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Venture Funding of Drug Startups Down, But Not Out

GuruFocus.com
·3 min read

The year 2020 was supposed to be a banner year to invest in drug startups. The Covid-19 pandemic got in the way of funding for new players, but that doesn't mean the year hasn't seen any startups.

Venture capitalists are predicting the downturn in deals won't be as severe as it was during the financial crisis of 2008. In fact, several firms and advisors haven't changed their view of opportunities as radically as might be expected.


For example, Amir Nashat, a partner at the venture firm Polaris Partners, said that during most of his 20-year career in the business, venture capital took place "under crappy circumstances" that made it challenging to invest in young drug companies, according to an article in BioPharma Dive. Things really changed in the past five years, when young biotechs came into favor as members of Big Pharma sought their innovative treatments.

The pace of drug IPOs has slowed this year, but not all that much. So far in 2020, 14 biotechs have gone public, down just three from the same period a year ago. Among the largest were Allogene Therapeutics Inc. (ALLO), Viela Bio Inc. (VIE) and Denali Therapeutics Inc. (DNLI). That's not to say the venture business has been unscathed by the pandemic. The rate of biopharma venture deals is down about 19% from the same time frame in 2019. Unless there's a reversal of fortunes, young biotechs may find it hard to close their next rounds of financing.

Bob Nelsen, managing director at Arch, thinks it's unlikely that any new funds can raise cash this year. The only ones who might be able to do so are those firms with established networks of investor relationships.

One big fear is that crossover investors, who often come in later and supply the capital biotechs need until they go public, will shy away from startups. Absent these investors, venture firms that got in early may have to pony up more money. However, biotech stocks have held up relatively well this year compared to the rest of the market on hopes for a Covid-19 treatment, which bodes well for continued crossover interest.

To attract new investors, development partners and potential acquirers, biotech startups need to hit goals like moving a drug into and through human testing. However, the pandemic has shifted drug and funding priorities, thus halting or slowing clinical trials for non-coronavirus-related drugs at nearly 100 companies of all sizes.

"There could be significant dollars lost and significantly extended timelines" for biotechs on the verge of, or already in, clinical testing, according to James Flynn, managing partner at Deerfield. His firm will be guarded about funding any company that's about to kick off a key drug trial or introduce a new product.

Nashat thinks investors will need to adapt to the realities created by the virus, adding that different types of entrepreneurs will emerge to capitalize of the opportunities while others will back off.

Disclosure: The author holds no positions in any of the companies mentioned in this article

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This article first appeared on GuruFocus.