That’s the advice for emerging growth life sciences companies in 2022, according to attorney Frank Rahmani, partner in the global life science and capital markets practice group at Sidley Austin LLP.
Prioritize your development programs and preserve your resources. That’s the advice for emerging growth life sciences companies in 2022, according to attorney Frank Rahmani, partner in the global life science and capital markets practice group at Sidley Austin LLP.
Despite years of record growth, “This isn’t the most hospitable environment in which to raise capital,” he told BioSpace. Instead, companies need to prioritize their programs. He advised assessing each program’s potential to generate data relative to valuation inflection points before determining which programs to advance. “The programs need to have the potential to generate meaningful data,” that sets them up as candidates for potential partnerships and/or for acquisition.
For context, Rahmani explained, “Some 200 biotechs went public in the past couple of years. Many of those that went public were very early in their development. Some were at least a year from initiating clinical trials for any of their programs, yet there were instances of valuations of $1 billion and higher.” Companies such as Bolt Biotherapeutics, Sana Biotechnology and Silverback Therapeutics, are just a few examples.
Now company valuations have lowered dramatically – 20% to 50% or more, according to a number of key biotech indexes – and many biotech IPO prices are down by as much as 40% to 70% from their highs. Lyell Immunopharma, for example, had a market cap of $3.94 billion June 29, 2021 and a stock price of $16.32 per share. By February 24, 2022, its market cap had slid to only $1.56 billion, and the stock price opened at $6.54 per share.
It’s hardly alone. Many of those nascent companies that went public during the pandemic are still sitting on hundreds of millions of dollars of cash and have shown little to no compelling data from their R&D platforms and pipeline programs. The large biopharma companies also aren’t yet jumping toward acquisitions. “They’re waiting for the valuations to settle and for those companies that are generating data indicative of a potentially differentiated platform,” Rahmani said.
In such an environment, many of the strategic partnering and licensing deals, and even acquisitions, will be among small- and mid-sized biopharma companies as they prioritize their programs, keeping some and divesting or shelving others and, in some instances, augmenting their existing programs with focused acquisitions and partnerships to achieve a more compelling pipeline portfolio.
While the proverbial ship has sailed for many products related to COVID-19, Rahmani said there is still some excitement around therapeutics that improve upon existing options and can potentially address a broader range of future viral diseases “Can you take one pill rather than an injection, for example, and get some level of immunity or meaningfully lower the viral load?” he asked.
He advised companies to look beyond COVID-19 to see how their products could apply to future pandemics or in other applications. There still is a lot of promise and buzz around gene editing companies, and applications of mRNA technology to non-COVID-19 indications continue to be attractive.
Given the concerns regarding inflation, Rahmani also predicted rising rates and continued volatility in valuations for companies that are perceived as being higher risk, such as pre-clinical and early clinical-stage biotechnology companies. “Valuations in those companies got quite frothy early to middle of last year. Now they are more down to earth but they’re still in flux.”
The regulatory environment appears stable for the immediate future. “There’s the usual banter but not a lot of regulatory action around tightening drug pricing, although discussions about reimbursement and drug pricing do occur from time to time, especially around each election cycle,” he said.
For example, Robert Califf, President Joe Biden’s nominee for FDA commissioner, said he wants to emphasize real world data in future submissions, which the FDA already is doing. “That won’t dramatically affect the opportunities or deals that emerge for early development-stage companies, although it may affect the valuation narrative for some companies’ pipeline programs as regulators and, in turn, investors will question whether marginal improvements in efficacy are meaningful.”
On the investment front, “I think boards of directors and investors are becoming more sophisticated and more disciplined. Many companies are going through the healthy exercise of assessing their programs and are focused on prioritizing resources assets,” Rahmani said. So, “Rather than trying to advance half a dozen or more programs on their own, some companies are opting to develop two or three in-house where they have the core expertise and synergies and seek partners for others. It’s good to have that discipline and focus, especially in this market.”
The focus on biotech during the pandemic enhanced general awareness of the industry, and ultimately, created a more cautious pool of investors. Even public investors, which have long been important in the biotech sector, now scrutinize biotech companies more thoroughly. “They are more sophisticated now. When they see early preclinical data, they are generally brushing it off, realizing it’s early and ultimately may not translate into success in the clinic and an approved product,” Rahmani said.
Retail investors also are pulling back. They comprised only a small percentage of recently public biotech companies, but the speculative nature of their investment drove many stocks up. For many micro-cap companies, “The volume of trading was so low that even the purchase of 10,000 shares could drive the stock up 10 to 15%,” he pointed out. “But, without institutional and longer-term buyers, the stock often goes back down.” When quick, high returns didn’t materialize, many retail investors left the sector.
This resettling within the biopharma ecosystem is healthy, Rahmani said. “Last year saw a flurry of IPO activity…now the market is absorbing all of this. The biotech market ebbs and flows.” The message for biopharma industry, therefore, is this: “Focus on programs that have the potential to generate meaningful clinical data and preserve your resources.”
