, healthcare innovation is providing M&A tailwinds for investors willing to deploy creative investment strategies and issuers who can leverage new and existing investor relationships.
“It’s been a pretty volatile year across the equity landscape as a whole, and certainly within biotech,” says John Hoffman, Co-head of Healthcare Equity Capital Markets, RBC Capital Markets, a role he shares with Jason Levitz. “The sector has been volatile and constrained,” Hoffman continues. “It feels like biotech has been underappreciated against a backdrop of persistent tailwinds that will hopefully catalyze enthusiasm for the space into Q4 and early next year.”
“The number of companies that have passed widely tracked and anticipated clinical and regulatory milestones in the past handful of weeks has clearly outstripped what we saw in the beginning part of the year,” he continues.
Hoffman notes that slightly muted activity in the sector may be due to concern regarding Federal Trade Commission (FTC) scrutiny and the impact of the Inflation Reduction Act (IRA) on drug prices as patent cliffs approach. “There's been some regulatory actions within the space that are outside of the control of any one company that has weighed on investor psychology, notably concerning the IRA,” he observes.
“But on balance, the sector has done a really good job controlling the controllable and it's dealing with these macro factors that have kept people a bit on their back foot throughout the course of this year,” he adds.
“The number of companies that have passed widely tracked and anticipated clinical and regulatory milestones in the past handful of weeks has clearly outstripped what we saw in the beginning part of the year.”
John Hoffman, Co-head of Healthcare Equity Capital Markets, RBC Capital Markets
Innovation creates tailwinds
Despite a turbulent year for biotech investment, Hoffman sees a remarkable period of innovation and expansion of drug development unfolding that can underpin a more robust period ahead.
“You have scientific innovation that continues to make new leaps and bounds across a whole host of therapeutic areas and modalities,” he explains. “M&A activity has gotten decidedly more competitive, which hasn't really happened for a couple of years; now you're starting to see multiple bidders in these M&A processes, which is a great leading indicator around what large cap biotech and pharma is thinking about within the smid-cap space.”
“You have companies that are operating with new-found capital discipline, which I think is a silver lining and may be a byproduct of a market that's become more challenged. FTC concerns are abating a bit around smid-cap M&A, which is great. And FDA approval rates are tracking towards historical norms, which is a reacceleration of a very positive trend,” notes Hoffman.
Creative strategies needed
Many companies are turning towards creative and atypical forms of financing, in response to today’s more choppy market dynamics. “What we're seeing in public markets is the return of more structured tailored financings in the form of either PIPEs, that's private investment in public equity, or registered directs, which are effectively private placements done with a registration statement,” says Levitz. “If you look back pre-2021, we didn't see a ton of PIPE activity. We’ve seen almost five billion raised in that format in 2023, versus roughly 14 billion raised overall by the public markets,” he adds.
“Companies really need to think creatively about different forms of capital, depending on their stage of development; whether that’s venture debt, royalty financing, strategic capital, grants, etc. It's really been an environment where you need to use all available sources of funding to advance your pipeline and get creative,” he continues. “So I think the punchline around public markets is that there are a lot of tools available for public companies. There is capital available and investors are looking for creative ways to put capital to work,” he explains.
In order to put this capital to work, companies need to leverage new and old investor relationships. “Investor connectivity has never been more critical,” says Levitz. “Most financings that we see done in both the public and private markets are driven by existing investor demand, with investors continuing to support capital they put to work earlier in a company's life cycle.”
“The most successful transactions that we see done in the public markets leverage those existing relationships but also tap new investors,” he explains.
“Companies really need to think creatively about different forms of capital, depending on their stage of development; whether that’s venture debt, royalty financing, strategic capital, grants, etc.”
Jason Levitz, Co-head of Healthcare Equity Capital Markets, RBC Capital Markets
