2023 was a year of economic uncertainty for the biotech industry, which led to a funding drought. It also held the record for biotech bankruptcies, which have seeped into 2024. Although a bleak start to the year with biopharmas like Humanigen and Athersys calling it quits in January, can the industry look for sustainable alternatives instead?
While 2022 was previously dubbed the highest bankruptcy year in ten years with eight biotechs having filed for protection, 2023 stole the spot with a whopping 41 companies declaring bankruptcy, according to the U.S. Securities and Exchange Commission (SEC).
A Life Sciences 2024 Dealmaking Trends & Outlook report by global law firm Ropes & Gray suggested that one of the reasons why there were so many bankruptcies last year was partly owing to a spike in debt financings that took place in 2021, as a response to declining interest rates that year.
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Biotech bankruptcies surge in 2023 amid an economic downturn
Although debt financings are typically opted for during times of low interest rates, it wasn’t popular with the life science sector until recent times. With the drop in interest rates, biotechs scurried to banks seeking funds, but then, as interest rates rose the following year, the industry pulled the reins on debt financing. However, the high rate of this kind of funding resulted in many bankruptcies last year.
This was also underlined by layoffs across the sector. Many biotechs slashed their workforce, including pharma giants like Grifols laying off 2300 employees, Takeda making more than 1500 of its staff redundant, and Biogen, Genentech and Thermo Fisher Scientific rooting out more than 1000 people from its workforce. This was the route that most companies in the industry, big pharma and startups alike, took to combat inflation and preserve capital at a time when investors weren’t too keen on funding the industry.
Life science companies like Infinity Pharmaceuticals, which was nearly two decades old, laid off 78% of its staff after a merger with MEI Pharma was sunk by the latter. What was supposed to be the last straw for the British company’s sustenance, which would have provided Infinity with $100 million in funds that were predicted to run on until 2025 to develop its three cancer drug candidates, was scrapped by MEI because it failed to win stockholder approval. Following layoffs, Infinity filed for bankruptcy in September last year.
One of the most notable biotechs that filed for bankruptcy in 2023 was Sorrento Therapeutics, which had turned down a billion-dollar buyout in 2020, and was in a legal spat with immunotherapy biotech NantCell’s founder over Sorrento’s claims that the latter was quashing the development of its cancer generic drug.
Other companies that went under last year include American biotech Rubius Therapeutics, after canning its solid tumor candidates, precision therapies company Goldfinch Bio amid funding woes, and 9 Meters, which was stumbling with its short bowel syndrome candidate.
Why is biotech struggling? Understanding biotech bankruptcies
Sarah Stevens, president of Azzur Labs and Azzur Cleanrooms on Demand, at Azzur Group, explained that biotech bankruptcies were mainly because of the economic downturn in recent times.
“From a macro standpoint, the unstable economic conditions worldwide post-COVID, supply chain headwinds, and inflation have all contributed to a more challenging financing environment,” said Stevens. “Scientifically, formulation and manufacturing process innovation is necessary to keep pace with cell and gene therapy opportunities. There are constraints related to fit-for-purpose, flexible manufacturing capacity.”
For example, cell therapy company Athersys, which failed an interim trial testing its stem cell platform for the treatment of ischemic stroke as its sample size of 300 patients was inadequate to achieve the primary endpoint, filed for bankruptcy and sold its assets to Japanese biotech Healios.
Another cell therapy company that filed for bankruptcy was Athenex, after it ran out of funds in May last year. The U.S. Food and Drug Administration (FDA) had slapped a clinical hold on its candidate after a patient died during its phase 1 neuroblastoma clinical trial. The company had previously hit a few snags with the FDA denying approval for its oral chemotherapy drug as well as pipeline and job cuts.
“It is always disappointing to see failure in medicines development, but of course, it is historically not uncommon. So many factors – both financial and scientific – can influence the fine line between success and failure. Even with recent incredible advances in biologic modalities, successful delivery to target with the necessary therapeutic and safety profiles remains challenging,” said Stevens.
Strategies for mitigating bankruptcy risk
Adopting alternative funding methods
Some biotechs are turning to royalty financing as a way to evade bankruptcies. Unlike debt and equity financing, royalty financing allows those seeking the funds to have full control of their company. Moreover, they are not bound to immediate repayment or even short-term horizons. So, without having to dilute ownership, biotechs can carry on with their research and development (R&D) projects. In the biopharma sector, investors like Royalty Pharma, Blackstone, and Healthcare Royalty Partners dominated the royalty funding arena, as they made up 71% of royalty origination deal value. But lately, other players have driven nearly half the royalties financing market value, according to a report by strategy insights firm ZS.
The report suggests that smaller biotechs turn to this kind of funding mainly to advance their late-stage assets or to support early commercialization. More than 50% of royalty financing deals were closed only once the biotechs had filed for FDA approval for their drug candidates.
Although more and more biotechs are adopting this funding method as an alternative to traditional funding, it is not without its risks. If a company doesn’t make enough revenue to pay back its investors, it could end up owing more money than what it is worth.
Grants are another way to secure funding in the biopharma sector. But while the biggest perk of grant funding is that the money received does not need to be repaid, they can be challenging to find, and most tend to be a one-time funding, and not a renewable – and thereby reliable – form of finance.
Looking for partnerships
At economically turbulent times, Stevens pointed out that partnerships could help biotechs evade bankruptcy and strengthen innovation.
“In an environment where raising capital is more challenging, there is a need for greater creativity,” said Stevens. “One mechanism is the development of partnerships and collaboration, which may then pave the way for mergers or acquisitions (M&As). Bringing together assets, which may otherwise remain dormant with technology platforms and capacity, is a way to enable development progression. Recent examples include the collaborations between Regeneron and Intellia, as well as AstraZeneca’s investment in Cellectis. Even more recently, Novartis invested significantly in gene therapy with Voyager.”
Setting realistic valuations
Besides, having valuations that are realistic can be key to securing funding. As overvaluing can misdirect investments, in a report by BioSpace, James Cassel, chairman and co-founder of Cassel Salpeter explained that overvaluing is a mistake, and that it is often better to keep a smaller portion of one’s company rather than wholly own it to eventually end up going out of business.
Biotech bankruptcies in 2024: is there room for optimism?
Although 2024 kicked off with the demise of American biopharma Humanigen when a reverse merger was scrapped and after its monoclonal antibody for COVID-19 had failed in the clinic back in 2022, it doesn’t mean the industry is set up for failure this year. In fact, initial public offerings (IPOs) are expected to rebound this year, and there is a sense of cautious optimism as the industry gets back on its feet.
Stevens said: “I think there are increasing signs of optimism for the remainder of 2024 and into 2025. The investment community is active and service providers are evolving to meet the particular needs of biologic modality and drug product manufacturing needs. Partnerships and collaboration will remain of increasing importance to ensure that the full potential of the biotech therapeutics revolution is realized.”