On June 12th, 2024, Gilmartin Group held a webinar with Matthew Harrison, Managing Director, Biotech Investment Banking at Morgan Stanley. The webinar covered the capital markets trends in the first half of 2024 and outlook for the second half of 2024 and beyond.
KEY TAKEAWAYS:
Current Health of the Industry
The COVID transformation of the market is very real, and the market has shifted significantly, namely the profile and stage of development that the capital markets want to support. In Morgan Stanley’s view, this is good for the health of the industry – there was a period where companies were not being rewarded for positive data announcements, and this made it difficult for investors to invest and for companies to get a reaction on their stock. With more discretion now on the investor side, data catalysts are being rewarded and that’s great for the health of the market
One of the points Matthew wanted to highlight was how the scope of innovation remains extremely robust. He’s been pleased to see more mid- and late-stage candidates within private companies that have strong data with intriguing clinical and commercial opportunities. There are plenty of disease areas that are ripe for innovation moving forward, including genetic material delivery, a widening variety of modalities in oncology, and neurodegeneration, among many others.
The State of the IPO Market
The bar for a successful IPO remains significantly higher than the industry became accustomed to. Once it was clear that interest rates would be higher for longer, thinking around the investment window majorly shifted. The IPOs from this year who are still trading above issue are largely later stage companies with a robust investment profile. This speaks to what the current market is willing to bear and what is currently attractive to investors. At this point, it is a base case of de-risked, proof-of-concept, clinical stage programs, in addition to near term catalysts. Broadly, investors want to see companies well-funded through key milestones with at least 12 months of cash after a distinct clinical catalyst.
When thinking about the ideal cash runway and optionality in the financing environment, it’s first important to consider where they are in terms of clinical proof-of-concept, particularly for a private company. If the cash runway is very close to achieving clinical proof-of-concept, Matthew strongly suggested to consider topping off that cash supply due to uncertainty in the clinic. Secondly, as the current IPO market remains valuation sensitive, companies need to consider what the post-valuation on their last round was, and what the bridge will need to look like, and how the step-up will impact IPO prospects. Ultimately, it is recommended to err on taking cash to give oneself flexibility, and if that means going back to reprice in the future, crossing that bridge when it comes.
In the year leading up to a potential IPO, companies routinely ask how much visibility with investors is needed. Matthew again takes it on a case-by-case basis – if the company story is novel and will take multiple meetings to delve into the nuances of the science, he recommends spending that time with investors upfront. However, if the story is less complex and an upcoming clinical readout is what’s going to be used to go public, it’s not useful to keep meeting with investors because everyone is waiting on the catalyst.
We are seeing that, especially for crossover rounds, companies are facing pushback on their valuations and find themselves taking either flat or down rounds to secure the necessary capital. Unfortunately, Matthew agrees that there’s not much we can do to pull ourselves out of this phenomenon, as there’s still private valuations set during COVID times that need to be worked through, and private valuations are much harder to reset. Recent valuations have been much more appropriate for what the current markets are willing to bear, which is an encouraging development for the long-term prospects of the IPO market.
Secondary Financings
At the beginning of the year, we saw both catalyst and opportunistic driven financings. However, in these past few months, most financings have been the traditional catalyst-driven financings completed on the heels of data. Morgan Stanley has mostly seen one-day marketed transactions and less overnights, but overall, the market wants to see strong positive data, and companies will hopefully be able to finance with mid-to-single digit (or even less) discount off their performance.
Matthew noted that one of the biggest differences between the 2023 and 2024 landscape is the return of the mutual fund buyer. As we have seen in demand for follow-ons, these large tickets have included a much broader scope of investors that are not just healthcare dedicated, even including more generalist participation within the mutual fund complex.
Matthew emphasized that for companies with tighter cash runways and fewer clinical catalysts, one should always take the money when available. While catalyst financings are ideal, companies may have to be creative about alternatives to bridge the gap, either with non-dilutive financings, partnering on earlier-stage assets, or laying out the go-forward strategy with existing investors.
M&A Outlook, Large Pharma, and Deal Making
We are in a very robust M&A market right now with a significant amount of capital being deployed. Broadly, there are plenty of willing sellers and buyers currently in the market. Part of this is due to a shift from the COVID period in the type of exits from, but another piece is that many large pharma companies are facing significant patent cliffs in the second half of this decade and therefore large revenue gaps, and bolt-on acquisitions are the preferred mechanism to fill these revenue gaps.
When it comes to partnerships, the first thing many investors would tell you is not to partner your lead asset, as that’s primarily driving the company’s upside. There are certainly cases where the scope of development for a lead asset is too large and the capital ask is unreasonable for investors, but keeping (at a minimum) US rights, and preferably global rights, is important. For companies that need to make more capital-conscious decisions, investors are more willing to consider platform deals for early-stage assets, or even partnering second or third programs to bring in capital.
Some companies may wonder how partnering will affect future strategic prospects. However, there are many M&A deals that have stemmed from partnership negotiations, and additionally, there are several cases where a company’s second or third asset is partnered, and in the end, the acquirer is typically unconcerned with these earlier-stage assets.
Data Disclosures: Conference vs. Company Event
The choice between presenting data at a medical conference or a company-sponsored event is a key decision for many companies, especially smaller biotech firms who want to stand out at these packed events. Ultimately, the decision should be based on what you are allowed to say at a meeting and when. Companies should look at what can be disclosed in the abstract (the more wholesome the better), to prevent a major messaging gap between the abstract and full data set. Simply put, companies should not put themselves in positions where there’s a significant disconnect between the abstract and the data presentation, as investors’ first impressions can be particularly sticky.
Presenting data is often a seminal moment for many biotech companies, and attention needs to be paid to the business/executional priorities (such as giving your principal investigators the opportunity to present data, the impact it can have on recruiting more investigators, etc.). However, a useful solution can be to have investigators presenting longer-term updates at later dates should the planned medical meeting have a significant disconnect between the abstract embargo rules and the data presentation.
Financing Implications in an Election Year
The base case for an election year is that if you want to try to access the market, you should do it pre-November, especially from an IPO standpoint. Historically, the volatility around an election is typically short lived and close to the dates of the election. At this point in the year, everyone is expecting a slowdown in financing activity, but Matthew’s suggestion to companies is to be prepared and leave yourself optionality if you’re expecting to have to finance around the election period. The optionality to quickly pull the trigger on a financing in case of a different environment than expected is crucial.
Overall, preparation is the biggest task for any company in the current market, and it’s never too early to think about what the path forward should look like in terms of financing. Importantly, companies should lay out the meaningful upcoming catalysts that one can finance on in the public market, as these could be very different from what you’ve previously used in the private market. Even if it means having excess capital, knowing and understanding your catalysts and utilizing your financial resources to drive towards those is a major key to success.
Gilmartin Group has extensive experience working with both private and public companies across the biotech space. To find out more about how we strategically partner with our clients, please contact our team today.
Authored by: Devon Chang, Analyst, Gilmartin Group