John Cassidy, Investment Associate at Arix Bioscience plc.
For private biotechs developing innovative therapeutics there has hardly been a better time to raise cash than 2018, which saw more than $14.2 billion of venture capital (VC) invested in the sector, beating the previous record of $11.5 billion1 in 2017. The flood of cash has been driven both by existing specialist biotech investors raising larger funds, as well as greater participation in the space by generalist investors, reflecting the positive sentiment towards biotech that has been built by high-profile scientific and clinical advances as well as impressive commercial and financial success for VC-backed biotechs.
This surge of capital has coincided with increasing uncertainty over how medical innovation will be valued and paid for by healthcare payers. This is especially true in the US, where resistance to high drug pricing is building and impacting revenue expectations for large biopharma. This puts pressure on large biopharma to maintain a pipeline of differentiated products that address major needs, a challenge that they look to solve by turning to external sources of innovation. Thus, macro factors squeezing large biopharma continue to offer opportunities to biotechs developing novel therapies. Biotechs developing therapies in crowded spaces (e.g. immunotherapy), without clear differentiation from other pipeline assets (e.g. similar mechanism, “me-better”) may struggle to find a buyer despite the potentially lower technical risk.
The challenge for VCs is to deploy larger funds efficiently without letting standards slip, which results in more competition for the best opportunities regardless of geography. Although the total investment in the sector is at record highs, the number of deals completed in 2018 was lower than in recent years (2018: 706 vs 2015-17: 707-891), suggesting that VCs are focusing on fewer, larger investments. This is driven by a desire to take larger stakes in the most compelling opportunities. This results in a growing divide between “haves” and “have-nots” in the biotech world, where the top tier of companies that have both teams with track records of executing R&D programmes and successful exits, and the combination of high-quality differentiated technologies are able to raise upsized VC rounds at high pre-money valuations, while others may struggle to secure funding.
Although many investors consider the US biotech hubs (Boston and Bay Area) as the source of the best ideas, there is a growing willingness to travel further to source innovation. This creates opportunities for European biotechs who are increasingly able to find support from international investors as well as those closer to home.
1. Source: PitchBook, 6 January 2019