The Reason Venture Firms Are Investing In Publicly Traded Biotechs

As more biotechs seek additional funding after the post-pandemic shakeout, venture capital firms are seeing opportunity in already public companies whose valuations are lower than they were initially. 

The result presents an opportunity to get in - or back in - at a more favorable price and with less risk than many startups present. JL 

Brian Gormley reports in the Wall Street Journal:

The downshift in the public markets is leading venture firms to back public biotechs they see as better deals than comparable private companies. Some venture firms are pumping money into publicly traded biotechnology companies, as falling share prices prompt these investors to expand their search for bargains. Private investments in public equities, or PIPEs raised more than $4.56 billion in 2023, the highest since 2015. Many portfolio companies that went public in recent years are raising capital again, sometimes at prices well below their initial public offering. Venture firms also are joining PIPEs tied to reverse mergers. Investors are rewarding companies that deliver excellent clinical data.

Some venture firms are pumping money into publicly traded biotechnology companies, as falling share prices prompt these investors to expand their search for bargains to the public markets.

Private investments in public equities, or PIPEs, are financing deals publicly traded companies strike with a group of investors. Biotech companies in the U.S. raised 56 PIPEs for more than $4.56 billion in proceeds in 2023, according to investment bank William Blair.

Both totals are the highest the firm has recorded since it began tracking these financings in 2015. 

Investors in PIPEs typically focus mostly or entirely on public companies. But these deals also attract venture capitalists seeking to support newly public portfolio companies, or make initial investments in public biotechs that they see as good values.

The amount venture capitalists devote to public companies is small compared with their investment in private ones. VCs funneled nearly $23 billion into U.S. and European biotech startups in 2023, according to HSBC Innovation Banking, which serves technology and life sciences companies and investors. 

However, these investors have more opportunities to join public financing deals because many portfolio companies that went public in recent years are raising capital again, sometimes at prices well below their initial public offering. Venture firms also are joining PIPEs tied to reverse mergers, in which a startup goes public by merging with a public company. 

In some cases, venture firms seek to make initial investments through PIPEs. 

Lightspeed

 Venture Partners, for example, in September became a new investor in cancer drugmaker 

Olema Pharmaceuticals

, which does business as Olema Oncology, by participating in a $130 million PIPE.

“I have never seen this difficult a financing market in my career,” said Lawrence Blatt, chief executive of drugmaker 

Aligos Therapeutics

, which raised a PIPE in October from investors including Roche Venture Fund. “It isn’t going to be every biotech company that can do a PIPE.” 

Companies negotiate PIPEs privately with investors and only announce them after reaching a deal. PIPE investors can’t trade their shares until material nonpublic information they have seen is revealed publicly, said Thomas Rose, a partner with law firm Troutman Pepper Hamilton Sanders.

People once associated PIPEs with distressed companies, but that view has dissipated as strong businesses have raised these financings, said Rahul Chaudhary, senior managing director and head of healthcare equity capital markets for investment bank Leerink Partners.

“The stigma of doing a PIPE that was there in the market 10 years ago isn’t there today,” he added. 

The downshift in the public markets is leading venture firms to back public biotechs they see as better deals than comparable private companies.

Last year, valuations reset more slowly for later-stage private companies than for public biotechs, said Lightspeed Partner Jonathan MacQuitty, because startups used tactics such as insider rounds to sustain their prices.

That has led Lightspeed to consider public investments, he said, adding that the firm seeks to participate in additional PIPEs beyond Olema’s.

“For about a year, we’ve hovered over a number of public companies where they have a reasonable amount of cash, good clinical data, and they want to extend the runway,” MacQuitty said.

Olema extended its cash runway into 2027 through the PIPE and an up to $50 million credit facility from Silicon Valley Bank. The company, which went public in 2020, says it now has capital to fund late-stage, or Phase 3, clinical trials of a drug for certain metastatic breast cancer patients.

 

Drugmaker Pharvaris went public at $20 in early February 2021, shortly before the biotech industry’s pandemic-era bubble popped. In June 2023, it raised a $70 million PIPE, selling shares at $10.07.

That allowed venture firm venBio Partners, which initially backed Pharvaris when it was private, to invest further at a relatively low price, even though the company was further along, said Dr. Aaron Royston, a venBio managing partner.

Biotech stocks have retreated, but investors are rewarding companies that deliver excellent clinical data with higher stock prices, Royston said.  

Since raising the PIPE, shares of Pharvaris, which is advancing a treatment for the rare inherited disorder hereditary angioedema, have risen to about $30 because of clinical data the company disclosed in early December. 

Pharvaris, whose PIPE also included General Atlantic, Foresite Capital, Bain Capital Life Sciences and Venrock Healthcare Capital Partners, sought to raise capital from investors that add value to the company, said CEO Berndt Modig.

“It’s not just about getting money, it’s about who supports the company,” he said.