What the biotech bear market means for start-ups

The Nasdaq Biotechnology Index has lost a good quarter of its value over the past 12 months. Shares in companies that do not yet have a product on the market have been particularly badly hit. The valuation of these companies often corresponds only to their cash reserves. Venture capital investments also experienced a clear decline. According to Pitchbook, the total amount invested in the US in the first half of 2022 fell by about 40% compared with the first half of 2021. Investment in Swiss biotech start-ups saw a similar decline.

Part of this decline can be explained by a return to more realistic valuations. “The IPO market was overheated numerically and in terms of price,” says Markus Hosang, general partner at Basel-based biotech investor BioMedPartners. However, prices have also suffered due to the end of the Covid-19 bonus and the sector shift towards cyclical values. In addition, the Russian invasion of Ukraine has introduced a degree of macroeconomic uncertainty.

Nevertheless, larger VC financing rounds still took place in Switzerland in 2022. BioMedPartners played a key role in the largest round in the first half of the year – Immunos Therapeutics’ Series B investment of USD 74 million. BioMed acted as co-lead investor in the Series A round, which closed at the end of 2019; the other co-lead investor – Pfizer Ventures – was brought on board by Hosang. As an existing investor, Pfizer Ventures was an important factor in the success of the Series B round three years later. “With Pfizer Ventures, we not only had a well-known backer on board with its own large network,” explains Hosang, “but as a corporate VC, it can also provide tangible support on the road to approval.” In addition to Immunos’ innovative and promising approach to fighting cancer, this was crucial in securing the Series B round.

As special as Immunos’ success is, the framework conditions for biotech start-ups in Switzerland are generally not quite as bad as a glance at the conditions on the Nasdaq might initially suggest. “The VC market is less volatile than the stock market and the European market is even less volatile than the US market,” says Jost Renggli, COO and partner at Venture Valuation, which specialises in the valuation of start-ups for financing rounds.

The start-up valuation operation is currently going well, which shows that despite the slowdown a lot is still happening in terms of financing. This does not surprise Renggli, who draws a parallel to the financial crisis in 2008. Back then, the low point in financing was reached only after two to three years. “It becomes really critical only when investors run out of money. We still seem to be a long way from that,” he says. In addition, he points to factors that make a recurrence of the downward trend after the financial crisis unlikely. The most important reason, according to Renggli, is that “the need for therapeutics is long term”.

Nevertheless, biotech start-ups should be prepared for the fact that investors are more cautious and new financing in particular is difficult. Renggli advises entrepreneurs to always keep several financing options open. Hosang also sees a difference between the current situation and the first phase of the pandemic. “The Covid-19 bonus is gone,” he explains. Even in the textbook example of Immunos, the negotiations took longer than initially planned.

To ensure that company development does not fail due to a lack of capital, Hosang recommends that start-ups approach and involve institutional investors at an early stage. His advice to even younger projects is to remain at university for as long as possible and to keep costs to a minimum until Proof of Principle.

(Stefan Kyora)