Biotechs face ‘funding Sahara’ as easy money runs dry

As Genocea ran low on cash in 2018, investors offered the US biotech a lifeline that allowed it to shift focus from developing a vaccine for genital herpes to targeting cancer treatments. There was no such safety net in May, when another cash crunch forced the 16-year-old group to fold.

“A year ago Genocea probably could have raised enough cash to stay afloat until it could finish trials on its personalised cancer medicines,” said Daina Graybosch, analyst at SVB Leerink. Now, however, “the world has changed for biotech companies”.

The fate of Genocea captures the stark predicament facing a biotech sector accustomed to record-low interest rates, a bull run in equity markets and freewheeling investors. While the rupture with the era of easy money has hit almost every sector, few are as exposed as the early-stage drug companies that rely on capital markets to fund long and risky development cycles.

Almost 200 listed biotechs globally are trading below the value of their cash reserves, according to investment bank Torreya Capital, and more are now swallowing draconian deals to survive as the funding drought in public markets deepens.

Just nine biotech companies have listed in the US this year, raising a total of $1bn, according to LifeSci Capital, a boutique investment bank. Almost 60 companies did so in the same period last year, tapping investors for $7.4bn.

“For many public company biotech CEOs looking to raise capital, it may feel like they are caught in the Sahara desert. There is no money to be found,” said Torreya managing director Tim Opler.

San Diego-based Belite Bio was one of the few to pull off an initial public offering. The company, which develops drugs targeting age-related diseases such as diabetes, raised $41mn in April and its stock has surged after US regulators fast tracked one of its treatments. But chief executive Tom Lin said he only had the confidence to push ahead with the listing because its largest shareholder was prepared to back it.

“We were actually quite nervous. The bankers tried to prepare us, letting us know we might not get enough investors or a good price,” Lin said. “[But] the most important thing was our existing shareholders are very confident about our pipeline . . . they participated in the IPO as well with $15mn investment, and that gave confidence for new investors.”

For listed biotechs unable to lean on existing investors, the remaining choices include raising equity at huge discounts, taking out risky loans, monetising future royalty streams and partnering with or being bought out by big pharma.

“What we’ve seen in the few follow-ons that are getting done are draconian pricing terms, warrant deals coming back and low valuations,” said Mark Charest, a portfolio manager at LifeSci Fund Management.

More than half of the listed companies that have completed follow-on fundraisings this quarter offered investors incentives to back their deals.

Others have turned to debt providers despite lacking the revenues to repay loans. Madrigal Pharmaceuticals last month secured a debt facility worth up to $250mn to help commercialise its most advanced drug candidate and finance a clinical development programme for another.

The abrupt change in the funding climate is not without winners, including companies such as Royalty Pharma, which lends to biotechs in exchange for a share of future revenues.

While the Nasdaq Biotechnology index has tumbled 26 per cent this year and the broader S&P 500 is down 23 per cent, Royalty’s shares are flat. Last month Royalty lifted from $1.5bn to $2.5bn the amount it intends to deploy annually for the next five years, in part to capitalise on the deteriorating outlook for many biotechs.

For some companies, however, even the most expensive funding options will prove elusive, and more are likely to follow Genocea into collapse.

“Quality [of biotechs on public markets] is lower in part because of the promiscuous capital markets” of the past two years, said Charest of LifeSci.

Many went public before reaching key development milestones that would have given a clearer indication of their chances of ultimate success, leading to a string of disappointing clinical readouts that have made it even harder to raise cash.

“If you fund the five best ideas out there the majority will probably do pretty well. If you fund 500, the number that don’t do well will be substantially higher,” he added.

Biotechs endured testing periods during the bull run that followed the 2008 financial crisis. The S&P Biotech index went into correction — a more than 10 per cent decline from recent highs — in 2015 and 2018, but industry executives say this slowdown is far more severe.

“This is the worst level of distress I have seen in the industry for the past 25 years,” said Pierre Jacquet, managing director of LEK Consulting’s healthcare division.

“It’s a perfect storm and it is likely that tens of companies will just return cash to investors. I just don’t see any alternative exit for some of these companies.” 

Last week Zosano, a California-based group developing a migraine drug delivery patch, filed for bankruptcy protection. In another sign of the stresses, the top shareholder in Forte Biosciences, which develops drugs targeting autoimmune diseases such as alopecia, called for management to wind up the company and return its cash.

Early-stage drug companies are particularly vulnerable to the market turmoil because there are few easy ways for them to generate revenue or cut costs while conducting expensive clinical trials. The sector’s woes also provide a glimpse of the pressures that could face more companies if the strains do not ease.

Senior bankers and lawyers are divided over whether stock markets will calm enough for IPOs to return en masse this year, but even the more sanguine do not expect to see a significant uptick in activity before the traditionally quiet midsummer period.

“Part of the discussion [with IPO candidates] now is ‘what’s your bridge if the IPO timeline doesn’t work?’” said a senior capital markets lawyer. “A year ago if a company said they wanted to list ‘right now’ you could aim to be public in three to six months. Now you have to ask ‘what’s your cash bridge for the next year?’”

Conditions are slightly less onerous for those biotechs yet to go public, giving them at least the option of trying to tap interest from a private equity industry still flush with funds. The appetite was underlined by buyout firm Apollo Management’s purchase last month of a stake in Sofinnova Partners, a European venture capital firm specialising in life sciences.

“It is quite striking that Blackstone, Carlyle and Apollo have all gotten into biotech and I’m sure there’ll be plenty more coming. It really reflects the mainstreaming of biotech as an asset class,” said Opler of Torreya.

There have been about 120 private fundraisings worth $9bn this year, according to LifeSci, down roughly 30 per cent from the comparable period last year.

This month Mineralys Therapeutics raised $118mn, led by European private equity firm Andera Partners and RA Capital Management, a Boston-based investment manager. The Philadelphia-based biotech is developing a novel treatment for high blood pressure, a condition that affects nearly half of all US adults, meaning a breakthrough treatment could prove a blockbuster drug.

“There is still finance available for companies, which have good assets, can generate short-term news flow or are capitalised well enough to get to the next de-risking event,” said LEK’s Jacquet.

Some have also drawn the attention of Big Pharma, which SVB Leerink estimates has up to $500bn to deploy on M&A due to the windfall from the coronavirus pandemic.

Bristol-Myers Squibb earlier this month agreed to buy Turning Point Therapeutics, which is developing a new cancer drug, for $4.1bn.

Nevertheless, most deals have been linked to promising drug pipelines rather than rescue of cash-strapped start-ups. There is little evidence that the steep drop in valuations is set to reignite M&A in a sector where dealmaking sank to its lowest level in a decade in 2021.

“We always follow the science,” said Eliav Barr, global head of clinical development and chief medical officer at Merck, pointing out that the appeal of a target lies with the drug or treatment it is working on, not the collapse in its share price.

“If you go down to the bargain basement, to the ‘for sale’ rack for a discount of 50 per cent — well there may be a reason why that is so,” said Barr. “Just because it is cheap does not mean it is good for the company.”