Biotech VCs Face Funding Bulge Amid Struggling Stock Markets

19/10/2021 - 5 minutes

Despite volatile biotech stocks limiting options for exit, Sofinnova Partners’ latest €472M fund highlights ballooning European venture capital and its growing focus on early-stage biotech investments.  

Biotech fundraising broke records in 2020 as the Covid-19 pandemic swept the globe. This year seems set to continue biotech’s winning streak in private fundraising. One example is a surge in funding going to European life sciences investors, which was topped up this week by the venture capital (VC) firm Sofinnova Partners’ €472M Capital X fund, dedicated to supporting early-stage life sciences firms.

Henrijette Richter, Managing Partner of Sofinnova Partners, told me that the fund’s impressive size was largely due to the team’s reputation and track record.

The context of the global pandemic, which demonstrated the importance of bringing innovative and efficacious new drugs to patients, has further fuelled interest in Capital X,” said Richter.

The splurge in private biotech investments starkly contrasts with the recent performance of biotech stocks in the US and Europe, which has been very poor since their prices peaked in February. 

We’ve got a slightly anemic public market environment; at the same time, the level of private capital deployed is huge,” said Nooman Haque, Managing Director of Life Sciences and Healthcare at Silicon Valley Bank UK, at Endpoints’ European Biopharma Summit last week.

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The last month in particular has seen a 10% drop in multiple biotech stock indices, in parallel to a drop in stock prices for Nasdaq-listed companies in multiple sectors. The hardest-hit biotech stocks have been small- to mid-cap companies on the Nasdaq, represented by the S&P Biotech index (XBI), and biotech companies listed on Euronext, which are tracked by the Next Biotech index (BIOTK).

What is striking is that this year the biotech [stocks] from almost every European country are down,” said Bertrand Delsuc, founder of the business intelligence firm Biotech Radar, in a Twitter Spaces discussion that he hosted last week. The only exceptions to this trend were stock prices for UK and Danish biotechs listed in Europe. 

The reasons for the volatile stock situation are myriad, including factors such as inflation fears, safety scares in gene therapy programs, individual company setbacks, and governmental policy. 

Public biotech companies have been confronted with difficult questions about drug pricing while larger early-stage platform players are still working through their science rather than products,” noted Richter.

The biotech market for initial public offerings (IPOs) has seen some duds, such as the cancellation of NH Theraguix’s Euronext listing last week, but overall it has remained strong. Two standout European life sciences IPOs in the last month came from two UK firms: the sequencing heavyweight Oxford Nanopore Technologies and the artificial intelligence-assisted drug discovery specialist Exscientia.

I think we’re heading into another record year in terms of, not only amounts of capital being raised, but also numbers of IPOs being done by companies,” said Lenny Van Steenhuyse, Equity Analyst Life Sciences at KBC Securities, in Delsuc’s discussion. “This is of course more outspoken in the US compared to Europe, but still here in Europe, we see a bit of a catch-up effect.

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While VCs are enjoying a major windfall from their limited partners, the mixed landscape of biotech stocks is making it harder for many of these cash-infused life sciences VCs to secure an exit and return on their investments. IPOs aren’t seen as true exits — VCs often sell their shares in the years following an IPO — and the best outcome is a merger and acquisition (M&A) deal of their portfolio firm with a big pharma company.

I’ve got this image in my head of a python swallowing something like an elephant and there’s a bulge of capital that has to escape somewhere,” stated Haque. “Big pharma M&A is pretty light; it hasn’t really changed a lot. At the moment [big pharma companies] seem pretty introspective.

One approach to tackle swelling portfolios is to aggregate multiple biotechs into a single larger company. Medicxi took this route when it formed Centessa Pharmaceuticals in February this year, blending together a group of its portfolio companies including ApcinteX, Morphogen-IX, and Orexia Therapeutics.

Additionally, a large cash influx into late-stage private biotechs leads many life sciences VC investors to redouble their focus on cheaper early-stage firms and company creation.

We see a ton of capital at Series B and Series C and that does lead to frothy valuations,” said Alex Pasteur, Partner at F-Prime Capital, at the European Biopharma Summit. “And so we’d rather do seed and Series A and create our own deal flow.”

Sofinnova has a range of funding pots allocated to different types of biotech and medtech companies, such as a crossover fund for late-stage clinical companies that it raised earlier this year. The firm, which has been investing in early-stage biotechs since before the public market favored this approach, sees an influx of life sciences investors focused at the early stages as a welcome trend.

What we are seeing now is probably more of a return to normal,” said Richter. “Our view is that we cannot plan for an IPO or M&A route, and having been through tough economic periods in 2001 and 2008, we know our companies need to adapt to be nimble and successful.

Cover image via Anastasiia Slynko

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