Biotech Financing: The Dynamics of Strategic Investment

After a challenging few years, the biotech sector is experiencing a bifurcation in funding. While early-stage companies struggle to secure financing, clinical-stage biotechs and those in ‘hot’ therapeutic areas are thriving. This “winner-takes-all” environment is driven by both VCs and big pharma companies, which are increasingly drawn to assets closer to market.

Experienced management teams and innovative therapies are key differentiators for biotech's succeeding in this landscape. The average Series A round has ballooned to over $80 mn in 2024, whereas in contrast, early-stage companies face intense pressure, with many being forced to merge, shut down, or raise funds on less favorable terms. Corporate VCs are stepping in to support early innovation, particularly in Europe, where the funding gap is largest and playing a key role in early-stage financing.

The appetite for advanced modalities - particularly in oncology and immunology - is what is likely to fuel growth in the sector. Investors are particularly bullish on antibody-drug conjugates and radioligand therapies which are seeing substantial M&A and financing activity.

Although the overall venture financing environment remains tough, select biotech companies with high-quality assets and experienced leadership are well-positioned to succeed. The shift towards larger, later-stage financing rounds signals that while there are fewer winners in this landscape, those winners are securing larger-than-ever investments.

The following article originally appeared in Nature Biotechnology.

“It was the best of times, it was the worst of times,” wrote Charles Dickens in A Tale of Two Cities. The same might be said for biotech financing today.

On the plus side: flourishing innovation, robust mergers and acquisitions (M&A) activity, and average private biotech funding round sizes at a 15-year high. On the downside: stubbornly muted public markets and cautious, choosy venture capitalists (VCs) struggling to raise their own new funds in “the worst [environment] I have ever seen” for VC fundraising, according to Antoine Papiernik, chairman and managing partner at Sofinnova. Most biotechs are stuck in a deep, long-lasting downcycle.

Most — but not all. Three years since the start of its fall from record-breaking pandemic peaks, biotech remains a sector of wildly divergent fortunes. The fat cats: companies with — and investors in — clinical-stage assets on big pharma’s acquisition radars, or management teams with a strong track record. The paupers: earlier-stage groups for whom the music stopped before proof of concept.

Capitalism drives a widening wedge between haves and have-nots. Investors and companies on the right side of the line “can attract funds, talent and entrepreneurs,” says Sander Slootweg, managing partner at Naarden, Netherlands-based VC firm Forbion, itself flush with proceeds from six-billion-dollar-plus portfolio company acquisitions by big pharma within the last 14 months. Experienced teams working in hot therapy areas are raising outsized rounds — like the $400 million in March 2024 for immuno-inflammation startup Mirador Therapeutics, founded by Mark McKenna, former CEO at Prometheus Biosciences (the latter of which was acquired by Merck & Co. for $10.8 billion in 2023). Neuropsychiatry-focused Seaport Therapeutics launched the following month with $100 million. It is founded and run by Daphne Zohar, co-founder of Karuna (acquired by Bristol Myers Squibb for $14 billion in late 2023). Cancer-focused Synnovation Therapeutics, which raised a $102 million series A in January, is run by a team with experience developing kinase inhibitors at Incyte.

Those biotechs and investors left behind — including the early-stage, the new and the unlucky — must streamline, refinance on less favorable terms, merge or shut down. “Financing early-stage innovation has been very challenging,” says David Schilansky, co-founder and CEO of European seed financier and biotech builder Home Biosciences.

Signs of a new dawn may be emerging. Central nervous system (CNS)-focused Rapport Therapeutics’ $174-million June initial public offering (IPO) was one of few to trade upwards, and the queue to list is lengthening. Biotech IPOs in 2024 remain rare, but sums raised in the first half of the year already surpass 2022 and 2023. Corporate VC is stepping up to support early-stage innovation, pushing overall biopharma VC financing to a projected $28 billion for the full year. That total won’t beat frothy 2020 or 2021, but still represents healthy growth from pre-pandemic 2019.

Selected VCs are in fact raising new funds: Flagship Pioneering raised one worth $3.6 billion in July, following Foresite Capital’s $900-million biotech-focused fund that closed in June 2024. SEC filings suggest a multi-billion-dollar raise is also underway at Arch Venture Partners. Assuming VC fundraising continues at this rate for the rest of the year, 2024 would see $20 billion in new biotech-focused funds, according to investment bank Stifel. That’s below 2021’s peaky $31 billion, but still a substantial step up from the previous decade.

Big pharma companies, meanwhile, still have about $1 trillion to spend, according to a recent Ernst & Young report, making them biotech’s best friend as public markets remain tight. Some drugs giants urgently need to fill large sales gaps as best-selling drugs including Merck’s Keytruda lose patent protection this decade. Others, like Novo Nordisk and Eli Lilly, are being showered with cash from their respective obesity/diabetes franchises, Wegovy/Ozempic (semaglutide) and Zepbound/Mounjaro (tirzepatide). Biotechs that “align themselves with what [big pharmas] need have a good chance” of success, says Papiernik.

Finally, interest rates — whose rise since the end of 2021 has lured investors away from risky assets like biotech — now appear flat or downward-trending. “It doesn’t feel good if you’re a small biotech trying to raise money, but things are going in the right direction,” says Allan Marchington, head of life sciences at investment company ICG in London. “We’re climbing out of it.”

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