The biotech investment landscape in 2024

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RTW Investments is a global multi-strategy investment firm focused on supporting innovative biotech and biopharma companies across the US, Europe, and China. To get an overview of what’s happening in financing for biotech companies in 2024, we had a conversation with Stephanie Sirota, chief business officer of RTW Investments.

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    About RTW Investments

    The company invests in both public and private companies across their entire life cycle, with a focus on those addressing next-generation gene and RNA therapies, rare diseases, targeted oncological, cardiovascular, and neurological disorders, and more.

    RTW Investments is a $7 billion full life cycle investment firm focused on the most innovative sectors across biotechnology and medtech. 

    The company has been in existence since 2009, and has a global presence in the space, with offices in New York, London and Shanghai. 

    “About eight, nine years ago, together with a few other specialist investors, we started investing in late-stage privates and pre IPO rounds, and we built that crossover ecosystem. And the irony is that we were able to do it with not that much capital,” Sirota explained. 

    “As companies and management teams got smarter around who should be supporting their company as they move into the public arena, it became clear that the specialist investor who had a public business could continue to support those companies. So that was kind of how the crossover ecosystem and biotech evolved. And we were one of the leaders in that.”

    The first company RTW Investments created was gene therapy company Rocket Pharmaceuticals.

    “We started that in our back conference room with the idea that there were a lot of very interesting assets that were moving through academic hands that were ready to go into human clinical trials and needed more capital and someone drive those programs forward out of academia,” Sirota said.

    How do funding firms assess biotech investments in 2024?

    The importance of a science-driven approach

    Sirota said when evaluating any company, the science comes first. Then, this is coupled with what she said is a “Warren Buffett like framework” for evaluating the valuation of a company. The competitive landscape is also taken into consideration.

    “I would say that our favorite investment is where we identify an asset that we believe is going to have a meaningful transformational effect, not just a short-term momentum-driven step up, but we’re looking for things where we can get multiples of return because we’re identifying value before the rest of the market has identified that.”

    During Sirota’s 12 years at RTW Investments, she has seen the company triple the number of modalities that can address diseases. 

    “It’s not just small molecules and antibodies, but we have gene replacement therapy, we have gene editing, we have antibody drug conjugates, we have protein degraders. There are so many ways to address diseases. We definitely follow the advancements in modalities, but then we also look across disease areas and look across therapeutic areas. So these days we’re very excited about metabolic and obesity and some of the adjacencies like liver diseases,” she explained.

    Data and disruption: cornerstones of biotech investment strategy in 2024

    Sirota said it’s important for investors to keep up with the research in every area to recognize when there is a game-changing opportunity.

    “Our process really starts with data collection. We even have a team that supports the research team. And together, we probably attend in person and also remotely over 200 medical conferences a year. And that is critically important to our process because we need to have that primary scientific data.”

    “When you have a market downturn, the competition for capital is fierce.”

    Stephanie Sirota, chief business officer of RTW Investments

    Sirota said that RTW Investments tends to stay away from crowded areas. 

    “We really look for drugs that we think are going to be placing and disrupting that current standard of care or bringing a new standard of care about. Our level of involvement is going to be determined based on the need. If something is already in a public company, and that public company is fine and has a sophisticated management team, we will, for the most part, be just a passive investor. And that, I would say, is the majority of our investments.”

    Funding challenges

    A lot of biotech companies have struggled to find funding, and it remains a topic of conversation. Sirota said it was not just the down market that impacted the funding environment. 

    “If you go back, the two years before that were exceptional and it was very easy for companies to go to IPO and to get a very rich step up to their last round. And we saw a lot of companies go public pretty early, even earlier than they normally do. So, you had preclinical companies in that public sphere. And, you know, when you have a market downturn, the competition for capital is fierce. 

    “Generalist investors exit the space, and then you’re left with specialists like ourselves who have to really be intentional about which companies we want to fund. And unfortunately, in that sort of competition for capital, not everyone is going to be able to get to the same size check.”

    However, Sirota believes the environment today is better, albeit without the capital from the generalist investors.

    Mergers and acquisitions

    Sirota said the trend toward more mergers and acquisitions was strong last year, and it is expected to continue.

    “That’s the beauty of this symbiotic relationship between biotech and big pharma. Biotech can be nimble and can make really meaningful advancements. And at some point, the large companies, whether it’s big pharma or large biotech, they have the ability to sell a drug and to properly commercialize it and to take those approved therapies and bring them to global markets. A biotech company, particularly a small or even a mid-sized biotech company, doesn’t always have the capability of doing it on its own,” Sirota noted.

    She explained that there have been around a dozen deals this year already with an average premium of more than 100%. The M&A activity has been across subsectors, and the trend is going to continue.

    The IPO market

    It seems as though the initial public offerings (IPO) market was a bit quieter in 2023, however Sirota said there have already been eight IPOs in 2024 compared to 11 in 2023.

    “Of the IPOs this year, less than half of them are actually trading above their IPO price. We think that folks are probably going to be a little bit more selective about taking something public until they know if that’s a real chance of continuing to hit some of those milestones. So that’s going to be a determining factor,” Sirota said.

    A wave of positive clinical data

    Sirota said that so far, 2024 has been highlighted by strong clinical data. She expressed hope that this translates into more confidence from other funders and other sources of capital. 

    Sirota also said the FDA has also become “a bit friendlier.” 

    A part of this, she explained, was due to so many resources having gone into COVID, as well as burnout. She said a lot of drug reviewers left, with less experienced staff filling in, leading to a more conservative approach.

    “Now, particularly with someone like Peter Marks, who’s a real champion of gene therapies and genetic medicines, we’re seeing some approvals and the FDA is friendlier. Hopefully, with a wave of positive clinical data from biotech companies, and then also a stable or hopefully a lower interest rate environment, all that capital is going to come crashing back.”

    The royalties market: a growing area of funding for biotech investments in 2024

    One growing area of funding is the royalties market. Sirota explained that there will be a competitive bid around a commercial product, with financiers competing for a slice of that royalty stream. 

    “Generally, they’re looking for an existing commercial product that the revenues are known and you don’t have to spend a lot of time figuring out or predicting what that commercial is going to look like,” Sirota noted.

    Sirota said when a company has a drug approved, it’s necessary predict how much revenue the drug will achieve, as well as peak sales.

    “There will obviously be a Wall Street consensus around this. But we have a team, and we’ve been doing this for the last 15 years, working on commercial forecasting. We look at every drug that launches every year and try to assess what we think that commercial forecast is going to look like. Not a lot of people are doing this. And so we can approach a company and then offer them a deal to give them money in exchange for a percentage of those revenues,” Sirota stated.

    “So, we’re buying, call it 5% of the revenue stream of a particular drug for its capital life. And this is non-dilutive, so in some way it has that difference from raising equity. It’s a lower cost of capital than equity, but then it’s not as burdensome to a company’s balance sheet like debt would be.”

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