Financing growth: Walking the tightrope
InsightIn the context of the particularly difficult public markets we have seen recently, Hannah Kuchler, Global Pharmaceuticals Correspondent at the Financial Times, chaired a panel of experts exploring what sources of capital are currently available to fund innovation and the development of new drugs, and what is needed to access those funds, before considering the outlook for the markets.
Our panellists were Olivia Cavlan, Chief Corporate Development and Strategy Officer at Alchemab Therapeutics; Andrea Ponti, Managing Partner and Founder of GHO Capital; Gil Bar-Nahum, Managing Director and EMEA Head of Biotechnology at Jefferies; and Tom Burt, Partner, Crossover Strategy at Sofinnova Partners.
Below are the top takeaways:
A challenging year after euphoric times
Panellists kicked off by reviewing the significant changes in market conditions since last year. In February 2021, stocks doubled in a day, and deal roadshows were coming together in four days. However, now 85% of the 2021 class is below IPO price and stocks previously bought at $16 are trading at $4. The gains of post-Covid euphoria have been wiped out, and we are back to 2017 valuations.
The Corporate perspective
In these markets, companies need to stretch every dollar. They are having to look at different options to access capital, and there has been a change in internal priorities from 2021 to 2022. Many companies that did IPO are suffering. Those that didn’t have to manage the trade-off between cost-cutting and starving innovation, the need to focus on your core product, and a strong preference for pushing out senior hires rather than cutting headcount or reducing executive salaries.
Data is everything
Good data is now being valued. And significant data bolstered by strong financing is the prerequisite for public funding. For IPOs to happen you’ve got to show up with insiders, a full book of demand and good data.
Early stage, non-diluted ventures are still attractive. Any avenue that enables non-dilutive funding is good – partnerships, contractual arrangements, debt or a royalty type structure, and grants, however small.
Biotechs are increasingly steering clear of building assets. There is a glut of non-scalable plants and people are now investigating alternative ways to monetise any assets.
Outsourcing offerings in Europe have become much better and cheaper. Panellists who used to source services out of the US, where technology capabilities were stronger, are now using services closer to home which paves the way for better, faster and more affordable healthcare.
Crossover investors see an opportunity in these markets after over-valuations in 2021.
With its considerable firepower, private equity is good news for healthcare and life sciences and can replace what the public market can’t provide. PE firms must remain disciplined in their selection and avoid buying up quality low-quality pre-clinical companies that fuelled the explosive valuations of 2021. The current dip in markets offers them the opportunity to be selective. While we have seen many big deals with VCs, PE firms continue to buy specific expertise that they don’t have in-house and “offer external people billions to do their thing”.
Big Pharma is struggling with looming patent cliffs and will be hunting for late-stage clinical assets ahead of their top-line growth, turning negative after 2025 as products come off patent. M&A will trigger follow-on IPOs, but in the meantime, the IPO market will get ugly; hence we are seeing the big investment banks firing teams, and lots of companies that went public but shouldn’t have may go back to being private.
Bear on the market, bull on the sector
In terms of outlook, panellists had differing opinions on timing, but all agreed that the market might be at or near the bottom. On the wider financial markets, they were gloomy, pointing to the unpredictability of macro factors such as Putin, energy and inflation as grounds for believing we are, at best, “halfway through a 3-year desert”. There was more optimism about the sector as, while we are unlikely to see the likes of 2020/21 again unless there is another pandemic, the panellists believe that good stuff will still get financed with small signs of public market improvement already being seen.