Though the recent market slump has scared many biotechnology startups from initial public offerings, it hasn’t scared venture capitalists like Bruce Booth, a partner at Atlas Venture.
Booth has spent nearly two decades at Atlas, a Cambridge, Massachusetts-based venture firm and prolific creator of biotech startups, and consulted at McKinsey & Co. before that. Over that time, he’s seen investors abandon and return to the sector more than once, and built biotech companies in booming markets as well as downturns. His firm has raised two new funds since the beginning of the COVID-19 pandemic.
“The depth of the capital markets today is way stronger, both on the private and public side, than it was 20 years ago,” Booth said in an interview.
That sentiment has been put to the test in 2022. After a multi-year run in which more biotech startups went public than ever before, IPOs have ground to a halt, with only 16 companies pricing new stock offerings in 2022 versus 82 by this time a year ago, according to BioPharma Dive data. Half of them raised less than $40 million, a significant reversal from the valuations new biotechs received at the market’s peak. Private financings for companies nearing an IPO are harder to come by as well.
Still, Booth is “cautiously optimistic” the public markets for biotech, which have shown signs of life of late, will pick up in the fall. A young Atlas startup could soon find out. Last week, that company, Third Harmonic Bio, became one of the most richly-funded biotechs in months to file to go public, with plans to take a former Novartis drug into early clinical trials. (Though Booth isn’t on the company’s board, Atlas is its top investor, holding a 38% stake.)
BioPharma Dive spoke with Booth about the turbulent state of the public markets, the changing shape of biotech venture capital, and what he’s expecting in the coming months.
The following conversation has been edited and condensed for clarity.
BIOPHARMA DIVE: How is this recent biotech downturn similar to and different from ones in the past?
BRUCE BOOTH: We’ve had a bunch of periods where the markets corrected by 20% to 40%. In late 2015 and early 2016, there was a downdraft associated with drug pricing. In late 2018, there was another downdraft that happened for a quarter. In March 2020 when COVID hit, the markets tanked for a few weeks.
What’s different about this relative to the 2018 or 2015 ones is both its duration and the broadness across all of the more risky asset classes. In a lot of ways, it's similar to the 2000 to 2003 period of time when the dual bubbles in dot-com and in genomics significantly pulled back. That kind of sentiment is a very similar phenomenon to what we’ve seen in the past two years.
It’s easy to say “this is so different from what we’ve seen in the past.” But what were the unique factors that led to this particular downturn for biotech?
BOOTH: The four words in the investing world that have lost more value than anything else: “this time is different.” The animal spirits of the markets lead to bull and bear cycles, and that's going to be an intrinsic feature to markets driven by people because of the way emotions and FOMO set in as the euphoria sets in.
In 2020 and 2021, we certainly saw that. We saw a huge number of companies going public, more so than at any point prior in biotech’s history. And it's no wonder that you're going to pull back from that because let's face it, that was a frothy, more bubblicious environment than was warranted by the nature of the stage of the companies and the assets that we were developing.
How are biotechs better positioned today to deal with an environment like this?
BOOTH: There was a very shallow pool of investors in the public world that wanted to do biotech investing 20 years ago. Today, there’s a huge number of specialist healthcare funds. Almost every mutual fund has a specialist team of healthcare investors. It’s a significantly larger [group] that withstands more of the volatility. As the markets have re-strengthened, we’ve seen investors coming back and doing follow-on financings with new public companies, many of which are going to need to finance this year or next year.
Still, despite a notable uptick in biotech index funds like the XBI in recent months, few IPOs are pricing, and the ones that did raised small amounts. Are any of your other portfolio companies considering an IPO?
BOOTH: We'll keep our eyes open to the markets and try to understand where public investor appetite is.
With a portfolio of 45 companies, we constantly have companies that are thinking about either accessing later stage private capital or the public markets. Because of the JOBS Act, you can explore the idea of going public confidentially and flip the switch and go public in about a month if you're prepared. There are a lot of companies in biotech that have confidentially been exploring this and if the markets re-strengthen on the IPO side, I’m sure we’ll see more and more offerings. If it weakens, those companies will exercise their options to do private financings.
What advice would you give to companies that might be ready to go public, but no longer can in this environment?
BOOTH: The important thing for young biotech companies that are private, growing and advancing their science is to have options. The job of any great management team, and particularly a great CEO, is to create a set of strategic choices for companies, whether it’s equity financings privately, IPOs and public equity financings, partnerships, or maybe acquisitions.
Those kinds of things are all the corporate development cards that you can play, and at the end of the day, biotech needs capital to fund new medicines, right? It takes a super long period of time to be profitable. Most biotech is what we call lossmaking. We are burning money to advance drugs deeper into clinical development.
Earlier this month, Bay Bridge Bio indicated that investments from traditional biotech venture firms have slowed of late, with newer firms picking up the slack. How is the venture capital landscape changing?
BOOTH: Over the last five years, we’ve seen new players enter the space. There's also been big tech funds that have decided to engage, whether that's Andreessen Horowitz with their biotech fund, or General Catalyst, traditionally a tech firm, adding team members that are going to be doing some healthcare and biotech investing. We are seeing more [firms] bringing – I’ll call it “corporate diversity” – into the venture investing world. People who have different backgrounds and different firms with different interests. That is a good thing to bring to bear in a space as rich with opportunities as biotech is.
Still, if you take all of venture capital, biopharma and biotech is like 10%. Biotech is completely dwarfed by the tech side. When we thought things were booming in biotech, things were also booming in tech. So it's not like biotech grew to 25% of venture, it was that both sides were increasing in sync with each other in the last few years.
You said in a July blog post that “the private biotech ecosystem is awash in more capital today than all but two years in the 40-plus year history of the industry.” What does that mean for companies considering another round of financing?
BOOTH: Sure, we’re down from the peaks in 2021 but there are still historically high levels of financing happening for private companies. If you think of 2013 to 2015 as being the early days in a long bull run, lots of great companies were founded and funded then. But they had a fraction of the cash available that we do today.
Despite whatever pullback there is, there is still just an enormous amount of capital available for young companies, in particular at the very early end. So seed rounds, series A’s — a lot of firms have focused on those spaces.
A recent report from SVB indicated that in the first half of 2022 there were far fewer rounds for companies ‘likely to IPO,’ a sign that the ‘crossover’ investors that pull companies public have retreated. Do you expect that to change in the coming months?
BOOTH: These investors have seen their portfolios get hammered over the last five or six quarters, so a lot of them have pulled back from doing further private investments. But what we’ve seen in the last few weeks are ‘green shoots’ [signs of economic recovery] in the market, both in later-stage private rounds and importantly, public follow-ons. It’ll be interesting to see whether those translate into an open IPO market in the fall.