Pathfinders Podcast | Investment Banking

Raising capital: A new playbook for a new era in biotech

In a market suppressed by inflation, how can the biotech industry continue to raise essential capital for innovation? The latest episode of Pathfinders in Biopharma brought together some of biotech’s foremost venture capitalists to consider the sector’s future, chaired by RBC’s Noël Brown, Head of U.S. Biotechnology Investment Banking.

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By Noël Brown
Published November 22, 2023 | 36 min read
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Key Points

  • In a tough biotech market, investors are favoring mid- to late-stage clinical companies, while early-stage ventures struggle for funds.
  • There has been a broadening of interest away from certain modalities and toward emerging fields and exciting new targets offering promising innovation.
  • Businesses still need to find the right balance between advancing its entire pipeline and focusing on a single lead program.
  • Creative deal structures, such as tranched investments tied to agreed upon milestones, are re-emerging.
  • Pharma is increasingly filling the funding gap, buying or investing in biotechs as a way of outsourcing innovation.

Early stage ventures lose out

A very different funding atmosphere has emerged from the speculative biotech frenzy of 2020 and 2021, driven by rising interest rates, inflation, and a challenging IPO market. As a consequence, some of the companies that emerged from the previously overheated market may now struggle to secure new funding in the current climate.

Arsani William, CIO and Managing Partner at Logos Capital, welcomed the chance to “cleanse the speculative access and move forward in a healthier way.” He predicts active investment management and “idiosyncratic picking on the private and the public side, particularly for mid- to late-stage assets is going to be the way to go.”

A new bifurcation is seeing early-stage companies struggle to get financing, especially those operating in crowded spaces such as cell therapies. Investors are favoring companies in mid- to late-stage companies which can demonstrate unique value propositions and large datasets showing proof of concept.

Chen Yu, Founder and Managing Partner at TCGX, suggests the current environment generates “an interesting boom opportunity for late-stage investors, [who] get to pick off the early-stage winners, but don’t have to pay a risk premium [for it],” resulting in a tighter future pipeline. Though, Yu suggests, it may take at least three years for the market to rebalance.

“It’s an interesting boom opportunity for late-stage investors.”

- Chen Yu, Founder and Managing Partner, TCGX

Exciting innovations beyond oncology

Turning to the most promising areas of innovations, Matt Young, Managing Director at Longitude Capital, highlights a broadening of focus beyond the oncology therapies which have recently garnered attention.

“We’re really excited about areas like immunology, inflammation and cardiometabolic disease,” Young remarks. Longitude Capital is also working on epigenetic reprogramming, as well as radiopharmaceuticals, which offer rapid and cost-effective drug development.

William notes the recent decline in cancer therapy valuations, but points to exciting new targets such as bi-specific T-cell engagers, which direct the body’s immune system against cancer cells. He remarks, “We've looked very closely at the T-cell bi-specific engagers in regard to what they can do on overall survival. On synthetic lethality, novel targets are coming to fruition... this holds great promise for the field [and] actually gets us quite excited for the sector.”

TCGX is heavily invested in GLP-1 therapies. Yu notes how a renewed focus on total addressable market would favor this sector: “If it’s a TAM-driven market, cardiovascular/metabolic will be big, because we all know that the most common causes of death are cardiovascular or metabolic driven.”

“We’re really excited about areas like immunology, inflammation and cardiometabolic disease”

- Matt Young, Managing Director, Longitude Capital

Balancing the pipeline

How can companies survive the current funding drought? Yu urges biotech business leaders to focus on attracting the right kind of investor base: “Get long-term investors and give on valuation to get that quality. You really have to make sure that you’re getting to your value inflection point.”

While setting up a product pipeline is effectively a form of insurance for biotechs, it has been particularly costly and not necessarily important to venture capital investors, who may want to focus on maximizing capital. Yu adds, “The company has to choose: is it worth it for me to have three assets in development?”

This underlined the need for companies to be sure a program was a potential winner and the need for companies to focus on the strength and quality of their people: “Being relentless about building a team that can execute well against a clear plan with the capital provided is really important,” remarks Young.

“Get long-term investors, and give on valuation to get that quality”

- Chen Yu, Founder and Managing Partner, TCGX

Staged deals make a comeback

Creative deal structures may be required to bridge the funding gap for companies in the years ahead.

Recent trends had led to the over-funding of some companies at a high valuation making it harder to attract new investors for the next phase. Young notes, “We're trying to be conscientious about what's it really cost to get to data that can really allow the company to transform in terms of valuation and breadth of interest.”

One solution is for investors to contribute in stages, rather than invest the full value requested upfront, working against agreed milestones. “What we’re seeing, for the first time in seven or so years, is the ability to tranche deals. If the data card flip actually looks positive and signals that the company has a future in the way intended when you first started a round, you put in more money at that point,” William explains.

“What we’re seeing, for the first time in seven or so years, is the ability to tranche deals”

- Arsani William, CIO and Managing Partner, Logos Capital

Pharma and biotech: a happy marriage?

If investors are becoming more risk-averse and shying away from early-stage businesses, an obvious alternative is standing by, in the form of pharmaceutical giants.

“Pharmaceutical companies are beginning to step up – not just as a corporate buyer but also as a big investor through different collaborations, supply agreements and venture capital arms,” William notes.

He points to Gilead’s recent upfront $100 million payment for opt-in rights on Assembly Bio’s current and future programs. “They’re doing this for the innovative edge, in order to be able to diversify and mitigate risks across an area they see as a high potential for the future.”

Noël Brown suggested investors should take note of such deals: “When a Gilead or a Pfizer invests in a company, to me that suggests the company is clearly undervalued, and somebody’s putting their money where their mouth is.”

However, pharma’s economies of scale would allow it to extract more value from biotech, which would remain a “golden goose” for outsourced innovation. “The symbiotic relationship between pharma and biotech is going to get a lot closer. It’s going to be a very happy marriage,” remarks William.

“When a Gilead or a Pfizer invests in a company, that suggests the company is clearly undervalued.”

- Noël Brown, Head of US Biotechnology Investment Banking, RBC

Featured Guest:

Chen Yu

Chen Yu,
Founder and Managing Partner, TCGX


Matthew Young

Matthew Young,
Managing Director, Longitude Capital


Arsani Williams

Arsani Williams,
CIO & Managing Partner, Logos Capital

View audio transcript

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