Odysseus eventually made it to shore, as BridgeBio CEO Neil Kumar reminded the industry last Friday in a nod to Homer’s classic tale. And on Monday, his biotech celebrated a key Phase III win, putting wind in its sails for a trip to the FDA.

Biotechs everywhere are hoping for a similar moment in the sun after a two-year troubled odyssey beset by low rounds of private financing, misaligned valuation expectations, a largely unrewarding public market and a dearth of IPOs.

But now optimism is in the air, industry insiders say, as a drumbeat of IPOs, acquisitions and successful clinical trials signal a healthy start to the second half.

“You can only starve a thriving ecosystem for so long,” said Julia Moore, managing partner at early-stage investor Breakout Ventures.

All signs point to the snow “finally melting,” as William Blair analysts put it. The SPDR S&P Biotech ETF $XBI is up about 5% since the start of the year, and ​​investors predict it will “close the year higher.” Inflation is easing. At the same time, biotechs and investors have to contend with a new set of problems: the looming Inflation Reduction Act (with more Big Pharmas suing to block the drug-pricing law this week), the FTC’s newfound scrutiny of industry, and macroeconomic conditions like interest rates.

Analysts, investors and bankers told Endpoints News that the second half of this year could lay the foundation for a recovery that drug developers are yearning for. But 2024 is likely the year the sector’s momentum will fully return, though it’s unclear whether that recovery will look like the unprecedented growth and dealmaking of 2020.

“We’re in a typical sort of sector recovery phase … that we’ve seen historically after bull markets,” said Yaron Werber, senior research analyst for TD Cowen’s biotechnology coverage. “There’s a big sell-off for a couple years and then slowly go into a stock-picking environment where specific stocks get rewarded for good performance.”

The biotech market has never been down three years in a row, per TD Cowen analysts.

A drip – not a waterfall – for IPOs

To understand the state of the biotech IPO market, take a look at the strong showings this month for Apogee Therapeutics and Sagimet Biosciences, with both trading above their initial pricings, and keep a close eye on what happens in September.

Jordan Saxe

“We likely will see more IPOs flip public after the Labor Day holiday, but we’re still expecting most to watch and wait until 2024,” said Carolyn Horn, Needham & Co.’s co-head of healthcare investment banking.

Turnstone Biologics is expected to list later this week, and another five to 10 biotechs will likely do an IPO this year, Jordan Saxe, Nasdaq’s head of healthcare listings, said in a July 18 interview.

While that’s a lower number of listings at this point in the year than in previous years, it would still be a “healthy number” in a historical context, he said. The biotech IPO queue is at about 50 companies, roughly the same number as in early May, Saxe said, and the exchange has since received a few more applications.

“It’s not a waterfall of applicants rushing in, but it’s a drip of new people looking at the IPO,” he said.

The Nasdaq is feeling “a lot more optimistic about the 2023 market for IPOs today than we were four months ago,” he said. And like Horn, Saxe agrees that 2024 looks like it will be a “really good window.”

Let the dry powder fly

Week after week this year, biotech startups turned to layoffs, pruned their pipelines or completely shuttered in the face of the difficult financing environment. Even when cash is flowing their way from Big Pharma partnerships, fledgling drug developers have tightened their belts.

“We don’t take our strong position for granted, especially in this challenging economic environment,” Capsida Biotherapeutics CEO Peter Anastasiou recently told Endpoints after announcing layoffs months after two Big Pharma partnerships brought in $125 million.

The pace and size of financing has certainly petered out in the first two quarters of the year. US venture capital investments in biotech and pharma totaled $9.9 billion in the first half of 2023, compared to $19.1 billion in the first half of last year, according to data from PitchBook last week. That’s the lowest six-month stretch since 2019.

Vineeta Agarwala

But even as down and flat financing rounds have ticked up, some investors say there’s still plenty of capital to deploy as they’ve rolled out a steady stream of new funds in recent months and created new ones.

“You have to have the capital available to deploy, and you have to have great science to deploy it into, and we still see both of those things to be very true,” said Vineeta Agarwala, a general partner at Andreessen Horowitz.

Before the downturn, Series Bs were flying off the shelves. Now it appears investors have a tougher set of expectations for the companies they are willing to invest in, and that may be a good thing.

“Maybe I’m the contrarian in the room that says this is actually a more rewarding period to be an investor in the sense that you can really feel like you’re going back to partnering with companies, thinking longer-term, thinking about de-risking over long periods of time, not just this, ‘Let’s get to the next 18 months,’” said Breakout Ventures’ Moore, whose firm has deployed about 30% of its $112.5 million second fund.

That kind of thinking may be why many young biotechs can see the light at the end of the tunnel, as seed and Series A financings and company formation have not been impacted at the same level as later-stage startups. Series A rounds were bigger over the last six months than the past few years, per data from DealForma. But the crop of companies formed prior to or early on in the pandemic that have progressed to the Series B or more mature level have struggled to pull together a lead investor for their next round.

Abbie Celniker

“It’s been a lot of time spent kissing a lot of frogs, talking to a lot of people before you go and then getting into these negotiations on what’s the right price and the right amount of money to raise so that you’re keeping your valuations in check,” Third Rock Ventures partner Abbie Celniker said.

With M&A up this year, there are still other avenues for private biotechs to take to survive, though a solid chunk of the year’s acquisitors have swooped up public companies. The global pharma industry has $700 billion to funnel into external R&D and business consummations, per a July 6 report from Goldman Sachs. Factor in other sectors of the life sciences industry, and that figure doubles, per an EY report from early this year.

But that doesn’t mean Big Pharmas are spending unwisely. They are being quite judicious about which companies they’d consider acquiring. Novartis finance chief Harry Kirsch told reporters on Tuesday the Swiss pharma giant couldn’t find the kind of bolt-on multibillion-dollar buyouts that checked their boxes in the second quarter.

Expect more reverse mergers, consolidation and spinouts

Biotechs and investors are rethinking what financing and dealmaking can look like, and that kind of financial engineering is in hot demand as biotechs seek alternative routes to funding.

The steady pace of reverse mergers is likely to continue, with industry leaders noting they’re another tool available for down-and-out companies looking to provide shareholders some form of return and rising startups eyeing public markets.

There’s also consolidation in the form of early-stage mergers, venture firms plucking paused assets off the shelves of other companies and licensing deals to provide near-term buffers.

Lorenzo Paoletti

“We’re seeing a lot of biotech-to-biotech conversations and actually VC-to-public biotech conversations,” said Lorenzo Paoletti, a managing director and leader of Truist Securities’ biotech investment banking. “The VCs are approaching and saying, ‘Hey, if those programs are on pause, do you want to talk about potentially partnering up or perhaps we can spin out these products in the pipeline and form a new company?’”

Those conversations weren’t happening at the same level in 2021, he said. Back in March, Third Rock took neuroscience programs out of Johnson & Johnson to form Rapport Therapeutics, which unveiled a $100 million Series A.

“It’s a very community-oriented time, much more so than it usually is — less competitive and more communal in trying to understand, ‘Are there natural consolidations?’” Third Rock’s Celniker said.

Read More