2022 Biopharma Capital Outlook:

Strategies to Navigate a Shifting Financing & Strategic Marketplace

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January 27th, 2022, webinar summary

The biopharma public markets faced significant headwinds in 2021, as major indices in the sector underperformed dramatically relative to the broader market. What drove such a significant downturn? When and how will it bounce back?  What strategic shifts will we see innovators employ to recoup and reinforce their value? Locust Walk held a webinar with a few of the industry’s leading experts in corporate dealmaking and investing to discuss the present and future state of biopharma. 

We entered 2021 during a historic biotech bull market, when the sector experienced a significant influx of generalist capital leading to soaring valuations and more companies entering the public markets.  One of our panelists, Brian Coleman, Global Head of Capital Markets at Locust Walk, described the recent biotech dip as more of a correction rather deflating of a bubble. He also suggested that in the coming months we may see investors become more judicious in their valuations as they focus in on the science and put their stock in later-stage companies with more favorable risk profiles closer to revenue. As we enter an environment that is less receptive to financings, he reminded the listeners that it is important to acknowledge the cyclicality of capital markets and deal making. Wherein, we could see increased partnerships being announced as we head into the new year, particularly for early-stage companies. 

As Liz Leveille, Head of Merck Boston Innovation Hub, explains, buyers will continue to follow the science and transact when and where it makes sense. The focus will remain on the best technologies that look to improve the lives of the patients they serve. Although 2021 saw a considerable decline in M&A activity, it will still be business as usual for Merck and others. Interestingly for Liz, more and more venture capitalists have expressed interest for their private portfolio companies, which most recently was not in scope.  Partnering is becoming more of a financing tool in this market. 

While we may see fewer early-stage companies going public, the recent biotech market dynamics may positively impact the propensity for companies to undergo strategic alliances or acquisitions. Andy Meyerson, Global Head of Strategic Transactions at Locust Walk, noted that we could start to see different types of deals being executed as companies decide where to focus their development efforts and prioritize their R&D spend. With capital becoming harder to secure, there will be a different set of conversations that companies have internally and externally when trying to balance equity dilution versus asset dilution. “We’ve already begun to see an increased willingness for venture-backed companies to do early-stage partnerships, which historically they’ve shied away from.” 

Being more open to take on asset dilution to raise capital and push development forward is also a byproduct of the business model, as Eric Heil, Managing Partner of Medical Excellence Capital, explains. With many platform companies, it’s easier to partner specific subsections of the technology in particular therapeutic areas while retaining value in others that eventually become the focus of the innovator. This openness to partner assets for early-stage private companies is also extending to public companies as they’ve seen what’s happened to their equity position over the last year.  

2021 also saw a regression in the number of crossover investments being done, while between Q3 and Q4 there were nearly double the number of Series A financings that closed. As Brain Coleman pointed, capital continued to move downstream during the recent biotech bull market, where public funds began to get more involved in crossover rounds and Series B financings. The decline in crossover rounds could be indicative of the recent market performance with too many companies waiting in the queue to go public.  It will be interesting to see how the volume of Series A investments will be impacted.  Public market performance will have to pick up for this trend to meaningfully reverse. 

Although 2021 appeared to be struggle for the biopharma sector, many deals got done and the panelists remained optimistic about the future. As we move into a market environment more conducive to strategic transactions, the hope is that will re-establish a positive sentiment throughout the market. It’s important to note that there is nothing structurally wrong with the industry, coming off the biotech craze of 2020, a downturn was almost inevitable. With a significant amount of biotech specialist capital sitting on the sidelines waiting to be deployed, companies and investors will return to focusing on the highest quality and most groundbreaking science. To hear more of the groups thoughts on the Biopharma industry be sure to listen to the full webinar and download the Locust Walk Year End Market Conditions report.