Featuring Andrew Aherrera, Partner, Panacea Venture
Jeni Lee, Partner, Pivotal Life Sciences
Regina Salvat, Principal, Sofinnova
Published July 8, 2024 | 4 min read
Key Points
- The M&A rally is pushing capital back into biotech, with unevenly divided benefits leading to a division of ‘haves’ and ‘have-nots’.
- Recent big-value funding rounds are focused on clear outcomes and discipline that Covid-era deals often lacked.
- Innovation and changing regulatory appetite are opening opportunities in a wide range of products and platforms.
- IPO numbers remain subdued, but dual-track funding and M&A processes are increasingly common.
Capital is back – but only for some
Capital is flowing back into the biotech sector. The M&A market is rallying as pharma companies go on an acquisition spree in an attempt to replace expiring patents. “Biopharma is beginning to show increased health across all therapeutic areas and modalities,” notes RBC Capital Markets’ Noël Brown.
“Biopharma is beginning to show increased health across all therapeutic areas and modalities.”
Noël Brown, MD and Head of U.S. Investment Banking, RBC Capital Markets
These trends are having a knock-on effect in venture capital, says Regina Salvat, Principal at Sofinnova. “Pharma has to fill huge revenue gaps, and they're moving towards larger and larger indications, I think also partially driven by some of the IRA policies,” she says. “And so we're starting to fund larger and larger indications on the venture side as well.”
Among the beneficiaries is Pivotal Life Sciences, a backer of neuro-focused Karuna, recently acquired by BMS. But Jeni Lee, a Partner at Pivotal, says it’s still tough to pick the winners. “You see these spaces heating up,” she says. “Certainly you can buy them publicly, but the real return is having invested privately, or at least as early as you can.”
“You see these spaces heating up – certainly you can buy them publicly, but the real return is having invested privately.”
Jeni Lee, Partner, Pivotal Life Sciences
Our venture capital panel sees a broad division in the market. While some companies have vastly exceeded their capital ambitions, another group have found themselves unable to raise even relatively modest amounts, leading to a clear distinction of haves and have-nots.
Andrew Aherrera, a Partner at Panacea Ventures, notes that most of the $20bn raised in the first quarter went to portfolio companies of large specialists that were arguably well-capitalized already.
Close attention should be paid to how M&A funds are deployed in the coming months, “and how much of it, if any, makes its way to these have-nots – or to the third or so of publicly-traded biotechs that have less than a year of cash [left],” he remarks.
Mega-rounds come with discipline
For Aherrera, the current picture in the public markets represents a recalibration, rather than total recovery.
“There’s been a clear recalibration of sentiment, a recalibration of capital allocation strategies on the part of investment and biotech companies, and a recalibration of discipline that went out the window in the Covid era,” he says.
This extends to the high-value deals seen in the sector this quarter, Aherrera believes. He suggests the beneficiaries of ‘mega-rounds’ are either robust platform companies with huge potential, or firms with a pipeline of later-stage assets that required their big capital injections to fund phase two or three clinical programs.
“Just because the headline number falls into mega-round territory, doesn’t mean that investors are back to writing checks indiscriminately,” Aherrera adds.
“Just because the headline number falls into mega-round territory, doesn’t mean that investors are back to writing checks indiscriminately.”
Andrew Aherrera, Partner, Panacea Ventures
At the same time, some of the cohort of companies that went to IPO at preclinical stage during the pandemic are within sight of reaching their potential, after enduring a tougher period in the interim.
Lee sees companies that have been through efficiency drives now better able to use the funding they secured to achieve clinical milestones that will drive future funding. Salvat echoes this. “It’s taken some time for companies to really mature on the private side,” she says. “We’re just now seeing a number of clinical stage companies with real value inflection points on the horizon that we can invest into.”
“We’re just now seeing a number of clinical stage companies with real value inflection points on the horizon that we can invest into.”
Regina Salvat, Principal, Sofinnova
New targets generate excitement
Target areas are broadening too, after a long period in which the market remained heavily weighted towards oncology therapies. There is new buzz about prospects in areas such as antibody-drug conjugates (ADCs), radiopharmaceuticals, and central nervous system (CNS) drugs.
Novel treatments in radiopharma and cell therapy are being explored by Sofinnova, says Salvat. The firm has also invested in the CNS space, with a pipeline of both novel and derisked targets.
Pivotal is also looking to new spaces potentially being opened by innovation or regulatory change. For instance, the FDA is considering a change to the osteoporosis studies that would replace fractures as the primary endpoint.
“Osteoporosis is a space that we historically would never have touched,” says Lee.
“Yet if you can use bone marrow bone mineral density instead, you have a biomarker that suddenly makes a phase three trial tenable, from a VC funding perspective.”
Jeni Lee, Partner, Pivotal Life Sciences
Diverging interests subdue IPOs
IPO volumes have yet to show the same renewal as M&A. However, Salvat notes a number of ‘dual track’ processes, where companies are raising funds while also exploring M&A – a strategy that has proved highly successful for some.
“High-quality companies with great drugs are willing to take down rounds in this market in order to build the right crossover syndicate,” she adds. “That’s a really great path for them as they move towards an IPO when the timing is right.”
Aherrera believes the dearth of IPOs reflects a misalignment between corporate and investor interests, and a track record of “broken deals” that track down below the issue price despite having been hugely oversubscribed. These failures make it harder to entice generalist investors into the space, he says, “so we’ll continue to keep specialists focused on supporting companies, and keeping the IPO window narrow.”
Brown emphasises the need for companies to attract the right kind of investor, and not just the maximum fund volumes. “These are investors you’re going to be interacting with on a weekly basis – you want them to be a positive force on your shareholder register,” he says.
Featured Guests:
Andrew Aherrera
Partner, Panacea Venture
Jeni Lee
Partner, Pivotal Life Sciences
Regina Salvat
Principal, Sofinnova
