When investors got wind of Silicon Valley Bank (SVB) being forced to sell its treasury bonds at a loss, owing in part to surging interest rates in the past year – a move by the Federal Reserve to counteract rising inflation – panic followed a bank run. And in a swift spur of events, the collapse of the California-based bank was announced on March 10, 2023.
The implosion, which is said to have caused a financial meltdown following the failure of the U.S.-based Signature Bank, and the near crash of Swiss bank Credit Suisse and the American First Republic Bank, salvaged by bailouts, has seen ripples in the global stock market.
However, the SVB collapse has been regarded as a symptom rather than a cause of an economic crisis, according to David Baram, president and CEO of U.S.-based Emendo Biotherapeutics, who has led the biotech’s seed and subsequent funding programs.
As a tech-lender, SVB’s demise may have made investors reluctant to fund tech startups. And, some young biotechs could be left high and dry too.
In addition, since the biotech industry is one that requires capital until commercialization kicks off, it often takes a while to bear fruit.
“If we take tech companies that already have revenues, because their time to market is much faster, there’s inflation, interest rates are going up, then they can raise prices, and they can compensate. Biotech cannot do that,” said Baram, referring to R&D biotechs, adding that this could affect the availability of funds for biotech companies.
Echoing Baram’s thoughts, Allan Shaw, CFO of Nasdaq-listed Portage Biotech, who believes that the crisis occurred during a bad environment for startups to begin with, said: “It’s just going to cost the companies more to get to the promised land. I would say that as a consequence of that, people are going to have to do more with less, and they’ll probably need to focus.
“They may have had aspirations of raising a family of programs, and now, they may just have to have this – have an only child in terms of how they allocate resources. So, I think people have to get a little bit smarter with capital and resource allocation and deployment. I think when money was free, people did everything because they could, they didn’t partner, they didn’t prioritize.”
Drop in IPOs: unfavorable for biotechs
Moreover, the economic climate in the past year hasn’t been favorable for the biotech industry. Having observed a significant drop in initial public offerings (IPOs) in 2022, where there was a 79% decline in the U.S. since the IPO boom in 2021, and plummeting figures across the Asia Pacific (APAC) region and Europe as well, companies have had to resort to other streams to generate funds.
Severine Piot-Deval, healthcare fellow at Hedder and former portfolio manager at asset management company Amundi, said: “Private biotech funding was already facing a slowdown in 2022, per SVB’s healthcare investments and exits annual report. The number of biopharma IPOs dropped from 92 to 19, the number of M&A (mergers and acquisitions) deals from 15 to 9, and VC (venture capital) dollars went from $39 billion to $29 billion.”
“And the bank, which with close to 50% of U.S. venture-backed life science companies as clients were one of the best observers, expected 2023 to see investment at 2020 level, few IPOs though more than in 2022, and private down rounds for the better valued companies. All this stems from the excess optimism of 2021 and to a lesser extent 2020, where funding levels had exploded,” said Piot-Deval.
Baram believes that the reason for the fall in IPOs might have been because investors are attempting to make safer bets – putting money into bonds and treasury bills with notably lower risks.
Meanwhile, although venture capitalists may have money, according to Baram, they need to be “very careful with how much they spend,” who added that companies that have a runway until around 2025, are in a better place financially.
So, those R&D companies that did not raise funds recently, may face the brunt of the collapse.
Piot-Deval, who believes that SVB’s collapse has shaken the market confidence, said: “There is no arguing that there was a private equity bubble. As there is no arguing that for all its drawbacks, the public market has better transparency and much faster price recognition. This will take a few years to wash out, and everyone will act more cautiously. In all likelihood, biotech going for series B and beyond will have to accept lower valuations, while there is already evidence that VC funds have moved to earlier (even seed) rounds.”
However, Piot-Deval is optimistic that although the demise of SVB will make it harder for some companies to borrow, and could take a while for biotech valuations to fully recover, this should not “directly impact much of the overall biotech funding environment.”
Yet, things are seemingly bleak at present. Shaw, who regarded SVB as a linchpin – formerly – in the healthcare and technology ecosystem, said that the situation has turned into a “bit of a witch hunt” with people looking for the next bank to fail.
“And they’re doing a job of generating a lot of fear in the markets and risk and uncertainty,” which could translate into people investing in less riskier ventures, according to Shaw; a point that Baram acknowledges as well.
SVB’s collapse turned into a “witch hunt”
Besides, the social media-fuelled bank run did not help allay the lingering fear over a looming economic crisis. Instead, it contributed to escalating the downfall of SVB.
“I think what’s also very interesting about what occurred was the impact that social media had… it really created fear at an accelerated pace that we’ve never seen before,” said Shaw who thinks that we need to introspect and consider how we could contain damage of that sort.
“When you create that kind of theory, that becomes self-fulfilling, and perception becomes reality; I think people have to be calm, because if you’re calm, no one gets hurt. You know, it’s like yelling fire in a crowded movie theater – never a good idea,” said Shaw.
Lessons learned from the SVB collapse: more collaboration between biotechs
As a result, there is much to learn from this, according to Shaw, who said one way for biotechs to avert the effects of a global financial crisis would be to collaborate with other biotechs to not only develop a stronger balance sheet to improve the cost of capital, but also leverage people’s capabilities towards creating a worthy pipeline.
“As part of being intelligent about how you manage your resources, also recognizing that time is the enemy; and you know, the shortest distance between two points is a shortcut. So, you know, collaboration is an easy way to make that stuff happen,” said Shaw.
“Also, with people who have platforms, collaborations are also very good,” said Shaw, recognizing that platform companies possess the technology that can be adopted in various therapeutic areas.
“If you’re only focused on oncology…you can have a collaboration with someone else who can utilize that program for autoimmune disease. You have somebody validating your program on their nickel, and actually making your program or your platform more valuable.”
While partnerships may be a good idea, some companies have also slashed candidates from their pipelines to cut down on costs.
“If you have a limited amount of resources… you’ve got to really decide on what horse you are betting on,” said Shaw, who believes that having a lot of drug candidates on a pipeline doesn’t necessarily drive value.
“I think you need to focus on a program that will actually drive value, as opposed to pandering… It comes down to a little bit of which child do I love better? You know, which one do you think has a larger market opportunity?”
Currently, some companies are also selling their programs when there aren’t enough funds to develop a product despite its possible efficacious potential. According to Baram, companies could even swap programs or focus on a specific indication, in a bid to manage funds efficiently.
While things might seem grim from a macroeconomic perspective, the healthcare sector still has quite a bit to look forward to.
“We are at a time where technology in biotech matured to be something that has the potential to change healthcare, as we know it, within a decade or two. It’s happening with gene editing, AI in pharma, gene therapy…So, these are exciting times in terms of technology,” said Baram, who recounts that funds are always available for promising biotechs.
“This is the renaissance of the biotech industry. This is an amazing time. So looking at that, and looking at the future… I believe it’s unstoppable.”