The last 2 weeks have seen tumultuous change in the markets and sentiment from investors. We conducted a series of short interviews to see how this had changed people’s perceptions for “fundability” of biotech companies and projects, particularly as it relates to early stage or start-up.
The groups we spoke to included venture capital (VC), high net worths (HNWs), CEOs of early stage companies who are currently fundraising, and finally corporate investors (trade buyers such as pharma).
Although this was not a large poll with statistically significant results, it did give some useful qualitative pointers for anyone considering going out fundraising. Thanks to everyone who contributed. Here’s the feedback we got:
As valuations across public markets are dropping (this time biotech is NOT immune), then there is a knock-on effect in private markets. This means valuations across the board are coming down, so it’s a good time for buyers to cherry pick assets if they can do it from cash on the balance sheet or operations. And it’s valid for licensing deals and acquisitions. But forget using any kind of debt to fund deals. So, good news for pharma who are looking to build out pipelines and who have substantial cash reserves. As pointed out in a recent Datamonitor report, more deals will get done, but at reduced valuations.
Other trade buyers (biotech, specialty pharma, generics) will still be able to capture this opportunity but less so, since cash reserves are smaller than big pharma. If anything, the rule of thumb seems to be “big buyer, small target” (in relative terms) since this means the buyer is not over-reaching to pay cash for a small acquisition target. And of course, any deal still has to make strategic sense – even more so in this climate; any acquisition will have to demonstrate an early ROI (ideally cash based).
We also learned that smaller trade buyers in particular are less willing to make speculative investments, and are sticking much more closely to areas of existing expertise.Though, they will consider specific assets which have a high degree of strategic fit and are now available at a discount.
The stronger groups have funds locked up, sometimes for several years, and will not need to raise funds themselves anytime soon. However, any groups having to raise new money from Limited Partners (LPs) will find the world has changed. Many LPs are not even taking new meetings since they are themselves having to revise their asset allocation and risk profile. So, there seems to be increased caution in new deals across the board. VCs will need to keep back funds (perhaps more than originally intended) to support existing portfolio companies, since other sources of capital are drying up.
Some VCs we spoke to are still keen to look at new deals (after all, that is their life blood), but only good deals will get done. Specifically, they like clearly defined biology around a target, prefer NCEs with paradigm changing potential, significant market opportunity and a clear path to exit. As you may imagine, criteria for a “good deal” is going to get much tougher. And again, valuations are heading south.
HIGH NET WORTHS
HNWs are usually the guys to get in at seed round and early institutional round to help develop and validate science. But let’s think for a minute what makes a HNW. Usually, it’s someone who has built wealth from being closely involved in building a business themselves (biotech, tech, or “old-economy”). After their first exit which vaults them to HNW land, they now have a new responsibility: how to protect the wealth they have already built. Such individuals will tend to do two things: (i) try and build new wealth within the specialist area they know; and (ii) diversify some holdings into other assets (e.g. stocks, real estate). So, valuations across all their holdings will be down – between new ventures (for the same reasons as mentioned under Trade Buyers above) and diversified assets.
Our conversations with a few HNWs has suggested that while a few are looking opportunistically at investing in complimentary assets at reduced valuations, much greater emphasis is on waiting by the sidelines while they see how the market develops. So, not a good source for early stage investment dollars.
CEOs CURRENTLY FUNDRAISING
A tough place to be (though maybe not as tough as being the CEO of a bank!). Feedback we have here is that valuations are down and existing investors are reluctant to take down rounds so end up funding a smaller internal round themselves. While this is good for a company short term, since it gets in vital operating funds, longer-term this will lead to even higher valuation expectations – and likely to create greater disappointment given the fall in valuations across the board. Such valuation falls are unlikely to rebound anytime soon, given the massive market dislocations.
AND THE BIG ELEPHANT IN THE ROOM…
Asset price inflation across all asset classes has taken place in the last 10 or so years due to the ready and very cheap availability of credit. Now, the credit has all but dried up. So, the party’s over, and it’s time for the great hangover.
People will still go on about their business, biotech companies will still get built, but asset prices across the board are being revalued down. And given the massive debt deleveraging starting to take place, support for such previous asset valuations is all but gone.
So, biotech must do whatever it can to shore up broader investor support: rationalize portfolios; build further relationships for partnering/ M&A; revise valuation expectations and models; and focus on two ROIs – Return On Investment, and Return Of Investment.
Cash is king. Welcome to the brave new (old) world.