Bear Market, Correction Phase or Back to Fundamentals: How Biotechs Can Set Themselves Up for Success
I was only just beginning to get my footing in the life sciences industry when I witnessed firsthand “the great biotech boom” between 2019 and 2021. Between 2019 and 2020, biotech saw double-digit annual growth in fundraising from VCs and deals and a triple-digit growth in IPOs. In fact, 2021 was a record-busting year with the volume and value of VC financing and IPOs at their peak as increased interest in life science R&D during the pandemic drove a significant amount of capital into the sector.
Deal volume and value plummeted in 2022 from 2021, although still exceeding 2020 levels. VC funding retreated as the number of IPOs diminished and companies that had gone public in 2020 and 2021 struggled to hold onto their value. With macroeconomic challenges looming and investor confidence weakened, we exited 2022 with only a fifth of the small cap biotech stocks tracked by Evaluate Vantage ending up on the year, and many trading below cash.
Having supported the debut of several companies with cutting-edge science and technology in the last few years while working with life science innovators on a day-to-day basis, I would be lying if I said the daily headlines about biotech shutdowns and restructuring were not concerning. On the bright side, new funds have continued to form recently and there is plenty of dry powder to deploy – with nearly $22 billion raised by new healthcare funds last year and $50 million raised over the last 24 months. In addition, recent FDA approvals of novel drugs in immunology and neurology are positive signs for the industry. Industry veterans and experts also seem to be in agreement that the industry is at a turning point and has begun to stabilize, correcting off peak levels in 2021.
When asked about current investor sentiment, my colleague Sara Michelmore, Managing Director of Investor Relations at MacDougall, pointed out that “biotech specialist investor sentiment appears to have improved and the consensus outlook for 2023 performance is cautiously optimistic.” With the bulk of the correction for biotech in the rear view, and while we are still in a bear market and the IPO window has yet to re-open, she added that “we are starting to see a shift to a more rationally driven, fundamentally anchored market which suggests potentially more favorable conditions as we head into the second half of 2023 and into 2024.”
Whether we are back to the basics or are navigating a shift in investors’ risk appetite, biotechs are competing to demonstrate scientific credibility and productivity to investors. What can companies do to stay grounded and stand out to investors?
Define a Clear Equity Story for Investors
Amid market uncertainties, investors are increasingly eyeing investments with less risk and high return potential. They are also conducting greater due diligence. Investors must be able to identify value inflection points, so defining or refining a clear equity story is key. This entails a concise narrative about the company’s scientific approach, addressable market opportunity, leadership team and business model. Additionally, communicating a smart capital allocation strategy built around risk adjustment or de-risking events is critical. If investors’ sentiment about the company is unclear, consider conducting an investor perception audit to better understand their perspectives on the company and the competitive context of the value drivers. Telling a well-defined equity story that resonates with investors adds significant value and credibility to the company.
Swift Decision Making Around Strategic Sources of Capital
Challenges are opportunities in disguise. Over the last few months, we saw some positive momentum and outcomes from companies that were creative and open to alternative financing options, such as M&A and licensing deals. Pharma companies are currently more amenable to licensing deals on individual assets rather than whole companies because of the lower cost. “Prepared and proactive management teams willing to consider both acquisitions and divestitures will be best positioned to deliver superior returns.” With uncertain access to equity capital, securing alternative capital streams can be a rational alternative. For smaller biotechs, pharma partnerships can also serve as “opportunities to gain validation and knowledge in addition to funding.”
Maintain Consistent Messaging and Branding
Once a clear equity story is defined, it must be told effectively. Ensuring consistent messaging across communications materials, such as corporate decks, websites and other external facing materials, helps investors understand your story. Don’t forget to be creative and bold too – competition is fierce in the life sciences sector, and investors pay attention to differentiated, memorable and clearly conveyed stories, not extensive scientific decks. The human brain processes visual content 60,000 times faster than text – a 1 minute animation or a 3D graphic is considerably more powerful than a page of text. These communications items all take time and extensive planning, so act early and be prepared for when the market turns.
Stay Visible and Engaged at Investor and Industry Events
As we approach the busy spring conference season, with the TD Cowen 43rd Annual Health Care Conference this week, it is time to start planning for meetings and refresh your corporate deck. Remaining visible and engaged is the easiest way to stay top of mind. Coupled with a well-defined corporate positioning and succinct messaging aimed at target audiences, companies are in a better position to generate and maintain investor enthusiasm.
Looking for counsel on how to effectively communicate your equity story for the coming year? We’re here to help. Download our Investor Relations Overview or reach out to the team directly. And be sure to check out MacDougall’s conference calendar updated nearly daily.