How biotech is financing the lockdown dip
The COVID-19 pandemic has had huge knock-on effects on economies around the world. In this article, legal experts from Taylor Wessing explore how the novel coronavirus has hit the life sciences and biotech investment sector and how they see investors behaving as the lockdown and pandemic eases and develops over the next 24 months.
At the start of the COVID-19 crisis, the life sciences sector was better funded than at any other time in history, with US venture funding reaching a peak of $5.5 billion in the first three months of 2020, according to PitchBook. Biotech companies are of course capital-hungry, generally being pre-revenue. They fund their R&D and general and administrative (G&A) costs from capital, typically returning periodically to investors in private financings or to the capital markets to raise more capital that funds the next stage of the company’s development.
Partnering with big pharma biopharma companies is an alternative way that biotechs can raise capital to extend their cash runway and survive through the COVID-19 crisis”
While the state of funding and outlook in Q1 of 2020 was positive, a key concern for the sector lies in the months (and years) ahead in the post COVID-19 world, with its anticipated knock-on effects on global markets including employment, travel and supply chains.
The stock market disruption caused when the COVID-19 crisis first hit Europe and the US resulted initially in lower valuations for public biotech. Private biotech valuations were similarly affected and while valuations of public biotech have largely recovered and in some cases boomed, many private biotechs still face the fact this unsettled economic outlook increases the risk that the company will not be able to raise its next round of investment capital on schedule. Furthermore, the delays to R&D roadmaps, milestones and data generation due to the operational disruption caused by lockdown are likely to further increase biotech’s hunger for capital – the crisis has brought every biotech company’s cash runway into sharp focus.
One task of emerging private biotech companies, unless they are well-funded, is to establish how to conserve money to increase their runways, with the aim of getting through the current crisis and surviving until normal conditions return. This inevitably involves prioritising programmes that are either essential to the corporate strategy, for example those that provide the highest long-term value opportunities or those that have milestone payments achievable in the short term, and shelving the rest. Anecdotally, one of our clients (an emerging European biotech) reports that it has frozen all but 12 of its approximately 400 projects, to illustrate the degree of prioritisation facing some companies.
In addition, companies are continuing to evaluate their options to raise capital, in particular through private financings and partnering opportunities with prosperous pharma companies who are still seeking access to biotech innovations.
Commentators are predicting increased volumes of investment into the life science sector in the longer term (ie, 12-24 months from February 2020, when the pandemic first struck in Europe and the US), as the COVID-19 crisis has highlighted to possible investors the importance of its technologies and products as well as their potential value. Following recent fundraising successes, there is still plenty of dry powder around in investment capital terms with many existing funds not fully allocated, so in principle still being open for business. Furthermore, new venture funds are still successfully being raised, despite the COVID-19 crisis. For example, Arch Ventures and Flagship Pioneering in the US each raised $1 billion in funds in recent months.
However, over the next six to 12 months, private financings are likely to face challenges due to more liquid public market opportunities for investors. Some venture capital (VC) investors are hoarding capital to follow up on their existing portfolio. Others are waiting to see how far valuations fall, in order to pick up cheap assets. This means that better capitalised companies with higher quality, deep-pocketed investors are likely to continue to raise money, though with greater difficulty and on more stringent terms than in previous rounds.
Companies with less prominent investors and less money in the bank may find it hard to raise capital – particularly if they had been looking to bring on board a new lead investor to co-ordinate a new round. These companies may seek to plug this with partnering deals (discussed below), grant funding or COVID-19 state-aid schemes such as the UK’s Future Fund, in which we played a leading role in advising the UK government on. There has been some discussion in the sector about how best to navigate a down round, but these do not seem to have materialised yet.
The initial hit to the public markets at the start of the pandemic was followed by a strong recovery. Q2 2020 was the strongest quarter for biotech initial public offerings (IPOs) on NASDAQ since 2008, with 26 IPOs. Secondary offerings have also been strong and European public biotechs have not missed out, with strong secondary listings on NASDAQ for RenalytixAI ($74 million offering in July from London Stock Exchange AIM to NASDAQ US), Calliditas ($90 million offering in June from NASDAQ OMX Stockholm to NASDAQ US) and Inventiva ($108 million offering in July from Euronext Paris to NASDAQ US). Argen-x also successfully completed a follow-on offering, the largest equity offering by a European biotech company in history, raising $863 million in May 2020.
However, this positive narrative for public biotech will not resonate with all. A leading US investment bank has reported that there are 100 biotech companies on NASDAQ with less than one year of cash runway and a market cap of less than $200 million. Anecdotal reports suggest that capital is being reallocated from those weaker public companies to favoured private biotech in cross-over rounds.
Partnering – non-COVID-19 assets
Partnering with big pharma biopharma companies is an alternative way that biotechs can raise capital (non-dilutive in this case) to extend their cash runway and survive through the COVID-19 crisis. We know of anecdotal evidence that the volume of partnering transactions is holding up well, with virtual negotiations not proving to be a barrier. Big pharma and larger high-growth public biopharma are more insulated from capital market swings so are likely to remain active and should be well-positioned to deploy their balance sheets to build their asset pipelines.
Deal flow has now tailed off, as it appears that pharma, governments and strategic investors have decided which horses to back”
There is likely to be an increased emphasis on upfront payments, at least for companies who are less well-funded (ie, companies with less deep-pocketed investors and less money in the bank). There may be an increased interest in regional partnering, in particular for Asia rights. Deals for Japan typically take a long time to negotiate, so may not deliver the desired funding boost within the required timeframe. For that reason, China deals are likely to attract more attention.
Given the COVID-19 funding pressures, we may see a trend in earlier-stage partnering deals. The movement towards early-stage deals was certainly boosted by the last downturn in 2008. Alternatively, to justify a healthy upfront, pharma companies may ask for deal-sweeteners in the form of follow-up or back-up compounds to be included in addition to the lead or secondary compound, even if still in the discovery or research phase, to reduce the risk of failure and justify the larger upfront payment.
Partnering – COVID-19 assets
In Q1 2020, many biotechs looked at pivoting their products, programmes or technologies to target the COVID-19 indication. In total, over 60 collaborations were announced in the course of a few weeks. Deal flow has now tailed off, as it appears that pharma, governments and strategic investors have decided which horses to back (at least in the first wave of deals) in the COVID-19 race and are now awaiting development.
The published deal values (upfronts and milestones) are quite low, so it seems that pharma and governments have adopted the approach of placing a large number of small bets, in order to spread risk and maximise the chance of a rapid solution. Given the likely competition between any products emerging from these programmes, the major role that governments will play in procuring these products for their populations and the full glare of public scrutiny over the pricing of any new products, there is likely to be significant pricing/reimbursement pressure. Therefore, these collaborations may not be financially lucrative programmes for the participants, at least not during the pandemic period.
Nonetheless, there could be benefits for participants that extend beyond satisfying altruism and good PR. These include validation of the biotech’s technology platform, exposure to strategic investors (pharma, large biopharma, diagnostics companies and large CROs) and development of a long-term relationship with a partner that could lead to deals in other therapeutic areas.
Governments’ traditional preference for working with larger companies and universities has been evidenced and it has been harder for emerging biotech companies to access large grants and supply deals, at least in this first wave of deals.
About the authors
Adrian Toutoungi is a partner in the Life Sciences team of Taylor Wessing. He works with many of the world’s most dynamic medtech, pharmaceutical and biotech companies on regulatory issues and advises on IP strategy and licensing issues, fund raising and complex alliances and partnering arrangements.
Josef Fuss co-leads the TMC sector group at Taylor Wessing. He is recognised as one of the UK’s leading venture capital lawyers and represents investors, companies, entrepreneurs and management teams on all aspects of Venture Capital, M&A and Joint Ventures and represents companies at all stages of their development. Josef works across key technology verticals and the life sciences sectors and has a particular interest in digital health.
Matthew Caskie is a trainee solicitor at Taylor Wessing. He assists the team on a range of contractual, regulatory and IP matters, often for clients within the life sciences sector. He has a strong interest in life sciences companies, including start-ups, and is excited by the continued success of the industry in the UK.