Even in this challenging market, biotechnology firms are attracting investment and building capital, but they need more than just a great innovation. They also need a good story, a clear path to commercialization—and probably results from a clinical trial, experts explained to an audience of biotech company leaders at the BIO CEO & Investor Conference in New York on Feb. 26
In a panel on Opportunities for Financing Your Company Through Series B and Beyond, moderator Kate Walsh, Managing Director, Life Science and Healthcare at HSBC Bank USA, led a discussion on the biotech investment scene with a bank director, a CFO, and a venture capitalist.
All the panelists agreed that investment in biopharma firms has slowed since the booming market of 2021, when interest in COVID R&D and the possibilities of innovations like mRNA technology drove investment to dizzying heights.
“The market kind of goes in waves, but the waves in the past 10 years have been shorter than this current downturn wave,” said Alethia Young, Chief Financial Officer at Bicycle Therapeutics, a firm working in oncology. “So I think at first, people were kind of like, ‘OK, we’re having a downturn and it’s not going to last that long. We’ll somehow make it through it.’ And then it went on for another year and another year. And here we are now in 2024.”
Looking back at 2023 and forward to 2024
The panel opened with Jonathan Norris, Managing Director at HSBC Innovation, presenting his company’s latest report on venture capital in the healthcare market during 2023, with a focus on biopharma. He said that, beyond initial series A funding, companies need to be holding clinical trials and showing data from those trials. “So series B kind of means be in the clinic unless you’re an exception,” he said. The exception would include having a great management team, a good investor syndicate, and “really interesting technology.”
Some of the largest deals were not yet in the clinic, he noted. “I would say four of the five biggest deals are developing gene therapies and are preclinical,” he said. Yet for most others, including those in oncology, where “deals were very much preclinical a few years ago,” investors are not willing to take on the risks of early stage countries.
The HSBC report showed biopharma venture capital investment in 2023 involved $22.9 billion spend on 613 deals—23% below the previous year and 42% below the level of VC investment in 2021. Much of the latest activity is insider rounds, where investors are providing funds for companies they’ve already funded, so the firms can continue working and hold out until there is clinical data or another event that lets them seek new funding, Norris said.
“What we think about 2024 is that it’s going to be a tough year,” Norris said. “You have the folks coming off of these insider rounds. Will they find new investors willing to come in?” Insider rounds are typically smaller than initial investments, and firms receiving funding for insider rounds can expect VCs to make “valuation resets” that value the firm for less than it was valued with initial investments. Nonetheless, “it’s better to bring in new money after a valuation reset than to not have any money at all,” Norris said.
Stand out to get ahead
But new investment is possible. It just requires more work than it used to, the panelists said. When it comes to finding funders, it’s important for firms to differentiate themselves from others, not only with the science, but also by explaining the overall possibilities of the company.
As Young noted, investors buying into small biotech firms are looking for rapid growth in the short term. At the same time, their risk tolerance has been reduced. Convincing investors that you’ve got high potential requires more than just showing them your science is sound, according to Young.
“It starts with kind of really sharing your lead asset story, telling it very clearly, in a way that people can digest,” she said. “You know when you’re talking to different types of investors and people, it’s best to speak English, and yeah, there are two different languages. There’s science-English and English, and it’s best to speak English.”
Ellen Hukkelhoven, Head of Biotechnology Investments at Perceptive Advisors, a VC company, agreed. “There’s the science, and I love the science, but I have been forced to think about the business a lot more over the last two years,” she said. “The drug needs to work, it needs to get approved—which is a separate question—and then it needs to sell. Even in preclinical companies, we are thinking about all three of those stages when we invest.”
One way companies have been distinguishing themselves is to share their clinical data or data about other research results with preferred investors before a private funding round or public offering. While this used to be rare, Hukkelhoven said firms are giving investors sneak previews of data more often, and it is a good idea.
“It allows the stock to move without the financing overhang. Once the data does come out, and you have the right investors around the table, hopefully you’re calling the people who are on your cap table already—and then also some of the ones who’ve been engaged with you regularly and who now want this opportunity to actually invest. And they really appreciate the time that they would have to digest the data over a couple of days while getting this financing together,” she said.
When she considers companies for investment, Hukkelhoven said she’s looking for firms that are in just the right stage of development.
“You bet on the ones that are a little later stage, that have proof of concept and also that still have a catalyst ahead of them, but it’s not too far away,” she said. “Because people are always thinking: Is my capital going to be dead money for the next year or two, or is it something where, six or eight months later, we’re going to have a small- or medium-sized derisking event that can lead to an exit?”
