Biotech: A new path to cap­i­tal rais­ing in pub­lic and pri­vate mar­kets

As biotech looks for­ward to a ro­bust 2024, RBC Cap­i­tal Mar­kets’ bank­ing ex­perts ex­plore how the firms who suc­ceed in an es­pe­cial­ly dy­nam­ic mar­ket will be those will­ing to em­brace new ways of think­ing about un­lock­ing val­ue.

KEY POINTS

• De­spite 2023 be­ing a volatile year for biotech, with con­strained in­vestor ac­tiv­i­ty, a num­ber of re­cent clin­i­cal mile­stones point to­wards strong per­for­mance for the sec­tor.
• Ther­a­peu­tic in­no­va­tion is cre­at­ing tail­winds that can be fa­vor­able in the start of 2024.
• In re­sponse to more un­pre­dictable mar­ket dy­nam­ics, sec­tor par­tic­i­pants are turn­ing to­wards more cre­ative fi­nanc­ing so­lu­tions that tap in­to a healthy flow of cap­i­tal that’s cur­rent­ly avail­able.

In an of­ten-volatile eq­ui­ty land­scape, health­care in­no­va­tion is pro­vid­ing M&A tail­winds for in­vestors will­ing to de­ploy cre­ative in­vest­ment strate­gies and is­suers who can lever­age new and ex­ist­ing in­vestor re­la­tion­ships.

“It’s been a pret­ty volatile year across the eq­ui­ty land­scape as a whole, and cer­tain­ly with­in biotech,” says John Hoff­man, Co-Head of Health­care Eq­ui­ty Cap­i­tal Mar­kets, RBC Cap­i­tal Mar­kets, a role he shares with Ja­son Levitz. “The sec­tor has been volatile and con­strained,” Hoff­man con­tin­ues. “It feels like biotech has been un­der­ap­pre­ci­at­ed against a back­drop of per­sis­tent tail­winds that will hope­ful­ly cat­alyze en­thu­si­asm for the space in ear­ly 2024.”

“The num­ber of com­pa­nies that have passed wide­ly tracked and an­tic­i­pat­ed clin­i­cal and reg­u­la­to­ry mile­stones in the past hand­ful of weeks has clear­ly out­stripped what we saw in the be­gin­ning part of 2023.” – John Hoff­man, Co-Head of Health­care Eq­ui­ty Cap­i­tal Mar­kets, RBC Cap­i­tal Mar­kets

“The num­ber of com­pa­nies that have passed wide­ly tracked and an­tic­i­pat­ed clin­i­cal and reg­u­la­to­ry mile­stones in the past hand­ful of weeks has clear­ly out­stripped what we saw in the be­gin­ning part of the year,” he con­tin­ues.

Hoff­man notes that slight­ly mut­ed ac­tiv­i­ty in the sec­tor may be due to con­cern re­gard­ing Fed­er­al Trade Com­mis­sion (FTC) scruti­ny and the im­pact of the In­fla­tion Re­duc­tion Act (IRA) on drug prices as patent cliffs ap­proach. “There’s been some reg­u­la­to­ry ac­tions with­in the space that are out­side of the con­trol of any one com­pa­ny that has weighed on in­vestor psy­chol­o­gy, no­tably con­cern­ing the IRA,” he ob­serves.

“But on bal­ance, the sec­tor has done a re­al­ly good job con­trol­ling the con­trol­lable and it’s deal­ing with these macro fac­tors that have kept peo­ple a bit on their back foot through­out the course of 2023,” he adds.

In­no­va­tion cre­ates tail­winds

De­spite a tur­bu­lent year for biotech in­vest­ment, Hoff­man sees a re­mark­able pe­ri­od of in­no­va­tion and ex­pan­sion of drug de­vel­op­ment un­fold­ing that can un­der­pin a more ro­bust pe­ri­od ahead.

“You have sci­en­tif­ic in­no­va­tion that con­tin­ues to make new leaps and bounds across a whole host of ther­a­peu­tic ar­eas and modal­i­ties,” he ex­plains. “M&A ac­tiv­i­ty has got­ten de­cid­ed­ly more com­pet­i­tive, which hasn’t re­al­ly hap­pened for a cou­ple of years; now you’re start­ing to see mul­ti­ple bid­ders in these M&A process­es, which is a great lead­ing in­di­ca­tor around what large cap biotech and phar­ma is think­ing about with­in the smid-cap space.”

“You have com­pa­nies that are op­er­at­ing with new-found cap­i­tal dis­ci­pline, which I think is a sil­ver lin­ing and may be a byprod­uct of a mar­ket that’s be­come more chal­lenged. FTC con­cerns are abat­ing a bit around smid-cap M&A, which is great. And FDA ap­proval rates are track­ing to­wards his­tor­i­cal norms, which is a reac­cel­er­a­tion of a very pos­i­tive trend,” notes Hoff­man.

Cre­ative strate­gies need­ed

Many com­pa­nies are turn­ing to­wards cre­ative and atyp­i­cal forms of fi­nanc­ing, in re­sponse to to­day’s more chop­py mar­ket dy­nam­ics. “What we’re see­ing in pub­lic mar­kets is the re­turn of more struc­tured tai­lored fi­nanc­ings in the form of ei­ther PIPEs, that’s pri­vate in­vest­ment in pub­lic eq­ui­ty, or reg­is­tered di­rects, which are ef­fec­tive­ly pri­vate place­ments done with a reg­is­tra­tion state­ment,” says Levitz. “If you look back pre-2021, we didn’t see a ton of PIPE ac­tiv­i­ty. We’ve seen al­most five bil­lion raised in that for­mat in 2023, ver­sus rough­ly 14 bil­lion raised over­all by the pub­lic mar­kets,” he adds.

“Com­pa­nies re­al­ly need to think cre­ative­ly about dif­fer­ent forms of cap­i­tal, de­pend­ing on their stage of de­vel­op­ment; whether that’s ven­ture debt, roy­al­ty fi­nanc­ing, strate­gic cap­i­tal, grants, etc.” – Ja­son Levitz, Co-Head of Health­care Eq­ui­ty Cap­i­tal Mar­kets, RBC Cap­i­tal Mar­kets

“Com­pa­nies re­al­ly need to think cre­ative­ly about dif­fer­ent forms of cap­i­tal, de­pend­ing on their stage of de­vel­op­ment; whether that’s ven­ture debt, roy­al­ty fi­nanc­ing, strate­gic cap­i­tal, grants, etc. It’s re­al­ly been an en­vi­ron­ment where you need to use all avail­able sources of fund­ing to ad­vance your pipeline and get cre­ative,” he con­tin­ues. “So I think the punch­line around pub­lic mar­kets is that there are a lot of tools avail­able for pub­lic com­pa­nies. There is cap­i­tal avail­able and in­vestors are look­ing for cre­ative ways to put cap­i­tal to work,” he ex­plains. 

In or­der to put this cap­i­tal to work, com­pa­nies need to lever­age new and old in­vestor re­la­tion­ships. “In­vestor con­nec­tiv­i­ty has nev­er been more crit­i­cal,” says Levitz. “Most fi­nanc­ings that we see done in both the pub­lic and pri­vate mar­kets are dri­ven by ex­ist­ing in­vestor de­mand, with in­vestors con­tin­u­ing to sup­port cap­i­tal they put to work ear­li­er in a com­pa­ny’s life cy­cle.”

“The most suc­cess­ful trans­ac­tions that we see done in the pub­lic mar­kets lever­age those ex­ist­ing re­la­tion­ships but al­so tap new in­vestors,” he ex­plains.

Gain per­spec­tives from the cut­ting edge of biotech to help you lead to­day and de­fine to­mor­row. Ex­plore RBC’s Pathfind­ers in Bio­phar­ma se­ries.