Investors Shaken by Coronavirus Sow Seeds of M&A, Financing Slowdown

Xconomy National — 

The coronavirus pandemic is narrowing the avenues open to biotechs for financing their endeavors, according to some industry veterans.

“I think that fear of losing out has pretty much gone out the window right now,” said Equillium (NASDAQ: EQ) CEO Bruce Steel in a phone interview with Xconomy, speaking generally of investor appetite. “I think they’re going to be very patient and pick their spots in terms of where they’re going to invest, and that’s going to put a lot of pressure on companies. If you map that backdrop of the overall investment environment against the backdrop where companies may be slowing down, in terms of clinical development, that’s not a particularly great combination.”

However, Steel—who before joining San Diego-based biotech Equillium was the founder and managing director of BioMed Ventures, the strategic investment arm of BioMed Realty—said he’s received mixed feedback from investors about how they are handling today’s uncertain reality.

Recently he spoke with a large, top-tier healthcare and biotech-focused investment firm that said it was “open for business,” and continuing to hunt for new deals. However, he also heard from a well-known venture fund that is battening down the hatches, focusing only on supporting companies in its existing portfolio.

Greg Dombal, chief operating officer of Boston-based Halloran Consulting Group, which works with life sciences, biopharma, and medical device companies, said some deals the firm is involved in have been thrown into limbo.

“Two diligence projects that we were working on that were pretty near-term to acquisitions were both put on hold this week,” he told Xconomy on Friday. “It’s a small number, but I think a lot of it had to do with market volatility, concerns about long-term liquidity issues…they weren’t completed scuttled, but they were put on hold until some things sort out and settle.”

Some companies that don’t immediately need funding are already working on how to stretch their existing cash so as to avoid needing to raise funds as the pandemic reshapes the business landscape, Dombal said.

“I do think we’re going to see a slowdown in some of the true M&A activities, and later in the year, we’ll start to see true effects on financing,” he said. Still, venture firms have raised billions in recent years—$46.3 billion by US funds in 2019—and that cash needs to be deployed, so some investment is likely to continue.

“It sounds a little mercenary, but right now there are some very good acquisition targets that are available for less,” Dombal said.

The lineup of targets, however, is likely to be irrevocably altered by the pandemic given the impact of the ongoing implementation of social distancing recommendations on the pace of biotech R&D.

COI Pharmaceuticals, a shared lab and services space for companies in the Avalon Ventures portfolio, temporarily closed down earlier this month, said Jay Lichter, COI’s president and CEO, during Xconomy’s Xcelerating Life Sciences San Diego event last week.

“The problem is, our business is driven on data and generating data, and if it’s in a lab, or a [clinical research organization], or a clinical trial, that’s going to be impacted,” said Lichter, who also serves as managing director of Avalon, in La Jolla, CA. “We have six active clinical trials ongoing now across the portfolio … every single one of those trials are impacted.”

That could affect how many startups are acquisition-ready down the line.

“Productivity is going to drop precipitously this quarter,” Dombal said. “That’s going to have long-ranging impacts on product pipelines. We may not even see the full impact of M&A declines or financing declines until 12 to 18 months from now, because products that would be currently discovered are not going to be discovered for another six months or nine months, or whenever we get back to some semblance of normal.”

Few biotechs appear interested in braving the public markets at the moment. This week there are no IPOs scheduled, according to research firm Renaissance Capital.

Boston-based Imara (NASDAQ: IMRA) raised about $75 million on March 12, offering 4.7 million shares at $16 per share—the low end of its projected price range—to continue its research on drugs for rare blood conditions.

Since then only one biotech has joined the IPO queue: Keros Therapeutics, a Lexington, MA-based biotech working on new drugs for neuromuscular diseases, which set a preliminary target of $85.25 million.

Some life science companies have recently raised secondary offerings, including Compugen (NASDAQ: CGEN), which offered 8.3 million shares at $9 apiece, raising about $75 million, and Kala Pharmaceuticals (NASDAQ: KALA), which offered 16 million shares at $7.89 per share, raising about $126 million.

BridgeBio Pharma (NASDAQ: BBIO) and NanoString Technologies (NASDAQ: NSTG) recently issued convertible bonds, raising $550 million and $200 million, respectively.

Whether fundraising will continue and at what level will be largely be determined by how long the disruptions caused by the rapidly spreading virus continue, Steel said.

“If things turn around quickly, and I can certainly think of scenarios in which they turn around quickly, I think this will be a relatively minor, temporary setback that the industry will move on from,” he said. “To me it’s a function of how long does this last, and how bad does it get, and I just don’t think we know the answer to that yet.”

Image: iStock/Valerii Evlakhov