The Silicon Valley law firm Cooley recently reported that it has “handled 298 publicly disclosed venture capital financings for Q3 2022, representing $8.1 billion in invested capital, continuing a downward trend for both metrics and the lowest for both since Q4 2019 .”
The company said deal volume, dollar volume and deal size for life sciences company financing also continued to decline in Q3 2022 compared to Q2 2022 and 2021.
But November was also when US bank JP Morgan chose to announce the launch of its healthcare venture capital practice, which will invest in early- to growth-stage companies in the space.
JP Morgan’s announcement comes at a time when, in the words of B Capital general partner and head of health care Robert Mittendorff MD, “public market biotechs are dramatically collapsing as interest rates rise and the focus on near-term development outweighs the promise of longer term results and approvals.”
Mittendorff is not alone in feeling this way. Six active biotech investors we recently surveyed told us that the macro environment has certainly had a major impact on deal flow, valuations and M&A in the biotech.
So where are private biotech companies? Mittendorff says startups in the space “consider reprioritizing their assets, decide whether to partner second or third assets with strategic partners, and evaluate tranche funding structure to meet their fundraising goals.”
However, Big Pharma’s M&A readiness is not as strong as people expected, said Shaq Vayda, director of Lux Capital.
“While broader capital markets predicted strong buying drive from the top pharma companies due to low valuations, practice shows that they prefer partnerships plus royalty agreements for later stage programs and corporate VC as a vehicle for engagement in an earlier stage. .”
This isn’t necessarily bad news for venture capitalists, who are seizing opportunities that others aren’t even looking at. For example, Mittendorf noted that he and his B Capital colleagues “regard market sentiment as overly negative.”
Among the opportunities biotech VCs are seeing, it’s increasingly common to have an AI component involved. “The ubiquity of AI in pitches that I see is striking,” James Coates, director of health and human performance at Decisive Point, told TBEN.
You may have heard that AI is involved in drug discovery, but there’s more to it, says Conviction founder Sarah Guo.
“We’ve seen tremendous progress in recent years in AI models for protein folding and docking – important scientific problems. But looking at the commercial side, there are also opportunities for richer use of data and smarter software workflows to improve efficacy. and increase efficiencies across the board in healthcare: from diagnostics, telemedicine, clinical trials, patient engagement and clinician decision support to revenue cycle management and claims processing,” she said.
However, investors are also more thorough in their due diligence than in previous years, and not just because of Theranos. For example, Franck Lescure, partner of Elaia Partners, said his company has seen “an exponential increase in concern about climate and environmental issues, regardless of the project – which used to be just a ‘nice to have’.”
Among other trends, investors are considering the impact of deteriorating US-China relations. “We’ve already seen CFIUS influence some of the deals we’ve participated in,” confirmed the Humboldt Fund’s general partner, Francisco Dopazo.
If U.S. sanctions against China were to extend to biotech, Dopazo said “the impact could range from funding (e.g., companies will not be able to tap strong and strategic Chinese capital) and scale (e.g., more difficult access to cutting-edge CROs ) to business development and commercialization (e.g. fewer options for business development deals) Clearly negative impact in the short/medium term for the industry as a whole.”
Read the full research here to learn more about how investors feel about the implications of US sanctions against China, what startups should consider when getting capital from government agencies, how to pitch these investors and more.