Initial stock offerings by drugmakers, for years a reliable staple, largely disappeared in 2022. Fewer than two dozen biotechnology companies priced IPOs last year, a decline of 79% from the previous year’s total and a sign of financial pain for the sector.
With public markets closed, biotechs even earlier in their corporate existence opted for extension or bridge financing from their venture backers. Some, however, simply ran out of cash. By the end of the year, the number of biotechs that had laid off staff surpassed 100 companies.
Dealmaking, such as Takeda’s $4 billion acquisition of a Nimbus Therapeutics immune disease drug, spurred some optimism. But private companies still face a challenging 2023. With economists warning of a recession, it’s possible the next 12 months will look like more of a repeat of last year than a bull market return.
Here are five top questions facing emerging biotech companies this year:
Will the IPO market open back up?
The big question facing investors is whether the biotech industry will see the kind of boom it experienced in 2020 and 2021. More than 180 companies went public over that two-year span, compared to just 22 in 2022, according to BioPharma Dive data.
There were several factors for the slowdown: companies that had already gone public struggled to hold onto their value, while clinical and regulatory setbacks combined with macroeconomic forces to sap investor confidence.
Some believed a return to the more modest IPO pace of years prior would help the industry, which now has a surfeit of cash-burning companies.
Whether companies choose to make their Wall Street debuts depends on how the market performs and what investors’ appetite for risk looks like moving forward, analysts said.
“We’re starting to see secondaries, and expect IPOs to eventually follow,” analysts at BMO Capital Markets wrote in a December report.
Lacking an easy path to IPO, young biotechs and their backers might see dealmaking as more attractive. Last year, 16 private biotechs were acquired for at least $50 million.
Dusan Perovic, a partner at Two Sigma Ventures, expects the rate of dealmaking to “speed up” in 2023.
“A lot of large pharma companies are actively looking and speaking to a lot of startups about deals and potential partnerships,” Perovic said. “There are lots of signs that the environment is much healthier than it was [in 2022].”
Are platform companies still an attractive investment?
Platform companies, which endeavor to apply a foundational technology across many drugs for different diseases, have drawn significant backing in recent years. The success of biotechs like Moderna attracted investors who saw them as having a higher chance of success.
But as last year’s market downturn endured, some investors have appeared less receptive to platform companies and their often sprawling, resource-demanding drug pipelines.
“A couple of years ago when money was so abundant, you could pick three different things that are preclinical, go after and pursue them all independently and aggressively,” said Jon Norris, a managing director at Silicon Valley Bank. “I think now what you’re seeing is investors and a management team saying you need to pick the best one.”
Venture firms that specialize in platform companies, such as sovereign wealth fund Mubadala Capital, say they’re still optimistic. But they’re doing greater due diligence before deciding which biotechs’ technology to fund.
Companies must demonstrate the ability to create a clinical-stage medicine, said Alaa Halawa, the head of U.S. ventures for Mubadala.
“When you invest in a platform company that has an agile and robust enough platform to create broad and deep pipelines, at the time of investment you have at least a line of sight of which indication or specialization you're building at the company,” Halawa said.
Will the pace of private funding continue to slow?
Venture investment in biopharmaceutical companies declined in 2022, with much of the dropoff versus 2021 occurring in oncology and neurology, according to a new report from Silicon Valley Bank. It’s likely the lower volume in deals will continue into 2023, Norris said.
Still, both the number and total value of investments last year remained above 2020 numbers, suggesting some resilience. Part of the decline may also reflect investors letting their previous bets play out before backing new companies in the same fields, the report noted.
Companies that raised Series A rounds in 2020 and 2021 would in theory need to return to their backers for Series B rounds in 2023. But a small flurry of Series A extensions at the end of 2022 indicates biotechs are still trying to collect data before attempting a fresh round of private funding.
“If you look at the valuations that those companies have raised at the peak, the majority of those are hard to justify at this time,” Halawa said.
Should the second half of 2023 bring more private financing rounds as startups that previoulsy raised two to three years ago finally hit milestones, investors will have an opportunity gauge was was signal versus noise.
“Their progress will pretty quickly show that they're better than the ones that are just thinking about the technology and how cool the technology is, but not about how it translates into it being helpful to patients,” Perovic said.
Will company restructurings continue?
Biotechs were forced to cut jobs en masse in the second half of 2022, with both large companies and young startups trimming their workforces to conserve cash.
With economists still concerned a recession could emerge, analysts believe biotech companies will tighten their purse strings to start the year. Already, a half dozen publicly traded biotechs have announced job cuts, including CRISPR stalwart Editas Medicine, which is laying off 20% of its staff.
“Pharma and biotech companies will likely look to trim operating expenses and focus on assets certain to be differentiators,” according to the December report from BMO analysts.
Mubadala’s Halawa said his firm is advising its portfolio companies to trim their costs by as much as 25% if they are in the early stages of drug development, especially if they expect to run out of cash by early 2024.
How will the Inflation Reduction Act affect biotech startups?
The law, signed by President Joe Biden in August, aims to reduce the price of prescription drugs in several ways. It gives Medicare the authority to negotiate prices on certain drugs that lack competition, while penalizing drugmakers that increase prices of their products within Medicare faster than the rate of inflation.
Though it will primarily affect large pharmaceutical companies, drugmaker executives have said it could have a chilling effect on investment in new research, particularly for small molecule medicines.
Still, early-stage investors are bullish on certain types of small molecules, such as covalent drugs. With uncertainty around which drugs will be affected, it’s too early to judge what the law will mean years down the line, said Vineeta Agarwala, a general partner at Andreessen Horowitz.
“It’s very hard for me to buy that small molecule innovation is dead,” Agarwala said.
For small drugmakers, the threat of reduced revenue could push larger pharmaceutical companies to do more deals.
“If you look at big pharma, they definitely are cash rich and slightly [intellectual property] poor today,” Halawa said. “If you look at the patent expiry over the next five years, we will see a lot of blockbusters that are going to be off patent. The question is, how is pharma going to fill that pipeline?”
Still, the IRA’s incentives could shape how startups plan their drug development.
The IRA is going to push investors and startups to think more about “how they can become best-in-class as opposed to the second- or third-line of treatment,” Halawa said.
Already, the law is pushing companies to adjust their plans, such as by focusing on larger indications early, or by developing several drugs at once, investors said in a recent BioPharma Dive panel.