Trends in Biotech Investing: Time to be Cautiously Optimistic

The standing-room only audience for LSX’s ‘Charting the Course’ Biotech Leaders panel was likely relieved to hear a stellar line up of VCs explain that trends in biotech investing are ‘improving’ and there are specific reasons to be ‘cautiously optimistic’. Panellists from RTW Investments, Gilde Healthcare Partners, Indaco Venture Partners, Oxford Science Enterprises, and Forbion painted a broad-brush picture of the dynamic investment landscape shaping the future of European biotech.

2023 was the second-best year ever for M&As, but one best to forget for IPOs. 2024 is already looking to exceed last year’s paltry 12 US IPOs, with 8 already in Q1. European biotechs have long looked West for finance, with NASDAQ remaining the focus, and there remains an enduring need for European management to think transatlantic from the get-go.

But all is not always awesome out West, as political pressures in a US Election year are bearing down on the sector. These include diplomatically fraught attempts to on-shore supply chains through the BIOSECURE bill, and the chilling effect on investment of the Inflation Reduction Act (IRA) of 2022, which seeks to lower prescription drug costs. The IRA also tilts big pharma R&D, and investment interest, towards the largest, often chronic, indications, which is not in the best interests of patients with rare diseases, or infectious diseases.

Pharma is pruning its pipelines, so some areas are deprioritized, as the behemoths refocus again, post-pandemic, on larger indications where $bn blockbusters can be sustained. This presents opportunity as spin-outs are created. However, investors have generally pulled back from early-stage investment, so there’s a widening gap in funding, as it has long been the case, in securing the investment to attain the much-sought after value inflexion point of data from clinical trials. For portfolio companies which have backing from sizeable VC funds, it often makes more sense to be kept private longer and achieve a critical mass.

For mid-size pharma, such as Ipsen, who are not looking for $bn blockbusters, IRA may be less relevant, and they may then be more interested in more diverse offerings to keep their pipelines full, and not fall off a cliff. Which is a big problem, as 2025 offers the scary prospect of a massive patent cliff. The big success of obesity drugs in tackling big waistlines, provides comfort: Lilly and Novo have $billions to spend, which should help ensure M&A continues its ascendency in ’24 and beyond.

So, be ready to talk up the ‘unfair advantages’ of your modalities, the unmet medical need they could elegantly resolve, the solutions they offer to current market dynamics, and how you’re going to be faster in development, to ensure you secure the best deal when talking term sheets across the partnering tables. And finally, grasp that ‘cautious optimism’ for all it’s worth and ask, with rock-solid conviction, for the money you need to reach where you need to go, rather than trying to drip feed your development plans.