By Jonathan D. Grinstein, PhD

Carlsbad, CA—Across the board, biotech investing in 2023 has seen a retraction from the high levels seen the past three years: venture investment has dropped and companies large and small have lost value. However, that doesn’t mean that biotech investors have lost interest or abandoned ship. In fact, with the FDA reviewing submissions for three cell and gene therapies in Q4, investors are looking beyond the discovery and development phase and into the manufacturing and commercialization of these potentially revolutionary medicines—a theme that has taken hold at the 2023 Cell and Gene Meeting on the Mesa.

To get there, cell and gene therapy companies will have to do more than fly by on the seat of their pants, hoping to just live another day. Instead, there’s a sentiment amongst investors that now is the time to show a vision for the long run if biotech hopes to have financial support to carry them through until the headwinds die down and into the tailwinds for smooth sailing. 

Is this the new normal?

According to Dynamk Capital’s market analysis, the size and count of deals—mergers and acquisitions (M&A) and initial public offerings (IPOs)—have dropped from the 2020 to 2022 levels through the pandemic. But with three quarters complete in 2023, their analysis shows that the industry numbers are on par with 2018 and 2019 levels, perhaps even higher. Beyond some outliers such as Danaher’s acquisitions of Aldevron and Cytiva as well as the Thermo-PPD deal, Daniella Kranjac, founding partner and managing director at Dynamk Capital, said the trend for deals is pretty healthy.

While recent transactions aren’t pulling in deals of 20x revenue as seen during the pandemic, they’re also not at the 3–6x revenue multiples seen in 2018–2019. The industry is at the “new normal,” she said, which is in the 10–15x range.

Valerie Dixon, managing director at Morgan Stanley, says it is less a “new normal”, and more of a reversion to the historical mean. It is foolish to hope for the same “irrational exuberance” of the market to return to pandemic levels and that things won’t change back to how they were in 2020 and 2021, she said.

“They’re not going to be saved by a white knight and get 15x as much revenue for their company. That’s not happening!”

Kicking the can down the road

While some investors, board members, and founders have been trying to stay afloat in the turbulent economic climate, Dixon said the perception that they can just kick the can down the road and stretch their cash for another two to four quarters is irrational, even in the context of recent geopolitical events—Russia and Ukraine and now Israel and Palestine.

“You can’t manage your balance sheet anticipating World War III,” said Dixon. “You need to be managing your own business for a two to three-year timeframe, not for next quarter or making that month’s quota.” Instead, Dixon believes that managing a biotech business today requires creating long-term, enduring, profitable growth. That’s what funders think is most credible.

“When you can tell a story about how you’re investing for long-term growth, then [the investors] will be there for your expansion capital or your growth capital when you need it,” said Dixon. “If they take that long-term mindset with you, that means that you can have confidence that they’re going to have capital that’s going to grow with you along the way. It’s not growth at any cost; it’s making sure you’re doing responsible growth and you’re hitting… milestones that will get you to that next inflection point.”

While Sean Mackay, Operating Partner at Casdin Capital, is excited about the numerous companies with great products in great markets, he won’t invest in a company if they can’t support their own operating expenses. For Mackay, it comes down to the return on investment from capital.

Consistency is key, Mackay insisted. He wants to know that a prospect’s revenue isn’t random and that a particular move is devoted to a big market that the company is creating or disrupting, which is harder to do. A company’s capital-raising process has to increase the number of shots on goal and, thus, increase the probability of raising the money. To succeed, Mackay says companies need to be creative and expand their funnel instead of just hopping to the next shiny thing.

To IPO or not IPO

Although there have been signs of life for investing in healthcare and biotech—nine deals so far in 2023 (eight in biotech)—today, only three are trading around issue price. Some 2021 biotech IPOs, Dixon notes, are trading as low as 85% below the original issue price.

“Just because you’re going public doesn’t mean everything’s great,” said Dixon, who has led Morgan Stanley’s efforts in life sciences tools and diagnostics. “You still have to pay attention to aftermarket performance… and not just be the first one out of the gate. Be consistent in execution and a good steward of the capital that you raise. Maybe they [went] public too early, took their eye off the ball, or any number of factors—all those things play into the success of an IPO.”

Kranjac’s guidance to founders trying to get term sheets done in this market environment and the near future is to make sure they are thinking about who they bring to the table— board members and investors who understand the market and can be helpful in terms of forging additional relationships, whether for investments, operations, or talent.

There is no magic wand to secure a deal sheet for financing, but Kranjac shared the advice she can give the founder of an early-stage company: although they may have the luxury of being pre-revenue and not having reportables on a monthly or quarterly basis, they should be raising as much money as possible.

“In this environment, the guidance that we’re giving our portfolio companies, and even companies that we’re looking at going forward, is don’t wait,” said Kranjac. “There were a number of folks that early in the year said, ‘We’re going to wait until the fall when the market’s better or until [JP Morgan] 2024, when things are going to be great. Don’t wait!”

As to how to value a company, Mackay said that during the 2019 and 2022 period, research analysts might have understood the liquidation value for a sale. But when there’s no M&A activity, that number is more difficult to calculate. The huge push by big pharma to invest in new therapeutic modalities like cell and gene therapies is evidence, according to Mackay, that the industry’s “tailwinds” appear to be very strong.

Dead cells don’t cure cancer

A major early theme of the 2023 Meeting on the Mesa has been manufacturing and commercialization. Along these lines, while the panelists are all excited about the development of cell gene therapies and the enabling tools that go along with them, they’re keeping a close eye on companies involved in manufacturing and commercialization.

Kranjac agreed that bioproduction is exciting because there are going to be many such medicines. And those are exactly the types of companies, like RoosterBio, Curi Bio, and CellFE, that Dynamk has been adding to its portfolio.

“You can’t take your eyes off the ball on the manufacturing process and the tools that help with potency, stability, purity, and quality control—dead cells don’t cure cancer,” said Dixon. “When there are huge acquisitions with outsourced manufacturing and you start seeing the Thermo Fishers and Danahers making multi-billion-dollar acquisitions in the space to have capacity for cell gene therapies, that’s a wake-up call.”