Are SPACs dead? – and other questions about the biotech market outlook

The narrative is that it’s a bad market for biotech, but CEOs and investors told a packed house at the 2023 BIO CEO and Investor Conference that there are plenty of reasons for optimism—and plenty of ways for companies to get the capital they need for R&D.

Moderated by Susan Roberts, the biotech market outlook panel covered prioritizing fundraising options, SPACs, and the impact of drug price controls.

What do biotech investors want?

Citi's Jennifer Sheng speaks about the biotech market outlook at the 2023 BIO CEO and Investor Conference
Citi’s Jennifer Sheng at the 2023 BIO CEO and Investor Conference (Credit: Clary Estes for Bio News)

Investors are “looking across the spectrum in terms of capital-raising—not just traditional equity markets but alternative sources, as well,” said Jennifer Sheng, Managing Director of Citi.

“When we look at companies, we’re considering what’s the fund-ability—not just now, but in a year from now,” said Janice Bourque, Managing Director of Life Sciences at Hercules Capital. “What are the milestones they will hit, what will it take, and will they be out of cash? Who are the investors behind those companies? Where are the VCs in their funds—tapped out?”

Venture capitalists also look for experienced management teams, she continued—“people who have been through this before,” because it’s a difficult time and these people will “understand what decisions you need to make soon.”

“As a VC you like platforms because you get a lot of shots on goal,” which is good for raising money, said Dennis Purcell, Founder of Aisling Capital LLC. “If you’re going to get acquired by big pharma, they like products.”

Are SPACs dead?

In a nutshell, a SPAC (special purpose acquisition company) is when a separate group of investors—who may or may not know or understand the industry—pull together a large amount of cash and hunt for technology with which they can put the cash to work, though it may not be long term.

But SPACs “seem to have fallen,” noted Bourque. “SPACS might have their place, but it’s very limited.”

“Reverse mergers are interesting,” said Bourque. A reverse merger is when a company reverses “into a shell,” merging “cash and product.” This makes for a stronger company in the end that has access to public markets and other forms of capital.

“Reverse mergers are here to stay, at least in this market,” echoed Purcell. “SPACS are dead.”


What kinds of fundraising should biotech companies consider?

Previously, IPOs needed assets in clinic and partnerships to demonstrate the validation of the technology, said Bourque.

Today, we see companies going out for IPO at the pre-clinical stage, with “valuations through the roof.” This can be difficult to justify. And as a result, companies may struggle due to severe dilutions, especially when the market cap drops.

Limited partnerships, on the other hand, “can unlock options for smaller companies that want to grow and become commercial themselves rather than just finding a big pharma partner,” said James Peyer, Ph.D., CEO, Co-Founder, and Board Director of Cambrian BioPharma, Inc., which focuses on aging technology.

All the big success stories (Amgen, Genentech, Genzyme) got started with R&D limited partnerships, noted Purcell. We need to think about what we can do to “resurrect partnerships.”

“Big private equity shops have a lot of capital to invest, and they’re starting to do it with royalty deals,” he continued. However, there are other kinds of capital we can pursue.

The role of the Inflation Reduction Act

Gil Efron, CEO of Purple Biotech, speaks about the market outlook at the BIO CEO and Investor Conference 2023
Gil Efron, CEO of Purple Biotech (Credit: Clary Estes for Bio News)

As we’ve reported, the Inflation Reduction Act, which became law last year, included drug price controls—and this could have a big impact on investment and future innovation.

Policymakers and the public focus on drug companies because they’re “available and public,” said Bourque. They’re not aware of “the in-between stuff,” like pharmacy benefit managers (PBMs) and hospitals.

“You’re the folks who are selling it,” she said. It’s “your name in the product,” so the public associates the drug company with the cost and doesn’t “understand that delta that exists between the actual return to pharmaceutical companies.”

“If there’s one thing COVID has done, it’s to raise the visibility of the challenges the industry faces in being able to get a drug on the market…rapidly and safely,” she continued.

“We’ve done a lousy job of explaining this to the public,” said Purcell. For example, Gilead’s hepatitis C cure “should have been a victory lap,” but became “headlines that we were gouging the public.”

This will become more important as more highly-priced treatments like gene therapy come out, and we need to explain how they save the health system money.

Peyer was more optimistic: “The ecosystem is maturing,” he said. “Biotech is in such a good spot overall that we can ‘afford’ the parasites,” like middlemen. However, it “will take political action to get rid of this.”

The contradiction is that “our insurance system does a horrible job of investing in prevention,” citing the hepatitis C example. “There is a fundamental flaw in the system right now, and that is disincentivizing prevention and only incentivizing reactive care.” For example, his company’s aging technology could be preventive, but the company is likely to need to conduct prevention trials outside the U.S., “which is a tragedy to me.”

The biotech market outlook

There’s been a lot of pessimism in the industry lately—but there shouldn’t be.

“As an industry, since we last met, it’s unbelievable what we’ve done,” said Purcell. These include innovations in Alzheimer’s, psychedelics changing the face of mental health, and developing vaccines in a few months versus the standard of a few years.

Both CEOs on the panel, Peyer and Gil Efron, CEO of Purple Biotech, are optimistic.

“Generating clinical data is the first task,” said Efron.

The market recovery will be “built around fundamentals,” echoed Peyer. He expects a “much more disciplined IPO window” to reopen in the second half of the year.

Bourque agreed: As progress and speed have accelerated, and “demand for health care is not going to stop,” she said. “People will want and expect treatments for things that didn’t exist when their parents are around.” As a result, the industry will continue to morph and sustain itself.

In life sciences, “we find a way,” said Citi’s Jennifer Sheng. Biotech has always been able to raise capital creatively—and will continue, if we go “back to fundamentals, back to basics, companies will be truly valued where they are in the clinic.”

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