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To B or Not to (Series) B – LifeSciVC

By Robert Clarke, CEO of Kinaset Therapeutics, as part of the From The Trenches feature of LifeSciVC

Strategic considerations of when and how to consider raising additional capital to support clinical development in an improving but still volatile market.

As we approach the mid-point of 2024, we find ourselves at Kinaset Therapeutics approaching an important crossroads for the company as we advance our inhaled pan-JAK program KN-002 for asthma and COPD. Supported by a strong venture syndicate and a $65MM Series A round, we recently completed a Phase 1/1b four-part trial in healthy normal volunteers, asthma and COPD patients. We are now in the exciting process of presenting our clinical data at scientific conferences and connecting with interested parties to keep them informed of our progress. As word has circulated about our clinical data in asthma, it’s been nice to have unsolicited interest about our program given the choppy financial markets. While we are still in the middle of our Series A, we are thinking about our path to registration including planning for our upcoming Phase 2 trial and beyond. A topic at board meetings has been consideration of when and how much to raise in a next financing that would allow us to enhance the value of our KN-002 program and the company. In terms of Series B and beyond investments, what are the current trends in the market that we should be thinking about?

Raising a Series B round of funding is a critical juncture for a biotech company, typically marking the transition from initial successes (in our case, clinical proof-of-mechanism) to scaling operations and pursuing later stage clinical trials. In the context of the current financial markets and IPO window, the dynamics of Series B fundraising have become increasingly complex and nuanced to each specific situation of a company. The private investors must continue to balance their capital risk with the future magnitude of return based on partnership, M&A, or a future public offering. On a positive note, there are signs that the biotech market is returning to more stable ground easing some of the pressures on both sides (investors and capital-craving biotechs).

Current Market Conditions

On the public side, the broader stock market is still showing signs of volatility driven by ongoing geopolitical tensions, fluctuating interest rates, and a pending election cycle here in the US. On the positive side, there has been a modest but open IPO window in 2024 for clinical stage companies with high quality assets/pipelines, as well as an appetite for public offerings for established biotech companies with favorable data (e.g. Insmed positive Phase 3 bronchiectasis). Summarized in a recent article from Biospace (Ney), as of this writing there have been 12 biotech IPOs in the first half of 2024 with one other in the queue. Rapport’s IPO in early June is currently performing quite well and certainly buoying spirits regarding biotech IPOs in 2024 (Masson). Biotech market pundits contend they expect the window will stay open for the next few months with an expectation that election proximity will perhaps push Q4 ’24 IPO considerations into 2025.

In the private investment market, the data suggests that the total amount of money that has been raised by biotech in private deals in 2024 is higher than the 2023 quarterly averages (Walrath). The wrinkle in 2024 is that fewer names are getting the money meaning the deals getting done are for larger dollars.

According to a recent report in Chemical and Engineering News (CEN), the biggest hit for fundraising is for early-stage deals as investors are currently more likely to look for reduced risk making bets on programs that are further along in development (Walrath). This could actually be looked at as good news for those in the market for Series B rounds or beyond with more capital coming into those lower risk deals. Venture groups also continue to raise new funds to deploy into biotech (e.g. Goldman Sachs $650MM Life Sciences Fund; Regeneron $500MM venture fund) and many groups still have significant dry powder to deploy from funds raised in the headier days of 2021-2022.

The other potential positive signal has been the ongoing surge in biotech M&A by pharma. With an uptick in deals towards year end 2023, this year has seen a relative plethora of pharma deals with a total value in the range of ~$50B year to date including a number of $1B+ cash upfronts/cash takeouts with Karuna’s acquisition by Bristol-Myers setting the current high-water mark at $14B (Sternberg). Of course, this is a welcome trend to biotech investors who can look to M&A as a reasonable consideration for a future return on an investment (Wu). And hopefully this M&A trend will continue as pharma collectively finds itself with quite a war chest to consider for strategic buys of biotech with promising assets and/or pipelines. In the aforementioned CEN article, Arda Ural of Ernst and Young was quoted as estimating that pharma has $1.2 trillion in capital available for consideration of acquisitions.

Implications for Biotech Series B Fundraising

Based on the above, it seems there is permission for optimism with regard to considering raising a Series B round in 2024 for clinical stage companies. Capital is abundant, deals are getting done, and investors are potentially seeing the dual advantage of future exit from investments via an open IPO window or a potential pharma M&A. However, following the heady days of 2021 and the IPO market, lessons were learned in 2H ’22 and 2023 that are leading to a higher bar for biotech firms in 2024. Investors are taking a more measured approach to where and how they will deploy capital into Series B investments looking for more concrete evidence of a company’s potential for success which can include promising clinical trial results, a robust pipeline or technology, and a more evident path to future regulatory approval. The more stringent evaluation can manifest in multiple considerations for a biotech seeking investment including:

  1. Current Investor Alignment: Critical to consideration of any further fundraising is of course having alignment from the seed/Series A investors around timing, expectations, and fit of new investors. Depending on where an investor is in their current fund or whether they are actively fundraising from LPs, there may need to be some compromise as to the when and how much for a Series B. This will also be tied to thoughts around valuation in a Series B as of course we’d all like an up round based on current success but this might need to be balanced by expectations of future return.
  2. Valuation Pressure: In a tighter fundraising environment, investors may leverage the uncertainty of a biotech’s prospects or perceive a weakness in the company’s balance sheet that could lead to lower suggested valuations. Settling for a lower valuation for a biotech can lead to numerous challenges in the future and companies will have to make tough choices around their need for financing versus the possibility of increased dilution. As biotech execs who are passionate about our companies and programs, we hate to hear it, but the reality is everyone loves a bargain.
  3. Investor Sentiment: Risk aversion among investors may lead to a continued trend that only the most promising biotech companies will secure financing meaning more money to fewer names. Companies with a compelling profile of clinical data, management team experience, and efficient development and business path forward will have the best chance to attract blue chip investors and leveraging relationships is likely to be as important as ever. Known is most certainly better than unknown. While that last statement may sound very pessimistic to newer entrepreneurs and companies with less mature track record, I hope the opposite is actually true (or will be true as the market conditions improve) in that the best science and medicine with the most promise to help patients will be recognized.
  4. Extended Due Diligence: Due diligence has become more rigorous, with investors digging deeper on assessments of target/indication selection, clinical data, future market potential, and competitive landscape. Dr Aimee Raleigh recently posted an excellent two-part series on this very blog that provided an overview into the critical thinking that goes into diligence around investment which is well worth the read. With this increased diligence rigor, closing a Series B is likely to take longer than we have collectively experienced in the past and therefore, we should build this into our timelines and expectations.

Company Strategies to Consider for Series B

As we consider a future Series B, we are working towards a number of critical directives that really fall into the mode of common sense.

  1. Have Compelling Data and a Strong Team: I know, Captain Obvious here. But this really is a key tenet to focus on. We are feeling bullish in our own case. From our Phase 1/1b clinical trial, we have a promising safety/tolerability profile and compelling clinical pharmacokinetic/pharmacodynamic data in a precedented, high value indication (asthma) built around a novel mechanism of action and mode of delivery for our lead KN-002 program. Almost as important, we have a very experienced team working on a compelling Phase 2 proof-of-concept study design that will allow the program to move to pivotal development. While we might not have a band of golden horseshoe unicorn entrepreneurs who’ve sold multiple companies for outrageous returns, we do have a group that has collectively delivered on multiple development programs through approval in the private setting as well as running companies in the public market. That experience certainly does count for something in the biotech space.
  2. Build Strategic Partnerships Early: Getting to potential pharma partners early can give a read as to who might be the higher probability future partners for the company. Even if a program may compete directly with something big pharma has, it is worth at least trying to have a dialogue so they are aware of the company. Being able to give an indication of interest, or at least acknowledgment that pharma knows you exist, will help with Series B investor conversations. Also, consider potential Series B investors as the other strategic partners to engage with even before the company might think it’s time to raise more capital. When the time comes for Series B, being able to reach out to a familiar name who already has some background on the company can make life easier.
  3. Communicating the Message: Clear, consistent communication with potential investors about the company, progress to date, future plans, and planned use of funds is essential. Dr Sara Nayeem at Enavate has created a very informative series of twitter blog posts that really captures any and everything a company might consider in terms of their approach to engage Series B investors. I highly recommend giving these posts a look.
  4. Financial Efficiency: No surprises here, investors do tend to appreciate a low burn rate. Given the uncertainty around the time to get a Series B complete, managing existing funds to the penny can only help. This can provide a potential upside to negotiating a Series B valuation as well as provide the company some protection if the round is taking longer to come together.
  5. Series B Purpose: Sometimes, a Series B is a just a Series B. The company is looking to raise enough capital to advance their program through the next inflection point of development and manage dilution for the current syndicate and team. But in a market like 2024, the company might want to consider whether the Series B would be better called a Crossover round. This can definitely be true in the current market where the majority of private investment dollars are going to more mature biotech opportunities. With compelling clinical data in hand, the IPO market could be considered and taking down a larger Series B round would be beneficial for transitioning to a plan to go public. Depending on the level of interest from pharma in the company at the Series B stage, this could also lead to an interesting dynamic about how a strategic partner might want to consider a company valuation now versus post Series B. In recent months, there have been several examples of companies that were poised to raise a next round of funding which seems to have prompted pharma to move on an M&A at the current valuation (pre step-up for next round).

So as we head into summer 2024, we will stay hopeful that the promising market dynamics seen so far this year continue regarding Series B deals, IPO, and M&A. Hopefully, election season, whichever way it goes, does not derail all the positive signs and the biotech market will continue to be on the upswing. And all the while, we’ll keep our eye on whether Roaring Kitty decides biotech is a topic for a future YouTube post and adds a new dynamic to the XBI markets.

Special thanks to Jamil Beg, Partner at SV Health Investors and Kinaset BOD observer, for providing views of current market dynamics and editorial comments to this blog post.

Works Cited:

pitchbook.com/news/reports/q1-2024-pitchbook-nvca-venture-monitor

Masson, G., Third Rock’s Rapport reveals upsized $154M IPO, FierceBiotech, 2024.
www.fiercebiotech.com/biotech/third-rocks-rapport-reveals-upsized-154m-ipo

Sternberg, C, 2024, Pharmaceutical Industry Mergers & Acquisitions Roundup,
Contractpharma, 2024. www.contractpharma.com/contents/view_online-
exclusives/2024-01-31/2024-pharmaceutical-industry-mergers-acquisitions-
roundup/

Walrath, R. Biotech fundraising in 2024: a story of haves and have-nots, Chemical and
Engineering News, 2024. cen.acs.org/business/finance/Biotech-fundraising-2024-
story-havesnots/102/i12

Wu, G., As biotech recovers, venture firms’ preferences appear to shift, Biopharmadive,
2024. www.biopharmadive.com/news/bio-2024-venture-funding-biotech
ipos/718119/