US biotech fundraising boom ends 2-year deal drought

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Biotech companies are rushing to raise money in US equity markets at the fastest rate since the peak of the mid-pandemic market boom.

Drug developers raised $6.2bn in equity capital markets in January, according to data from Jefferies. That marked the largest total since February 2021, the same month that the most popular tracker of biotech stocks hit its all-time high.

The funding surge marks a sharp turnaround after a two-year deal drought that forced many companies to cut jobs and shelve projects to save costs, and forced some out of business.

“There’s been a noticeable, dramatic improvement in sentiment among investors,” said Rahul Chaudhary, head of healthcare equity capital markets at Leerink Partners.

Fundraising has been encouraged by a rebound in stock prices, expectations that the Federal Reserve will soon start cutting interest rates, and a boom in mergers and acquisitions activity in the sector.

The closely followed SPDR S&P Biotech ETF tumbled almost two-thirds from its 2021 high, weighed down by rising interest rates and a backlash to pandemic-era over-optimism about new drugs.

The downturn — described as “an utter capitulation” by one asset manager in mid-2022 — was seized upon by hedge funds, many of which snapped up shares in biotech companies whose valuations tumbled as interest rates began to climb.

The SPDR biotech ETF has since rebounded about 40 per cent since late October as investors bet that interest rates had peaked.

Jesse Mark, head of equity capital markets at Jefferies, said the most notable shift was an increase in “opportunistic” deals from companies whose fundraising was not linked to encouraging drug trial data or other scientific milestones.

“In two years of challenging markets, most companies were relying on catalysts to raise capital,” said Mark. Now, he added, “broader investor interest created a window for opportunistic issuance”.

The bulk of the recent fundraising, $5.6bn, was raised by already listed companies, but initial public offerings have also been picking up pace, and the strong performance of recent deals was expected to encourage a further increase.

“There’s a good backlog of biotechs who didn’t go public over the past year or so who are sharpening their pencils again,” said Yasin Keshvargar, a capital markets partner at Davis Polk, the law firm.

Kyverna Therapeutics, which is developing therapies to treat autoimmune diseases, provided the latest sign of investor appetite when it raised $319mn in an IPO last week. Kyverna raised its target price range, sold shares above the top of the increased target, and then its stock jumped a further 36 per cent on its first day of trading.

Peter Maag, Kyverna chief executive, said it was a “stellar outcome” and that he was particularly encouraged by the level of interest from large generalist mutual fund investors, rather than only healthcare specialists.

However, most of the companies that have listed were relatively advanced in the drug development process, and investors remain cautious about backing earlier-stage companies. Metagenomi, a pre-clinical group backed by Moderna and Bayer, priced its $94mn IPO last week at the bottom of its target range, and fell 31 per cent on its first day of trading on Friday.

Maag said it may take longer for fundraising to rebound for the riskiest companies, but added: “If you have good clinical data and know what you’re doing, I think companies are financeable right now.”

Biotechs are particularly reliant on equity markets because they often need large amounts of capital to fund drug development before they generate enough revenue to repay debt.

Keshvargar said an uptick in biotech deals was a “positive” sign for those hoping for a broader rebound in other sectors, but said it was “not directly transferable”.

“Both biotech and non-biotech IPOs benefit from a lot of the same underlying economic circumstances . . . [but] there are some specific biotech factors such as increased M&A activity in the space, and enthusiasm from specialist biotech investors who are key buyers,” he added.

Andy Acker and Daniel Lyons, portfolio managers on Janus Henderson’s healthcare and biotech teams, said the recent pick-up in M&A activity across the sector had been driven in part by US regulators’s approval of Amgen’s $28bn acquisition of Horizon Therapeutics in September.

But that deal may still not be enough to return the industry to the “heady days” of dealmaking and fundraising during the pandemic, when biotech stocks “could benefit regardless of the quality of a company’s pipeline or balance sheet”, they said.

Additional reporting by George Steer in London

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