December 2020
The year 2020 was an amazing year for biotech growth companies. Venture capital (VC) investments into the sector reached new highs quarter on quarter. The IPO market for biotech listings was hot, with 36 companies going public through the year in the U.S.1 Valuations skyrocketed in step.
VC investment into the biotech sector has been breaking records almost consistently for the past decade. Year after year, VC appetite for biotech investment has grown.
Not a flash in the pandemic pan
In part, investor appetite for biotech has been fueled by the pandemic. Drug discovery accelerators and those with candidates or products for COVID-19 have, not surprisingly, enjoyed significant investor attention since the start of the pandemic. But the effect has been wider—the public’s renewed focus on personal health suggests the growth prospects for the wider healthcare and biotech sectors will remain strong long after the impacts of the pandemic have been managed.
Yet the reality is that the pandemic only focused the spotlight on a sector that had been on center stage for some time already. VC investment into the biotech sector has been breaking records almost consistently for the past decade. Year after year, VC appetite for biotech investment has grown.
The public wants biotech
If appetite for biotech investments has been strong in the VC community, it has perhaps been even stronger in the public markets. In Q3 2020, biotech offerings made up 4 of the 10 best performing IPOs (led by Berkeley Lights, a digital cell biology company, which enjoyed a first-day pop of almost 200 percent and currently trades at around four times its initial offer price).
Investors also piled into so-called “blank check” companies with a biotech focus. New special purpose acquisition companies (SPACs) have been formed by a growing number of top-tier biotech investment houses including Casdin, Cormorant, Deerfield, EcoR1, Foresite, MPM, Perceptive, RA Capital, RTW, and 5AM. RA Capital’s biotech SPAC was the first to issue only common shares (and enjoyed a first-day pop of around 20 percent).
Valuations continue to rise
Insatiable investor appetite is driving up valuations. In fact, average VC life sciences pre-money valuations have more than doubled over the past year (at the end of June, the average had hit $144.3 million).2
One of the reasons that biotech stocks and growth companies have enjoyed a long period of sustained valuation growth is that the sector is perceived as being largely insulated from economic disruption.
Indeed, whereas the valuations of growth companies in other sectors (particularly technology) tend to be based on business metrics influenced by market dynamics (such as revenue, earnings per share and net loss), the value of a biotech company is largely in its clinical and preclinical data, which is the currency of progress and value in this sector, and it is little changed by pandemics or economic disruption.
For owners and executives at privately held biotech companies, the message is fairly clear: there has never been a better time to raise capital.
Time to get out there?
Don’t expect the attention on biotech to wane any time soon. In fact, my work with biotech startups and growth companies across the U.S. suggests the pipeline of potential deals and IPOs may well set new records in 2021.
For owners and executives at privately held biotech companies, the message is fairly clear: there has never been a better time to raise capital. If you have not done so already, now is the time to explore all of your funding options and to be talking to venture capitalists, SPACs, and other investors about your company’s future.
Keep in mind, however, that the market is not just writing blank checks for any company with a biotech spin. Knowing what investors are looking for and telling the right story around the data are still essential for a successful round of fundraising.
Footnotes
- Renaissance Capital as of December 2, 2020
- KPMG Semiannual IPO & M&A webcast, July 21, 2020
