Despite a summer of blockbuster rounds, biotech funding is on track to level off at pre-pandemic norms

It might appear as though the private biotech sector is approaching a thaw. In recent weeks, a Flagship startup raised $273 million, an RNA company put together $200 million, and even a preclinical radiopharmaceutical biotech secured $175 million.

But under the microscope, the reality is much more complicated.

Bruce Booth

Private biotech financing has remained largely flat for much of the year, according to PitchBook data as of Monday. The sector pulled in roughly $5 billion each quarter in 2023. That’s high compared to historical levels, Atlas Venture partner Bruce Booth tells Endpoints News, but well below the Covid-19 pandemic boom years of 2020 and 2021.

The third quarter is on track for 12 raises surpassing the $100 million mark, which is the same as in the first quarter and one fewer than in the second quarter. That said, nine of those raises came in the last six weeks.

The plateau counters the better-times-are-coming vibes that have circulated in recent weeks and point to a world in which investors appear to be much more disciplined than they were roughly two years ago.

“Science projects a handful of years ago may have been a winning strategy, because you can sell those into the public markets early,” Booth said. “But the reality today is many investors, especially the investors that are downstream of us, really want to see product candidates that have real potential to address significant market opportunities.”

PitchBook’s data back up Booth’s point. From seed funding to early-stage and late-stage investments, 2023 figures are largely similar to those seen in the pre-pandemic years of 2018 and 2019. The total number of financing rounds per year is also similar, as are the topline dollar amounts raised.

These were good years for biotechs with great science, though the total figures raised at that time never came close to the pandemic boom years.

Even with some recovery underway, the vibes today remain much worse. Instead of biopharma companies putting out seemingly endless streams of good news, many have reorganized themselves, laid off staff and trimmed pipelines. It’s not a phenomenon unique to one sector, with major corporations — particularly in the tech sector, like Google and Meta — earlier this year paring back from 2020 and 2021 excesses.

Geoff Meyerson

A major driver of the last biotech bull market was low interest rates, according to Booth and Geoff Meyerson, CEO of the life sciences-focused investment bank Locust Walk. Back then, at the outset of the pandemic, interest rates fell to zero percent and the market was flooded with cash while the government printed money.

The economic stimulus also accelerated what was already happening in the second half of the 2010s, leading to the aggressive but short-lived boom in 2020 and 2021. The biotech hype machine went into overdrive, Meyerson said, and a lot of venture-backed companies essentially set up “smoke and mirrors” to raise money for science that would never yield a drug as Covid-19 vaccines brought unprecedented attention to the life sciences space.

“There was an enormous amount of companies that got funded on a dream, and ultimately 20 technologies focused on CRISPR-Cas-pick-your-number is not sustainable. The world doesn’t need that many companies like that,” Meyerson said.

After the sector peaked in February 2021 and the downturn came in 2022, investors had hoped this year would produce some recovery, but that hasn’t yet happened.

The size of private funding rounds are up this year, according to Locust Walk data that Meyerson provided, leading to larger average round sizes.

The third quarter also saw more cash funneled toward companies with Phase II and III candidates rather than early-stage companies, which had remained a more attractive investment during the downturn.

Despite promising rounds for Generate:Biomedicines, ADARx Pharmaceuticals, and Mariana Oncology, the sector is unlikely to emerge from the doldrums until late 2024 or early 2025 at the earliest, Meyerson predicted. Recession fears have waned, though interest rates have not, meaning fewer private companies have pursued IPOs this year.

Additionally, the “generalist” investors are no longer participating in funding rounds, closing off what had been a key financing avenue for private companies during the pandemic boom.

“The specialists who are active investors are still going to invest, just their bars have gone higher,” Meyerson said. “It is really, really hard for us to help a preclinical company to raise capital if they don’t already have institutional investors.”

Michele Park

Some remain cautiously optimistic that the private and public markets will thaw sooner than Meyerson believes if interest rates start coming down. Booth notes it could happen sometime in 2024, which some forecasts are already calling for. He still couched his assessment: “I don’t have a crystal ball on this.”

Michele Park, a partner focused on biopharma at New Enterprise Associates, said that several VCs raised life sciences funds in the last few months and will likely start investing soon, if they haven’t already. That environment could result in firms investing in promising science at more realistic amounts, she said.

“The veteran investors in the space recognize that this is a time to reset valuations,” Park said. “And this is in the backdrop of what we feel is a gradual rebound of the market and a slowly warming, pre-IPO-rounds market, and we see this as an opportunity.”

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