PIPEs in biotech fundraising: is this growing trend fueled by economic uncertainty here to stay?

PIPE financing in the biotech sector

This past year has not been very sympathetic to fundraisers in the biotech industry. As the economic downturn grinds on, many companies are in need of funds to stay afloat. A recent trend in the way biotechs have secured funding, might be telling of how these companies are determined to pull through.

A private investment in public equity or PIPE is an investment made by private accredited investors in public stock at a discounted rate. This stock is not freely tradable, and because it’s privately held, it will be restricted for a period of time. This kind of investment was thought to be less popular, but now that’s a thing of the past. Currently, with capital drying up, biopharmaceutical companies have hit a rough patch. And so, many are willing to venture out and explore non-typical ways to raise money.

“The biopharma sector and small-cap sectors have faced economic headwinds over the last few years,” said Warren Duncan, chief financial officer (CFO) at Filament Health. “Although potentially more dilutive than sources of capital that were previously available to biopharma companies, it is encouraging to see capital being invested in the biopharma sector.”

Funding drops by nearly half in 2022

2021 was a record year for biopharma IPOs at the New York Stock Exchange (NYSE), which is the world’s biggest exchange, with more than 2,400 listed companies, and is home to over 3,000 exchange traded funds (ETFs). This was led by a boom in special purpose acquisition companies (SPACs), despite disruption from the COVID-19 pandemic. More than 100 biotechs raised nearly $15 billion that year. But then, investments began to lose steam as stubborn inflation and rising interest rates burdened investors.

Financing for biotechs dropped by 48.6% compared to 2021, and last year, the initial public offering (IPO) market fell as market uncertainty drove down IPO proceeds by 93%, according to Lynn Martin, president of the NYSE. 

To add to that, many SPACS that were waiting to go public decided to call it quits after they drew scrutiny from the U.S. Securities and Exchange Commission (SEC). More than 50 SPAC mergers were terminated in 2022, according to global law firm White & Case

Investors also shifted gear and decided to put money in companies that had candidate drugs which were already in clinical trials instead. 

“Over the last few years, many companies in the biotech sector have struggled to fund their business, and investors have selectively invested in high-quality assets, under a broad range of investment structures,” said Duncan.

Now, early-stage biotech funding is predicted to take a 40% plunge this year, according to a report by HSBC Innovation Banking. Jonathan Norris, managing director at HSBC Innovation Banking, and lead author of the report, told Labiotech that new investors are demanding different milestones compared to 2021 and the years prior. Presently, investors want to see clinical results before making investment decisions.

Can PIPEs help counter the biotech financing crisis? 

So, it’s no surprise that young biotechs that have gone public are looking for new ways to obtain funds. Earlier this year, American clinical-stage company Taysha Gene Therapies, raised $150 million through a PIPE funding led by RA Capital Management, PBM Capital and RTW Investments, among others. However, last week, as Taysha pulled the plug on its lead gene therapy candidate for the treatment of a rare central nervous system (CNS) disorder, following a U.S. Food and Drug Administration (FDA) meeting, it now expects its cash runway to last into the fourth quarter of 2025.

Over the year, other major PIPE financings have taken place, including a $160 million deal for American gene therapy company Krystal Biotech, U.K.-based mental healthcare pharmaceutical COMPASS Pathways bagging $125 million financing upfront with up to an additional $160 million tied to exercise of warrants, and Canadian precision medicine company ProMIS Neurosciences securing $20.4 million. And, only last month, American clinical-stage biotech Inhibrx announced that it would receive $200 million in financing that was limited to some of the company’s existing investors.

Tim Opler, managing director at American investment bank Stifel Nicolaus, believes that PIPEs might be a significant way for companies looking to rake in investments. “I think it’s fair to say, if you look at the last three or four months, that the number of PIPEs has been really high,” said Opler during an episode of the Biotech Hangout. He told Labiotech that the benefit is that “at least the company can raise money.”

And for investors, there are a few perks to investing in a PIPE, according to Opler. Upon signing a confidential disclosure agreement – during which time, a company shares confidential data with potential investors – investors get a sneak peek into valuable information like positive clinical trial results, which allows them to predict whether the stocks will go up, and thereby invest in the company. Moreover, investors can negotiate higher discounts with the company, as well as be entitled to additional warrants.

“So, let’s say the stock was trading for $10 a share, the day before the PIPE. With a PIPE, let’s say, you buy the stock at $8 a share… And so, some PIPE investors will actually buy the stock with a discount. They’ll sell the stock… So, you turn around and you sell your stock that you paid $8 for, for $10, or maybe by this point, it’s gone to $9, so you get an instant profit. And then you hold on to those warrants and hope the stock goes up.”

However, as these deals become more frequent, critics of this financing strategy say that these kinds of transactions hurt the biotech sector because certain private investors get an early look at data with a PIPE, giving some investors an upper hand over others. This was debated on the Biotech Hangout podcast. 

“I think the bottom line is that the stock market should be a level playing field for everyone and obviously the reality is that it’s not, and someone who’s always been kind of a small independent investor, it has bothered me when you see things like this,” said Brad Loncar, founder of BiotechTV, on the episode. “I think it does disadvantage the individual investor just by perception of it itself. I don’t think it’s a good trend but it’s probably something that’s – especially, while the financing picture stays difficult – going to be something that’s probably going to grow in commonality.”

PIPE deals, here to stay a while in the biotech financing space

With the IPO window shut and capital being scarce, companies do not have a lot of bargaining power with investors, according to Opler. 

“PIPE investments have become quite popular,” said Opler. “I would say one week in three these days, the PIPE market’s actually bigger than the follow on market. And so, the PIPE market has become quite important. And if you went back two or three years, you would not see that at all.”

As this is a “time of life and death for biotech,” Opler explained that in the next two years, many biotechs will have gone out of business.

“If you can raise money in a PIPE, that can make a huge difference in whether or not your company survives,” he said. “The good news is that PIPEs are there… We’re in a very, very difficult time for the market. And so, the availability of the PIPE market is obviously, overall, a good thing.”

As companies find creative ways to get a hold of funds, Duncan’s company Filament Health recently filed an SEC registration for a SPAC. While he believes that there are pros and cons to PIPE deals, as with any other kind of investment, many biotech companies are currently in need of financing to advance their pipelines. “It would be prudent to assume biopharma companies executing PIPE transactions believe funding their business and obtaining capital through a SPAC outweighs the drawbacks within these types of transactions.”

As only last week, U.S.-based commercial-stage company BridgeBio Pharma announced a $250 million PIPE investment, it’s safe to say that PIPE deals aren’t leaving the healthcare funding arena anytime soon. That’s to say, at least not until the current economic slump that we are in changes for the better.

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