Shortly after the COVID-19 lockdown started in the UK on 23 March 2020, the Biotech Industry Association polled its members to ask for their biggest concern as a life science business.

The main issues highlighted by the membership were:

• operational disruption (33%)
• capital raising/cash flow (16%), and 
• supply chain disruption (13%).

Intriguingly, at that point, operational disruption was the main concern, with supply chain disruption and capital raising coming someway behind. As the COVID-19 crisis has unfolded over the last few months, and as some labs start to return to work, it seems likely that capital raising concerns will creep up the corporate agenda.

In this second article of our two-part series, we'll examine concerns related to availability of investment capital and cash flow (Part 1, which focuses on operational disruption, is available here).

The funding outlook post COVID-19

First, the good news.

At the start of the COVID-19 crisis, the sector was better funded than at any other time in history, with US venture funding for the sector reaching a peak of $5.5 billion in the first three months of 2020, according to PitchBook.

Biotech companies are of course capital-hungry, generally being pre-revenue. They fund their R&D and G&A costs from capital, typically periodically returning to investors in private financings (private biotech) or to the capital markets (IPO, secondary offering, private placement, PIPE) (public biotech) to raise more capital to fund the next stage of the company's development.

So while the state of funding and outlook in Q1 of 2020 was positive, a key concern for the sector lies in the months (and years) ahead in the post COVID-19 world with its anticipated knock-on effects on global markets including employment, travel and supply chains.

The stock market disruption caused by the COVID-19 crisis has already resulted in lower valuations for public biotech, and while investment activity in private biotech is generally still continuing, private biotech valuations are likely to be similarly affected. Also, the disruption increases the risk that the biotech company will not be able to raise its next round of investment capital on schedule.

At the same time, the delays to R&D roadmaps, milestones and data generation due to the operational disruption discussed above are likely to further increase the biotech's hunger for capital.

The crisis has brought every biotech company's cash runway (ie the time available to the company until it burns through its existing capital) into sharp focus.

Unless very well-funded, the task of emerging private biotechs is typically to work out how to conserve cash to increase their cash runways, with the aim of getting through the current crisis and surviving until more normal conditions return.

This inevitably involves prioritising programs which are absolutely essential to the corporate strategy (for example those which provide the highest long-term value opportunities), or those which have milestone payments achievable in the short term, and mothballing the rest.

Anecdotally, one of our clients (an emerging European biotech) reports that it has frozen all but 12 of its 400-odd projects, to illustrate the degree of prioritisation facing some companies. Simultaneously, companies are continuing to evaluate their options to raise capital, in particular through private financings and partnering opportunities with cash-rich pharma companies who are still seeking access to biotech innovations (non-dilutive capital).

Private financings

Commentators are predicting increased volumes of investment into the life science sector in the longer term (ie 12-24 months from now), as the COVID-19 crisis has highlighted to potential investors the importance of its technologies and products and their potential value.

Following the recent fundraising successes, there is still plenty of dry powder around in investment capital terms, with many existing funds not fully allocated, so in principle still being open for business. Also, new venture funds are still successfully being raised, despite the COVID-19 crisis. For example, Arch Ventures and Flagship Pioneering in the US have each raised $1 billion funds in recent months, joining the club of $1 billion+ investments funds announced in Q1 of 2020 alongside New Enterprise Associates and Qiming Venture. LSP Bioventures in Europe also raised a significant amount with its $600 million life science fund.

However, over the next 6-12 months, private financings are likely to face challenges due to more liquid public market opportunities for investors. Some VC investors are hoarding capital to follow up on their existing portfolio. Others are holding back to see how far valuations fall, in order to pick up cheap assets.

This means that better capitalised companies with higher quality, deep-pocketed investors are likely to continue to be able to raise money, though with greater difficulty and on more stringent terms than in previous rounds.

Companies with less prominent investors and less cash in the bank may find it hard to raise capital – particularly if they had been looking to bring on board a new lead investor to co-ordinate a new round.

While there has been a shift in attitude and acceptance about the new ways of working, these companies also face the practical difficulty that a significant number of new investors still appear to prefer to meet the management team face-to-face (not via Zoom or other video conferencing platforms), given the importance of the management team to the performance of the biotech. So this makes it harder to put together a new funding round remotely.

For those companies, there is a risk of a programme funding gap 6-12 months out, before a new wave of capital arrives into the life science sector. Companies may seek to plug this with partnering deals (discussed below), grant funding, or COVID-19 state aid schemes (such as the UK's Future Fund). There has been some discussion in the sector about how best to navigate a down round, but these do not seem to have materialised yet.

Turning to public markets, these took a hit at the start of the pandemic and remain largely closed in Europe. However, May 2020 was the strongest month for biotech IPOs on NASDAQ since 2008. Secondary offerings have been strong too, both on NASDAQ and London's Alternative Investment Market. However, this positive narrative for public biotech will not resonate with all. 

A leading US investment bank has reported that there are 100 biotech companies on NASDAQ with less than one year of cash runway and a market cap of less than $200 million. Anecdotal reports suggest that capital is being reallocated from those weaker public companies to favoured private biotech in cross-over rounds.

Partnering (non COVID-19 assets)

Partnering with big pharma/larger biopharma companies is another way in which biotechs can raise capital (non-dilutive in this case) to extend their cash runway and survive the COVID-19 crisis.

There is anecdotal evidence that the volume of partnering transactions is holding up well, with the need for virtual negotiations not proving to be a barrier. Big pharma and larger high-growth public biopharma are more insulated from capital market swings, so are likely to remain active and should be well-positioned to deploy their balance sheets to build their asset pipelines.

There is likely to be an increased emphasis on upfront payments, at least for companies who are less well-funded (ie companies with less deep-pocketed investors and less cash in the bank).

Similarly, for those companies, there may be a trend towards preferring pure licensing deals over co-commercialisation deals (eg co-development, co-promotion or some other profit share mechanism), even for later stage assets, due to the increased cost implications of co-commercialisation for the biotech. 

On the other hand, biotechs may still seek to emulate the Amgen model and retain co-commercialisation rights, in the hope that in three to four years when those assets come to fruition, the funding squeeze will have passed and capital can be raised to fund the costs of building out a full commercial (manufacturing, sales and distribution) infrastructure. In those cases, an opt-out is likely to be important, to give the biotech the flexibility not to participate.

There may be an increased interest in regional partnering, in particular for Asia rights. Deals for Japan typically take a long time to negotiate, so may not deliver the desired funding boost in the required timeframe. For that reason, China deals are likely to attract more attention.

Given the COVID-19 funding pressures, we may see a trend towards earlier-stage partnering deals. The trend to early stage deals was certainly boosted by the last downturn in 2008. Alternatively, to justify a healthy upfront, pharma companies may ask for deal-sweeteners in the form of follow-up compounds or back-up compounds to be included in addition to the lead or secondary compound, even if still in the research or discovery phase, to reduce the risk of failure and justify the larger upfront payment.

Partnering (COVID-19 assets)

In Q1 2020, many biotechs looked at pivoting their products, programmes or technologies to target the COVID-19 indication.
A flurry of deals were put together at top speed. These included:

• BioNtec entered two collaborations to develop their pre-clinical mRNA- based vaccine for COVID-19. One was a global/ex-PRC deal with Pfizer, the other a licence of PRC-rights to Fosun.
• Sanofi entered into two vaccine collaborations, one with the US government (to develop a recombinant-DNA vaccine) and the other to expand its existing infectious disease programme with Translate Bio (for an mRNA vaccine).
• GSK was one of the first companies out of the blocks, striking a $250 million equity and collaboration deal with Vir Biotechnology (PRC) to find prophylactic/therapeutic monoclonal antibodies for COVID-19.
• Oxford University's Jenner Centre and its spin-out company, Vaccitech, have received £65 million of public funding from the UK government for development of its viral vector CdAdOx1 vaccine and to support its clinical trials. Oxford has also entered into a partnering agreement with AstraZeneca for the further development, large-scale manufacture and distribution of ChAdOx1 (a chimpanzee adenoviral vector-based vaccine). Interestingly, during the pandemic period, the University and Vaccitech will not be entitled to any royalties on sales. AstraZeneca has in turn committed to deliver 100 million doses of the vaccine to the UK government and 300 million doses to the US government, under a BARDA-funded pact valued at $1.2 billion. Oxford Biomedica has also announced a one year clinical supply agreement with AstraZeneca for the manufacture and supply of multiple batches of the vaccine candidate, to assist AstraZeneca in ensuring short-term availability.

In total, over 60 collaborations – vaccines, therapeutics, diagnostics (both nucleic acid antigen testing and antibody testing) – were announced in the course of a few weeks. Deal flow has now tailed off. It appears that pharma, governments and strategic investors have decided which horses to back (at least in the first wave of deals) in the COVID-19 race and are now awaiting developments.

The published deal values (upfronts and milestones) are quite low, so it seems that pharma and governments have taken the approach of placing a large number of small bets, in order to spread risk and maximize the chance of a rapid solution.

Given the likely competition between any products emerging from these programs, and the major role that governments will play in procuring the products for their populations, and the full glare of public scrutiny over the pricing of any products which emerge, there is likely to be significant pricing/reimbursement pressure in relation to any products emerging from these programmes. Therefore, these collaborations may not in the end be financially lucrative programmes for the participants, at least not during the pandemic period.

Even so, there could be benefits for participants which extend beyond just satisfying altruism and good PR. These include:

• validation of the biotech's technology platform
• exposure to strategic investors (pharma, large biopharma, diagnostics companies, and large CROs), and
• development of a long term relationship with a partner which could lead to deals in other therapeutic areas. 

Governments' traditional preference for working with larger companies and universities has also been in evidence. It has been harder for emerging biotech companies to access large grants and supply deals, at least in this first wave of deals. 

Final thoughts

The COVID-19 crisis has caused operational disruption for many VC-backed emerging biotechs, delaying their product development and eroding their capital base. 

To survive, all options for raising further capital are being considered, in particular private financing and partnering. Given the high degree of uncertainty in the current situation, these should ideally be pursued in parallel in order to avoid wasting time.

On a positive note, those biotech companies that make it through the current crisis will be leaner and fitter, and better placed to benefit from the anticipated increased level of interest in life science investing over the next few years.