Young biotechnology companies find themselves in a tougher spot today than they did two years ago.
Initial public offerings are no longer the sure thing they were in 2021. Private financing rounds are harder to raise. Investors are more cautious, and layoffs have become common as companies run low on cash.
Biotechs and their backers aren’t sure, either, when the outlook might brighten. “There’s a survival of the fittest process going on right now, with access to capital being so tough,” said Akshay Vaishnaw, the president of Alnylam Pharmaceuticals, in a recent interview. “It’s not clear when the new dawn will come.”
A new report published Monday by the life sciences arm of accounting and consulting firm BDO gives some insight into the current environment and how companies plan to respond.
The report, a yearly poll the firm conducts with 100 of the sector’s financial executives, found biotech companies expect to cut research spending and more aggressively pursue partnership deals in 2023.
Specifically, about a fifth of responders are planning to reduce research costs, compared to only 2% who indicated the same entering 2022. Forty-five percent plan to sign a collaboration or licensing deal to extend their cash runway. Most said that investors are doing more due diligence than they were in recent years, and about half indicated funding is harder to secure.
BDO’s findings mirror those observed by the National Venture Capital Association. In a recent report, the NVCA found that the number of funding deals for biotechs fell by about a fifth last year. Measured by total value, the drop was steeper, by about a quarter compared to 2021.
“The question is, was the decrease in activity during 2022 just the after-party effect of 2021 wearing off? Or is the VC industry just taking a moment to regroup?” the NVCA wrote.
The slowdown has left CFOs polled by BDO thinking of other ways to conserve cash. The most popular methods involve outsourcing development, manufacturing and clinical operations jobs. Next are partnership deals and M&A, though executives are considering layoffs, pipeline reorganizations and debt raises as well.
One surprising finding is an uptick in the number of executives who plan to take their companies public. According to BDO, 13% of respondents are eyeing an IPO, compared to 6% a year ago and more in line with the numbers reported in 2020 and 2021. That’s despite the fact 2022 was one of the slowest for IPOs in years, with only 23 biotechs pricing new offerings, according to data compiled by BioPharma Dive.
Jordan Saxe, the head of healthcare listings with the Nasdaq stock exchange, said around 50 biotechs are waiting for the markets to become more receptive before testing the waters. But he isn’t expecting activity to pick up until the second half of this year or 2024. So far, only two biotechs, Cadrenal Therapeutics and Genelux, have priced IPOs in 2023. Both raised small sums, however.
“I think we're still going to see those companies hanging around, waiting for the tap on the shoulder from their banker saying, ‘Now is the right time to go out and do that public round,’” he said. “We just don't know which quarter it's going to be, or if it’s 2024 or 2023.”
The BDO report speculates that, once IPOs do return, they’ll likely look different than they did in 2020 and 2021, when the bulk of companies that went public were either preclinical or had drugs in Phase 1 testing. Future IPOs will likely involve companies that are “further along in their development or have already released a product,” the report said.
For his part, Saxe thinks the development stage for IPO candidates is less important than having a “clinical milestone,” even an application to begin a human trial, coming within two years. If the wait for a milestone is longer, “you're sitting as a public company with no news and defending a stock price in a market that's challenging,” he said.
In the meantime, the M&A drumbeat continues. Pharmaceutical companies in need of new drugs to offset looming patent expirations are sitting on tens of billions of dollars in cash. Yet the BDO report authors warned that a “disconnect between buyer and seller expectations” could dampen the outlook for deals in 2023 — a phenomenon that’s already been apparent in recent deals.
Still, there is some optimism. Close to half of the responders in BDO’s report indicated plans to pursue a deal if economic conditions worsen. M&A activity picked up last year, and at least some dealmaking executives interviewed by BioPharma Dive suggested smaller companies are now more willing to negotiate.
“Last year, [stock] prices might have gone down, but management mentality had not changed. They still thought that their value was very high,” said Samit Hirawat, the chief medical officer of Bristol Myers Squibb. Now, “we're beginning to see that biotechs have accepted that their value has changed.”