Bursting of the biotech bubble: venture capitalists are rethinking private companies in Q1 2022

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A significant increase in venture funding in the private biotech sector was seen in the past year, entering a bull market where stock prices were continuously rising. This caused a biotech bubble that has since burst where the stock has declined, leading to the entry of a bear market this year.

A 46% decline in the value of venture financing deals for US-based biotech companies was observed, from $7.8 billion in Q1 2021 to $4.2 billion in Q1 2022, as shown in Figure 1, according to GlobalData’s Pharma Intelligence Center Transaction Database. On April 21 of this year, a US investor roundtable was held at the International Biotechnology Convention to discuss the outlook for biotechnology in today’s market, titled “The Venture Investor Outlook & Mindset: Pitching the Science of Tomorrow”.

Oncology received the largest total venture capital funding among the top five therapeutic areas with $4.6 billion in the first quarter of 2021, but this fell 67% to just $1.5 billion in the first quarter of 2022. Infectious diseases saw the second largest decline in venture capital funding of 36% from the first quarter. 2021 to Q2 2022, with $0.9 billion and $0.6 billion respectively.

Panelist Mike Powell, Executive Partner at Omega Funds, pointed out that in the current bear market, investors are becoming increasingly selective; where people “look at their companies’ reserves much tighter, they allocate cash much tighter”. Investors are cautious, however, with Omega Funds “now looking at more undervalued public companies… [with] quality.” These challenges in public markets could therefore continue to impact investments in private companies during this year.

Powell said new offerings could pick up if companies broaden their selection of investors to pitch their business to. Instead of having two venture capitalists, he advised private companies to have “three or four…around the table, [to] choose venture capital with deep pockets…with knowledge or experience of the sector in which this company operates… [and with a] great ability to fund the business over the longer term even if no new investors come along in a year, we know we have four great investors around the table.

According to panelist Shobha Parthasarathi, vice president of Xontogeny, early-stage biotechs looking to approach investors need to develop a therapy that addresses an unmet need. Parthasarathi commented, “If you are a very early stage company…there has been so much money raised in the last couple of years,” where investors are now becoming more cautious about agreeing to invest.

The Covid-19 pandemic helped boost venture capital funding last year, with many early-stage biotech companies going public with high stock prices that have since fallen. As a result, venture capitalists appear to be more selective in their biotech investments this year. It remains to be seen whether this trend will continue for the foreseeable future as investors and pharmaceutical companies think more carefully about capital allocation.

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