Are we at the end of the biotech boom cycle?

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Bankruptcy, closures, and layoffs – oh my! But it’s not all doom and gloom for the biotech boom. Innovation is still in demand, and although the VC landscape is changing, companies are still able to find funds.

The market environment in biotech has remained bumpy since last we wrote on the topic. The past few months have seen an acceleration in the number of companies announcing reorganizations and Reductions in Force (RIFs) to reduce cash burn and realign with a newfound austerity among investors. Morbidly, there are even dedicated websites where you can follow recent layoffs, like the Fierce Layoff tracker. It all paints a rather bleak picture.

However – and despite claims to the contrary – this is all a normal part of the market cycle. Over a decade of easy money and low interest rates have lulled us into a false sense of standard, but it is time to adjust our frame of reference towards the new old normal. High interest rates mean you can now get 4.5% on a 2-year treasury bill (up from 0.14% just 2 years ago), and the tightening of the belt is still ongoing. This means a shift towards less risky assets and away from equities (let alone private equities). VC investments have gone down as a result. Who wants to wait for a promising quantum computing startup to deliver, if you can get 5% in a triple-A corporate bond? As it turns out, most people don’t.

Bleak conditions

This shift away from risk has already had severe consequences for companies. Some of the organizations affected are those that that have been around for a long time and reinvented themselves time and time again, like Sorrento Therapeutics, which filed for bankruptcy in February. Even more striking are a series of high-profile companies that have raised inordinate amounts of money in the past few years through private financing rounds or IPOs. The list is long but includes: Rubius Therapeutics (exploring options after raising $200 million in an IPO not even two years ago); Redx (reverse merging into Jounce, a relatively new immuno-oncology darling); and Adaptimmune (merging with TCR2 to consolidate cash and assets in cell therapy). The layoffs have been rife as well: 90% for Magenta therapeutics; 70% for Neoleukin; 40% for Graphite, 25% for Aligos – the list goes on and is likely to grow in the months to come.

“The ‘end of easy money’ is also translating into the ‘end of optimistically propping up companies’ and tempering significant company spendings in others.” – Ward Capoen

The press releases associated with these dismaying announcements often come after disappointing clinical news. But it is also because the risk assessment of investors has changed, and it has subsequently become more difficult for companies to pivot after poor tidings, raising new money to continue operations. The “end of easy money” is also translating into the “end of optimistically propping up companies” and tempering significant company spendings in others.

An additional effect of this changing landscape is the recent sudden collapse of Silicon Valley Bank (SVB) and Signature Bank, and the close call for several other banks catering to VC-backed tech and biotech companies. SVB ended up in what we in Belgium would call a “Dexia scenario”: an asset-liability duration mismatch. The bank was buying long-duration mortgage-backed securities with the deposits of their private tech and biotech companies, who were raising record rounds and putting the cash in the bank. Of course these companies also spend money, but as long as they continued raising new rounds, the deposit base of the bank kept growing. The problem started when the fundraising slowed, and finally reversed at the end of last year. SVB started experiencing liquidity issues, as it could not wind down the mortgage-backed securities portfolio fast enough to keep up with the cash outflows. When the bank had to raise funds to buffer the balance sheet, the very public concerns of VCs triggered a run on the bank, which led to the banks failure and the FDIC stepping in.

A silver lining to the stormy clouds

As we have written many times in the past, these current conditions are not the end of the world, and even open up some opportunities. Has fundraising dried up? Absolutely not. Quralis just announced an $88 million Series B, and the new startup Aera Therapeutics (founded by Feng Zhang of CRISPR fame) just raised an eye-watering $193 million combined Series A and B with a stellar syndicate. Innovation is still in high demand.

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Things on the M&A side are also decent, with announcements at the JP Morgan conference in January for three acquisitions each with about $1 billion upfront, of which two are commercial. Pfizer recently made a bid to acquire cancer company Seagen for $43 billion, and Sanofi is acquiring Provention for $2.9 billion for its commercial immune interception portfolio. It is clear from this activity is that the pharmaceutical sector is mitigating risk by acquiring commercial companies or programs with clear clinical proof of concept.

The night is always darkest just before dawn. Although there may yet be bumpy roads ahead, there is also a light on the horizon, and no need to despair.