As biotech recovers, venture firms’ preferences appear to shift

After a turbulent few years, 2024 has given the biotechnology industry some signs of a return to normalcy.

For one, venture investment appears to have stabilized at levels seen prior to a pandemic-era spike. Data presented by the Biotechnology Innovation Organization at the group’s annual meeting this week in San Diego showed private drug companies in the U.S. raised $3.8 billion during the first quarter.

Annualized, that pace would match the $15 billion venture firms invested in U.S. biotechs last year. Venture funding totaled $13 billion in 2018 and $12 billion in 2019, before surging to twice those amounts in 2021 and 2022, per BIO. “If this pace continues for the remainder of the year, we’ll have another year similar to 2023,” said Chad Wessel, a director of industry analysis for BIO, at a meeting panel.

Venture capital firms are also active in raising cash, reloading for new investment in the sector. Several new groups have launched this year, including Regeneron’s venture arm and Goldman Sachs’ first life sciences fund, which raised $650 million. Established investors are busy, too: Arch Venture Partners outlined plans in February to raise $3 billion, while Canaan Partners recently added $100 million to its 13th fund.

“Coming out of the pandemic, there was a hesitation on behalf of investors, governments and industry in terms of where we’re headed,” said Seema Kumar, CEO of Cure, a self-described “healthcare innovation campus” in New York affiliated with Deerfield Management. “There is new momentum. People are being more bullish about what the future holds.”

Yet there have been some clear shifts in how investment is flowing into the sector. Money spent on preclinical companies has dropped even as the size of private rounds has increased overall, however, according to BIO. Data from the group also show that increasing investment in preclinical biotechs helped drive 2021 and 2022’s totals to record highs.

And as less money goes into those early-stage startups, fewer of them are finding success going public, according to BioPharma Dive data. The companies pricing IPOs now tend to be clinical-stage and with management teams made up of industry veterans.

“When things got really frothy from 2018 to 2021, we found ourselves defensively doing company formation, and earlier stage — things that were perhaps two years from the clinic versus our normal preference for 12 months from the clinic,” said Nina Kjellson, a general partner at Canaan.

As to clinical-stage: “These days, we are able to fund clinical-stage companies at compelling valuations.”

According to Andy Seid, a partner at Bioluminescence Ventures, venture funds are likely to be more selective now than they were during biotech’s pandemic-era bubble. “A lot of folks have capital tied up in existing portfolios, and allocation of dry capital is really toward follow-ons as opposed to new investments,” said Seid.

And investors’ long-term strategies may now be more weighted toward M&A or pharma partnerships than via initial public offerings, some industry sources suggested to BioPharma Dive.

While there have been spurts of IPO activity this year, there have also been weekslong dry spells in between. The last biotech to successfully price an IPO was Contineum Therapeutics in early April, although two companies this week set terms for new offerings.

One factor driving that stop-and-start pattern may be the broader economic environment, as the Federal Reserve has not yet moved to cut interest rates in the U.S. Investors predict an acceleration may come later in the year, after the presidential elections and the Fed’s plans become clearer.

“M&A and partnerships are definitely something companies are going to do just by function of the [IPO] not being completely made available,” Bioluminescence’s Seid said.

Editor’s note: This story has been updated with additional commentary.