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Newly optimistic, biotech investors weigh lessons of sector’s downturn

The J.P. Morgan Healthcare Conference, a yearly temperature taker for the biotechnology industry, had a different feel in 2024.

For the first time in awhile, young drugmakers and their backers were optimistic the sector’s downturn might finally be over. An improving macroeconomic picture, combined with a recent run of dealmaking, has led many to hope investors may again see biotech as a worthy bet.

“This event is always the canary in the coal mine for the year,” said Andreesen Horowitz general partner Jorge Conde. “This year, we have a happy canary.”

Yet underneath the optimism remain concerns the rebound may be short lived. Private funding rounds and initial public offerings are still difficult for biotech companies to pull off. Early technologies aren’t getting the same support they were three years ago. Among nearly a dozen investors and executives interviewed by BioPharma Dive, all expect changes in how biotechs are built and that industry layoffs, which regularly made headlines last year, will continue.

An election and geopolitical conflict could also bring uncertainty for a sector already defending itself against drug pricing legislation and an aggressive Federal Trade Commission. The Federal Reserve, which has signaled interest rate cuts, may still surprise markets, too.

”There’s a lot of stuff going on in the world that no one in this room really can control,” said Kristina Burow, a managing director at Arch Venture Partners. “2024 is probably going to be a roller coaster.”

The new funding climate

Investors interviewed at the meeting were hesitant to make predictions on biotech initial public offerings, which have dropped dramatically since their 2021 peak, according to BioPharma Dive data. While there were some signs of market momentum last year, each spurt of IPO activity quickly lapsed into longer dry spells.

There were a few big winners in 2023. Radiopharmaceuticals developer RayzeBio went public and was quickly acquired by Bristol Myers Squibb. Companies with drug candidates in testing, like Neumora Therapeutics and Structure Therapeutics, were rewarded with lucrative offerings and a climbing share price.

Overall, however, performance was mixed and IPOs were few. Public investor demand appears limited to more advanced companies, making the road to an IPO for earlier-stage startups harder.

“We’re still optimistic on companies, but the trading dynamic hasn’t been great,” said Carlo Rizzuto, a managing director at Versant Ventures, which invested in RayzeBio.

Private investors also appeared to shy away from backing so-called drugmaking platforms, which saw large drops in funding totals. And later funding rounds were harder for companies that raised Series A rounds but hadn’t hit key milestones yet. Gone are the days of a quick pivot from a Series A to a “crossover” round and subsequent IPO.

“People with a platform that is five years away from the clinic, that’s just not going to fly in this environment whatsoever,” said Christiana Bardon, a co-managing director of MPM BioImpact. “But if you have a Phase 2 asset that’s coming into the clinic for a great indication, you’re going to do fine.”

Building differently

Platform companies will still exist and win investor backing, of course. But they’re now being more tailored to the moment, investors say.

During the height of biotechs’s bull run a few years ago, billions of dollars were going to companies built with such broad ambitions. They were staffed with high-powered management teams and hired hundreds of employees to build out technology they claimed could support many drugs across many diseases. “That’s because things were frothy,” says former Alnylam Pharmaceuticals CEO John Maraganore, now a consultant and adviser to startups. “Companies got overbuilt.”

That frothy environment led investors to provide what a16z’s Conde described as “R&D funding with public capital.”

“You’re putting your phone on ‘Do Not Disturb’” and saying “you’re not going to hear from me for awhile,” he added. In the meantime, share prices — and the broader market — deteriorated.

Venture backers are aware market expectations are now higher. “People are, in this environment, judging companies much more sharply and quantitatively about their demonstrable progress rather than the promise of progress,” said Vik Bajaj, a managing director at Foresite Capital.

Platform companies may therefore have to be constructed differently, with more tightly controlled spending. “Leaner,” Rizzuto said, with smaller staffs, more outsourced functions and smaller physical footprints.

“Work the deal hard over the initial 12 to 18 months, until you really feel confident that there’s a ‘there’ there,” he said.

In Maraganore’s view, preclinical companies should stay under 100, or even 50, employees until advancing far enough to warrant growing bigger.

Companies may also delay filling out their executive team, which can be a big source of cash burn for fledgling companies. Startups like Artbio and Maze Therapeutics already have taken this approach.

“We’re not rushing to build a C-suite,” said Artbio CEO Emanuele Ostuni, adding that he wanted the “middle layers of the company to be solid.” Maze CEO Jason Coloma chose not to hire a full management team and is currently performing multiple C-suite functions instead.

“But you have to consciously say ‘okay, we’re not going to do that,” he said.

Lessons learned

One frequent criticism of biotech in recent years is that too many companies were created. Many were formed around similar technologies and targeted similar groups of diseases. Once the market turned, they had to fight for investors’ attention and cash. A wave of layoffs and company restructurings has followed.

Venture capitalists interviewed by BioPharma Dive claim things may be changing.

Conde says that, in the past, investor and founder groups split off to start more competing companies, diluting the talent, intellectual property power and funding that can go into each. Now, he speculates there may be a shift to pool larger groups behind fewer companies. Already there have been data suggesting as much from J.P. Morgan and Pitchbook, showing that venture firms are making less, but more substantive, investments.

“Instead of investing in three different companies, let’s actually go back to the way things used to happen in biotech,” Conde said. Then “you’ll have a concentration of technology and talent and, and syndicate support and all that.”

Even if fewer companies do get built, investors say they will have to quickly get initial drug prospects moving and engage potential pharmaceutical partners early.

“Focus, performance and execution are going to be what makes the difference now,” said former Sage Therapeutics CEO Jeff Jonas, now a partner with investment firm Cure Ventures.

Maganore said these strategies suggest the next crop of biotechs should be “a lot more grounded in product opportunities than what you’ve seen before.”

“Every time we go through these cycles, we learn,” he said.

Gwendolyn Wu contributed to this report.