Biotech market provides dose of optimism

In the past year, the biotech market has seen buoyant activity, reaching record levels of investments globally. In Europe, life sciences and biopharma companies raised more than $6bn from venture capital and private equity players across 174 deals, according to Unquote Data.

Notable deals included a $152m series-B round for iTeos Therapeutics, co-led by RA Capital Management and Boxer Capital; a $130m series-B round led by General Atlantic for Immunocore, which was followed by a recent $75m series-C round with participation from Blackrock; and a $126m round led by QIA and other investors for CureVac, a messenger RNA (mRNA) therapy specialist that is currently developing a Covid-19 vaccine.

Furthermore, Warburg Pincus invested in ArchiMed portfolio company Polyplus-transfection, in a deal that valued the business at around €550m, while Immatics was acquired by Nasdaq-listed SPAC Arya Sciences Acquisition Corp, which is backed by sponsors including US firm Perceptive Advisors.

More recently, Forbion, Morningside Ventures and Ascendant BioCapital led a $196m series-A round for clinical-stage biotechnology company NewAmsterdam Pharma, while biotech company IO Biotech raised €127m in an oversubscribed series-B round led by HBM Healthcare Investments.

We have seen generalist funds approaching the biotech market for the first time and also a large number of VC investors shifting towards healthcare" – Michael Preston, Cleary Gottlieb Steen & Hamilton

The market has also seen a flurry of biotech-focused fundraises, including the final closings of LSP 6 on its $600m hard-cap in March 2020 and Forbion V on its hard-cap of €460m in December 2020. In Q1 2021, Abingworth Bioventures VIII held a final close on its $465m hard-cap, exceeding its $375m target, and Advent Life Sciences closed two new funds with commitments totalling $215m.

New challengers
The investor base behind the biotech market has widened, with newcomers entering the biotech arena, generalist funds refocusing their approach towards life sciences, and players specialised in other areas of the VC industry broadening their scope.

"We have seen generalist funds approaching the biotech market for the first time and also a large number of VC investors traditionally focused on technology shifting towards healthcare investments," says Michael Preston, a partner at Cleary Gottlieb Steen & Hamilton (CGSH). "They have seen incredible potential at the intersection between healthcare and technology and realised how disruptive and influential technology will be for the healthcare industry."

The key investment rationale for many funds has been to look for companies that are either working on a vaccine, developing fast and accurate testing techniques, or researching antibiotics for Covid-19. However, opportunities are not limited to the development of drugs, but have flourished across numerous segments and sub-sectors of the industry.

"In addition to investments in vaccines, we have seen a large pocket of opportunities in all the applications and processes that have been developed and deployed in biotech and biopharma because of the impact of Covid-19," says Preston. "They include conducting virtual drug trials; using remote diagnostic techniques; building secure and effective logistics for drug deliveries; developing wearable technology to track and trace viruses and the impact that they have; and developing new tools for dataset analysis. These represent great opportunities for investors, especially VC and PE funds, which are able to take on the risk involved with disruptive and experimental technologies."

The pandemic has also improved collaboration across the industry, facilitating and sparking partnerships between incumbents and emerging industry players. This has made it possible to launch and develop ambitious projects, which often need to be fuelled with intensive capital, requiring the participation of PE and VC investors.

"As it becomes clear that fighting the Covid-19 pandemic is beyond the ability of any single entity, the crisis has given rise to a surge in collaboration between industry players," says John Newton, private equity partner at Ropes & Gray. "We have seen life sciences companies working together, and also establishing partnerships with universities. These collaborations forged under the pressure of the pandemic are likely to spread into other areas of drugs and diagnostics, benefiting the entire biopharma industry. We would expect there to be investment opportunities for PE investors to partner with and fund new collaborations."

Trials on hold
However, the spread of the pandemic has also meant that thousands of trials have been suspended or delayed because of the difficulties in continuing under lockdown conditions. Among others, biotechnology firm Addex Therapeutics announced that its clinical trial for Parkinson's disease had been delayed, while much paediatric cancer early-phase clinical research and hundreds of oncology studies were suspended.

Preston says: "Covid-19 has produced a seismic shift in R&D priorities and has affected other clinical trials. It has been harder to keep trials going when social contact has to be limited and a large number of trials that were ongoing were halted or abandoned. In oncology, for example, only about 20% of the trials that we would expect to see running are in process. Helping these biopharma companies restart development can be a promising area of opportunity for private equity investors."

In addition, an unprecedented number of clinical trials have refocused on Covid-19, and companies have shifted their activity to products and services used in the fight against the spread of the virus.

Archimed partner Loïc Kubitza says: "Following the pandemic, many mRNA therapeutics companies reorientated their research from developing treatments for cancer to addressing Covid-19. The same refocus happened in medical diagnostics, where many businesses developed lateral flow-based tests for faster diagnostics at an acceptable level of accuracy. Given the urgent need to meet the Covid-19 crisis head on, one of our portfolio companies, Diesse, similarly reorientated its activity, developing a blood test capable of tracking Covid-19 antibodies in partnership with the Spallanzani Institute in Rome.

"This refocusing process is often part of a delicate and complex strategy, which needs the expertise of both scientists and business managers. This is why PE firms need deep sector expertise and wider business knowledge. That helps portfolio company managements refocus day-to-day operations towards a new objective, without losing in terms of overall performance."

Biotech revolution
Despite causing delays and disruption, the magnitude of changes triggered by the pandemic has sparked innovation across the industry. "Covid-19 has accelerated some essential trends that will benefit the entire industry: the use of analytics and data to expedite drug discovery; the application of artificial intelligence technologies to data mining for novel compound discovery; assistance with cost management; and the prioritisation of the clinical pipeline," says CGSH's Preston. "The innovation that has spread in response to Covid-19 will have a long-lasting impact. It will also make biotech opportunities more attractive for a larger number of investors, cutting time for product development and putting the spotlight on the advantages more than the risks."

The pandemic has also caused a noticeable change in business practices across the biotech industry, which is destined to transform the face of the industry. Ropes & Gray's Newton says: "Life sciences companies and regulators have confronted a new set of challenges and opportunities that have resulted in a shift in business practices. Regulators have adapted to match the speed of developments and the restrictions the pandemic caused. Companies have shifted towards supplier diversification and domestic manufacturing as a result of import and supply issues they experienced. As a result of both the regulatory easing that has occurred and the needs that prompted it, companies conducting clinical trials have adopted remote monitoring modalities and decentralised clinical trial designs."

Despite the noticeable increase in investment activity last year, the European biotech industry continues to suffer from a lack of late-stage capital" – Tim Haines, Abingworth

In the coming months, the biotech market is forecast to further develop and pick up steam, attracting increasing capital from public institutions and private investors. The exit environment is also expected to become more favourable, benefiting from clarity around valuation, a better outlook upon the full impact of the pandemic and regained confidence among investors.

"Despite the noticeable increase in investment activity last year, the European biotech industry continues to suffer from a lack of late-stage capital, while there is a reasonable amount of early-stage deployment," says Tim Haines, chair and managing partner of Abingworth. "Many investors will redirect part of their capital in the late- and growth-stage space to support the development of local projects that emerged during the pandemic. In addition, the public markets in the US will continue to look open, and we expect to see a number of interesting IPOs lining up this year."

The pandemic has certainly widened the opportunities available for investors, but the biotech investment space remains full of challenges. It entails strong regulatory scrutiny, the need for an impeccable due diligence process, and a deep understanding not only of science and technology, but also of intellectual property ownership, as well as the ability to find the right risk-reward profile. However, the appetite for opportunities across the sector continues to grow in continental Europe and the UK, allowing companies to raise money from a broader and more diversified pool of investors.

CGSH's Preston says: "The experience of the past 12 months has opened up and democratised the investment thesis in biotech and biopharma, showing that developing a disrupting technology or an innovative drug does not necessary entail a long, risky and perilous path, where the risk reward profile is almost inaccessible to most. This will have a long-lasting effect on the entire life sciences market, making biotech more accessible to a broader range of private equity players in the years to come."

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