How can pharma start-ups build themselves a positive future?

The global boom in start-up valuations has abruptly stopped. What felt like never-ending growth in biotech-pharma investments has been replaced by a landscape of failed initial public offerings (IPOs), dramatically lower valuations, more acquisitions, and job cuts. How can biotech start-ups buck this trend and create sustainable, valuable businesses over the long-term?

The changing market for pharma start-ups

Over the course of the past decade, biopharmaceutical companies experienced a period of growth and prosperity, marked by a significant infusion of financial resources and driven by enthusiasm surrounding innovative technologies such as cell therapy, gene editing, and messenger RNA.

However, this has changed dramatically. Many biotech companies, such as Faze Medicines and Ambys Medicines, have ceased operations. Others have laid off staff - with roughly 3,200 biotech employees losing their jobs between 1st January and early April 2023. Stock offerings have struggled. The number of IPOs has collapsed from 120 in 2021, to just 24 in 2022. While the NASDAQ 100 and Indian Nifty 50 stock market index grew by more than 60%, similar pharma indices have shown relatively muted growth.

According to data provider Traxcn, private biopharmaceutical companies experienced a 40% decline in funding between 2021 and 2022, with investment falling to $26.7 billion. Only 589 funding rounds (up to Series B) occurred in 2022, the lowest in five years. This funding gap led to an all-time high of 100 acquisitions last year in the sector.

Aside from general investor sentiment around start-ups, four macro indicators have contributed to the market transformation:

1. After the development of the COVID-19 vaccine, R&D investments in the pharma industry remained stagnant throughout 2022, which investors typically view as an indicator of sector decline.
2. Clinical trials in Russia and Ukraine, which make up 5% of global innovative biopharma trials, have been adversely impacted due to the ongoing conflict.
3. IPOs launched during the pre-clinical to phase 1 trial phase were considered high-risk, resulting in a significant decline in valuations.
4. Central banks have tightened monetary policy after the pandemic, with rate hikes of over 2.5 percentage points in the US and UK.

How to build a pharma unicorn

Accessing investment to build billion-dollar start-up unicorns is still possible. However, it requires a new approach from start-up CEOs – and, based on our experience, they should focus on these five areas:

1. Present clinical evidence to demonstrate proof
IP assets (such as patents & trademarks) instill investor confidence and establish distinctive positioning. As part of this, having successful clinical trial results is back in investor focus. Rivus Pharmaceuticals, for instance, raised $132 million in its Series B round following successful clinical trials of a drug candidate targeting cardio-metabolic disease and obesity.

Backing this up, 70% of companies in the first half of 2021 had at least one clinical trial initiated during their IPO process. Evidence suggests that going through large private rounds to fund these trials can decrease time-to-IPO and increase valuations post IPO.

Start-ups should leverage the budding relationship between Contract Research Organisations (CROs) and venture capitalists to help raise investment. This can range from creating an effective investor deck together or presenting data in a way that makes it easier to digest. For example, CRO ICON has a dedicated group that helps biotech start-ups fine-tune their pitches for the investment community.

2. Build efficient asset-light business model
Biotechs lacking the resources to meet their milestones, or who are not able to optimise their pipelines should consider alternative financing and partnership models. Efficient and asset-light business models are crucial for success, as investors increasingly seek cost reductions. For instance, Mubadala is urging its portfolio firms to cut expenses by up to 25%.

Collaborations across the value chain can help in reducing costs, expanding capabilities, and accelerating timelines. Utilise shared infrastructure and partner with Contract Manufacturing Organisations (CMOs), Contract Development and Manufacturing Organisations (CDMOs), and Contract Research Organisations (CROs) to bring in capabilities as required.

Adopt AI solutions to reduce cost, expedite drug screening, lead optimisation, and clinical trials. For example, Standigm uses AI in the drug discovery phase, eliminating uncertainty and saving time and cost during development.

Bringing in experienced leadership also helps build a strong business model. It aids in developing a funding strategy-led roadmap, establishes credibility with venture capitalists, and enables efficient workforce planning to fill capacity gaps and hit important milestones.

3. Target new markets
Evidence suggests that the largest 2021 IPOs focused on advances in key areas of unmet patient need. In line with this, start-ups should keep an eye on these areas, along with new regional markets. For instance, the areas which attracted most funding during 2022 were oncology ($5.7 billion), neurological disorders ($1.0 billion), and inflammatory diseases ($880 million).

Start-ups should focus on underserved areas and conditions that still offer large enough addressable markets. Take a global approach, but don’t overlook local and regional markets. For example, the prevalence of the mucopolysaccharidoses group of metabolic disorders is 14 times higher in Saudi Arabia than in the United States, providing a significant market opportunity.

4. Focus on innovative business models
Start-ups should bring flexibility in their business models and look beyond the traditional value chain. For example, adopt portfolio models, as pioneered by BridgeBio and Roivant Sciences. These span multiple technologies and disease areas. Alternatively, virtual business models, which rely on virtual collaboration and outsourcing, have become more popular due to the pandemic. Moderna developed its COVID-19 vaccine using this model.

5. Look at emerging hubs for development
Despite the high costs of living and lab space, most start-ups are located in established hub cities such as Boston, San Francisco, San Diego, and London. Emerging hubs should be examined to cut costs and attract top personnel and talent, establishing bio clusters, increasing site productivity, and leveraging unused clinical trial capacity. For example, supported by government initiatives, India and APAC are emerging as development hubs for biotech startups.

Transforming to meet changing investor priorities

Predictions anticipate that the current start-up funding winter may be coming to an end, with a projected increase in investment during Q4 2023. Even so, intense competition for finance and high valuations will persist. Bridging this gap successfully and navigating the current market downturn requires companies to carefully manage their finances and reassess their strategies for creating long-term value.

To unlock their potential and maximise valuations, pharmaceutical start-ups must therefore adjust their priorities, operations, and initiatives to align with evolving investor preferences. This transformation will enable them to achieve their objectives and reach lasting unicorn status pre- and post-IPO.