As we wrote in our last post, the COVID-19 pandemic has had a significant impact on R&D, slowing many development programs not directly related to coronavirus research, especially at smaller companies. An important factor in this delay has been the lack of cash.
According to an April 2020 report by the Bernstein investment bank and BioCentury, 40% of 104 small companies surveyed have less than one year of cash on hand to fund operations and only 22% have enough cash to operate for two years without new funding. The situation for privately held biotech companies is particularly difficult, with only 13% having two years of cash on hand, while 41% of publicly traded firms have sufficient financial reserves to last the same period. As a result, given the negative impact that the pandemic has had on the financial markets, companies are working hard to conserve their resources and avoid being acquired at bargain prices or forced into deals at significantly reduced valuations. Even among profitable companies, 31% are reducing expenditures by slowing, delaying, or ending research programs and laying off or planning to lay off staff. Some 34% are also lowering employee bonuses and salaries.
Companies’ ability to raise new funds has been mixed. For those focused on developing drugs or vaccines against the coronavirus, R&D grants and investment by government agencies and joint research initiatives such as the EU’s Innovative Medicines Initiative, as well as non-profit entities such as the Gates Foundation, have significantly supplemented funding availability. There have also been some notable recent financings for companies focused on cancer, such as Grail’s $390 million funding to help support the development of a blood test capable of detecting up to 50 different tumor types. While the number of successful private seed and series financing rounds were reduced in April from earlier in the year, they still totaled $1.5 billion – higher than what achieved in April 2019. For many companies focused on other areas of R&D, however, the pandemic has threatened to stop or slow their financing prospects, forcing them to look for other sources of capital, including government grants and out-licensing of assets.
Similarly, only a quarter of those planning initial public offerings in 2020 are proceeding on track, with another 20% moving forward with lower valuations or raising less money. Those deferring their IPO plans say they will now likely hold off for at least a year. Still, nine venture-backed U.S. biotech companies have succeeded in going public as of May 1, 2020. Five of those, addressing a variety of therapeutic needs including cancer, blood and musculoskeletal disorders, fibrosis, and ear, nose and throat diseases, have had successful IPOs since the pandemic struck in the United States: Legend Bio, Pliant Therapeutics, Zentalis Pharmaceuticals, ORIC Pharmaceuticals, Imara, Keros Therapeutics, Lyra Therapeutics, – and as of mid-May, several more have filed for initial offerings. According to Jordan Saxe, head of health care listings at Nasdaq, a strong prior crossover investment round was a common thread for most of the recent biopharma IPOs – ensuring that many of the IPO participants were already well familiar with the story.
Overall, the Nasdaq Biotechnology Index has risen considerably since January, up over 6.4% by late May. Sophisticated life science investors appear to give top importance to the long-term potential of many healthcare companies to generate innovative products and future profits, despite the lengthy timelines that characterize drug development.
A survey by RBC Capital Markets in late March of 88 professional healthcare investors found than more than half saw the financial market decline as a new opportunity to invest, and nearly 90% of those surveyed said they were unconcerned about possible medium or long-term disruption of biotech company operations. This optimism appears to exist within the venture capital community as well. Several prominent venture firms have recently announced the raising of significant new funds for health care investments. These include Arch ($1.5 billion,) Flagship Pioneering ($1.1 billion), Oberland Capital ($1.05 billion), Deerfield ($840 million), and venBio Partners ($394 million).
For companies in need of cash but unable or unwilling to raise new funding from investors, partnering appears to be the current financing strategy of choice. According to the DealForma Biotech Database, 118 R&D partnerships were announced in April, the highest one-month number over the past decade, for a total value of $8 billion. More than half – 65% — of these were coronavirus-focused. For the year to date, approximately 312 R&D deals related to the pandemic have been signed, including all deal types involving biopharma companies, academic centers, government agencies, and manufacturers. In some cases, talks leading to these deals started months earlier. But many of those focused on the development of new drugs and vaccines to address the pandemic were completed at record speed.