'Is the worst behind us?' Financial expert talks biotech funding

In this abridged excerpt, Scanlan offers up insights on the current life sciences financial landscape and projected what biotech funding could look like over the next 12-18 months.

The full article (embedded below) formed part of the CPHI annual report – an accompaniment to CPHI Milan, the world’s largest pharma event, held earlier this month – and centers on the health of the outsourcing sector.

Improving landscape

During last year’s CPHI (held in Barcelona, Spain), total funding into the sector appeared to be bottoming out, and we asked, “Is the worst behind us?” It is safe to say that through the first half of 2024, total funding into the sector is improving (Figure 1).

Figure 1: TTM Quarterly US biotech funding – all sources. William Blair Equity Research, August 2024

Looking at the underlying sources of funding into the sector (venture, follow-ons, IPOs) reveals a mixed bag. Venture and follow-on funding (figures 2) have trended quite well, and there is room for optimism here.

Figure 2: Quarterly US biotech follow-on and venture funding. William Blair Equity Research, August 2024

Follow-ons have improved significantly from the low point in Q2 2022 with generally positive trends, while venture funding has exceeded pre-pandemic levels in Q2.

IPOs (initial public offerings) are showing some signs of life but continue anemic versus both the pandemic and pre-pandemic levels (Figure 3).

Figure 3: Quarterly US biopharma IPO funding. William Blair Equity Research, August 2024.

As of mid-September 2024, the US logged 18 biotech IPO’s and just under $3 billion raised which is close to the totals for full year 2023. Q3 2024 saw over $900 million of IPO activity. Very encouraging signs as we move into the final quarter of 2024. A recovering IPO market will fuel more investment across the sector including venture and follow on financings.

EU biotech venture funding

Turning to Europe, venture funding has been quite strong in 2024 versus the prior two years, and is on pace to exceed every prior year except 2021 (Figure 4). Increasingly US investors have looked to Europe/UK for their emerging hubs of innovation.

Figure 4: Total venture funding in Europe; Nature Biotechnology; DealForma Database

China biotech venture funding

The Chinese venture market paints a different story and continues a downward trajectory in 2024, which is on pace to end around 2019 levels, but well below 2022 and 2023 (Figure 5).

Figure 5: Total venture funding in China; Nature Biotechnology; DealForma Database

China is still trying to navigate geopolitical obstacles, fallout from the US BIOSECURE Act, and other economic issues which have affected venture investment.

Biotech cash runways stabilizing

Last year we looked at Biotech’s cash runway given the lack of evidence of a sustained financial recovery. At that time, the cash runway was well under two years, and the trajectory was still declining (Figure 6). Biotechs were doubling down on cash preservation mode, and this rippled out into the clinical research organization (CRO) and contract development and manufacturing organization (CDMO) sector.

This year, with generally more solid evidence that we are in the beginning of the recovery phase, the cash runway seems to have stabilized from a trough in Q3/Q4 2023 and has now started a slow recovery.

Figure 6: Capital IQ; KPMG Corporate Finance - US biopharma services industry update H1 2024

An improving cash runway, along with improving economic conditions and interest rate cuts, means biotech’s should start moving back into more traditional spending patterns with CRO/CDMO’s reflecting more confidence in the next 12+ months financial outlook. This will, however, take time to start rippling over into the pharma services sector, and CRO/CDMO’s should be monitoring closely average proposal value improvements, and time-to-close as leading indicators here.

Still too many biotechs….Still too little cash

Last year, the industry suffered from a capital supply/demand imbalance, with large numbers of biotech companies vying for too little capital. This was putting pressure on valuations and distribution of capital across the sector.

In spite of some consolidations and rationalizations within the biotech sector, the total number of companies with active R&D pipelines has continued to grow through 2024 (figure 7). As for mid-year, there are now over 6,000 pharma companies with active R&D pipelines, and over 50% of these companies have only one-to-two products in the pipeline.

Figure 7: Number of biopharma companies, Pharma Intelligence, Piper Sandler, Sept 2024

More biotech firms mean more fuel required to progress pipelines, and while funding into the sector is generally showing signs of life, there are more companies today (versus last year) vying for available capital. Investors have nearly infinite choices on where to invest in the sector, and with more biotechs, more compounds in development, and only slightly more capital flowing, investors have been discriminating even more around where they are investing.

Generally speaking, in the current environment, investors have gotten more cautious and have tended towards focusing on 1) Therapeutic assets/modalities with more of a historical track record of success, and 2) Those therapeutic programs that are further advanced in the clinic. So where are investors placing their bets?

Biotech Investment by therapeutic modality

Highlighting current investor sentiment, Oppenheimer’s 2024 proprietary survey pinpoints where investors view the best bets in the current biotech investing environment (Figure 8).

Figure 8: Oppenheimer 2024 Proprietary Investor Survey. Presented at Chemoutsourcing Sept 2024

According to the survey, antibody drug conjugates (ADCs), bi-specifics, and small molecules top the list. Surprising is the lower interest noted in cell and gene therapy (CGT) categories, given the public funding into those companies has been strong in 2024. However, looking at early-stage venture funding into cell and gene reveals a deep trough in these modalities in 2024 (Figure 9).

Figure 9: Venture Funding - Cell and gene companies; Nature Biotech August 2024, Dealforma Database H1 2024

As of mid-year 2024, only 16 CGT companies received venture rounds totaling only $500 million, compared with 65 companies receiving $3.5 billion in all of 2023. Investors have cited clinical, manufacturing, and commercial hurdles as reasons to be more cautious.

Turning to public funding by drug type (Figure 10), the data reveals the top five modalities receiving public investment thus far in 2024 is small molecules, followed by antibodies, cell therapies, oligonucleotides and gene therapies. The biggest public funding increases versus 2023 came in oligonucleotides and cell therapies.

Figure 10: Public biotech funding (IPO’s and Follow-ons only). Source: Dealogic funding data for public markets

According to Biopharma Dive’s US Biotech IPO tracker, as of September 2024, 18 IPOs launched thus far which is nearly the level to the number launched in all of 2023.

Biotech investment by stage of development

According to Pitchbook, through mid-year 2024, private venture investment into preclinical phase biotech was around 28% of the total (~$3.5 billion), while 62% (~$7.6 billion) went to support clinical stage companies. Overall, the percentage is down from previous years. Notably, increasing investment in preclinical biotechs drove 2021 and 2022 to record funding levels.

With less private funding going towards early-stage biotech, many have tried to turn to the public markets, however IPOs and public follow-ons are now heavily tilted towards clinical stage where more advanced (“de-risked”) assets and more seasoned management teams are in place (Figure 11).

Figure 11: Number of biotech IPO’s + follow-ons by lead phase of development; Dealogic funding data for public markets

Also noteworthy is the percentage of IPOs in preclinical companies is at about half the rate seen over the prior 4 years (Figure 12). With the overall share of public and private funding tipping towards clinical biotech, it is not surprising that the platform/preclinical stage biotechs have been feeling a significant funding pinch.

Figure 12: Percentage of US biotech IPOs by lead phase of development, Biopharma Dive.

Conversely, the jump in relative funding into clinical phase companies appears to be fueling an uptick in clinical trial activity. Starting in the fourth quarter of 2023 and continuing into 2024 there has been an increase in Phase I and Phase II clinical trial starts (Figure 13).

Figure 13: Clearview, Globaldata, Harris Williams Pharma Services Sector Brief Q2-2024

Scanlan CPHI Annual Report ... by Dan Stanton