Building a successful biotechnology startup is challenging in the best of times. But the task has grown more daunting since late last year, when an investor retreat from the sector fueled a steep market downturn.
Venture investors and biotech executives hosted by BioPharma Dive in a Tuesday panel highlighted the difficulties startups now face. Now more than ever young drugmakers need to spend wisely, have a clear development plan and be willing to get creative to advance their science, the panelists said.
“We want to see progress and discrete programs that are going to get into the clinic and show proof of concept very quickly,” said Christiana Bardon, co-managing partner at BioImpact Capital and portfolio manager at MPM Capital. “I think investors are demanding that.”
Yet the group suggested the current shakeout could be a “healthy” response to a prolonged bull run that, in 2020 and 2021, brought nearly 200 new biotechs onto the public market. They also touched on trends they’ve observed in funding deals and what’s catching investors’ attention.
Read on for three takeaways from the discussion, which can be watched on demand here.
Expect biotech’s contraction to continue
This year has been tough for biotech, with publicly traded companies restructuring to save cash and initial public offerings hard to pull off. The sector is consolidating, too, as acquisitions, reverse mergers and delistings shrink the overall number of biotechs.
Investors expect more of the same, at least in the near term, amid a tougher funding environment.
“I don't want to sound all gloom and doom, but the truth is, not all biotech companies are meant to go forward,” Bardon said.
Venture capital firms are more selective now than they were in 2020 and 2021 when biotech valuations were sky high. That could lead to fewer new biotechs, as investors put money into private rounds for more mature startups instead and funds stretch their investment windows.
Panelists stressed that companies need to get creative and adjust their expectations to get the attention of investors and potential partners. They expect companies will be more willing to discuss research collaborations and deals for drug rights, but fewer of the large private financing rounds that have become commonplace in recent years.
In September, for example, Scribe Therapeutics got $25 million from Sanofi, as well as the potential to receive up to $1 billion in future payments, by giving the company “non-exclusive” rights to use its gene editing technology to make cancer treatments.
“That allowed us to do a deal that made sense for both parties,” said Benjamin Oakes, Scribe’s CEO. “It’s non-exclusive, we can do it again if we want to. It gets Sanofi the technologies they need very quickly to push their own drugs into the clinic.”
Startups need a plan, not just an idea
At the market’s peak, when going public quickly was expected, new biotech companies — particularly those led by experienced teams — had little trouble pitching their stories to investors. Now, with IPOs hard to pull off and acquisitions the primary source of investor returns, startups need a better plan if they want to get funding.
Young companies need to clearly show how their technology is different, and what their path is to proving it in clinical testing, said Chris Garabedian, the chairman and CEO of biotech company creator Xontogeny.
“In today’s environment it's even more important that the early founding team, besides having good technology that people might be interested in, has a clear plan on how to de-risk it with the most efficient use of capital possible,” he said. “M&A doesn’t really happen [before] clinical proof of concept.”
That means companies have less wiggle room than previously to use early funding to try many different things. “All of those several $100 million-sized financings where people could spend infinity and beyond building their platforms, I don't think we're going to see that now,” Bardon said.
Instead, they need to answer “later-stage questions,” like how their drugs could really help patients, earlier, said Mira Chaurushiya, a senior partner at Westlake Village BioPartners.
“Right now, I think the opportunities that are going to get funding have a much more clear idea of where they're going to take it into the clinic,” she said.
Drug pricing law could change investors’ calculus
The biotechnology industry is still grappling with the impact of the Inflation Reduction Act, which President Joe Biden signed into law in August.
Industry executives have warned the law could shift research dollars away from small molecule drugs, which could be subjected to government price negotiation nine years after their initial approval. Some large companies, like Alnylam Pharmaceuticals and Eli Lilly, have already cited the IRA for recent strategic decisions.
The law may change the calculus for startups and their investors, too. Garabedian said the law is causing companies to adjust their development plans for small molecule drugs by either evaluating them in larger indications early, or developing multiple drugs at once.
“I don’t think the investor market for biotech pharmaceuticals is going to go away,” Garabedian said. “We’re all going to adjust and figure this out.”
Still, the law could add momentum to a shift that’s already underway. Drugmakers have moved towards drugmaking approaches like protein therapeutics and genetic medicines, and the law will accelerate that, Bardon said.
“At least at our firm, we’ve made a conscious decision that we would prefer non-small molecule modalities,” she said.
Colin Babej contributed video editing.