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Biotech VC funding softens amid macroeconomic headwinds

While US-based pharma and biotech companies kept pace with pandemic-era venture funding levels at the start of this year, deal activity has slowed in Q2.

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The need for scientific innovation during the height of the COVID-19 outbreak fueled investor interest in pharmaceutical and biotech startups.

As a result, the industry registered record VC fundraising in 2020 and 2021, reaching $28.2 billion and $38 billion, respectively, according to PitchBook data.

While US-based pharma and biotech companies kept pace with the pandemic-era venture funding levels at the start of this year, deal activity began to slow in Q2. And venture capitalists predict investments will be even less robust in the second half of 2022.


While demand for new medicines doesn’t drop amid a weak macroeconomic environment, investors say that the rise in interest rates and the generally depressed dealmaking climate is leading to a slowdown in investments in life sciences startups.

“Later-stage investing has slowed more significantly than the early-stage investing,” said Greg Yap, a life sciences- and healthcare-focused partner at Menlo Ventures. That is because most crossover investors, who until recently led most late-stage biotech deals, are now finding better value opportunities in the public market.

The Nasdaq Biotechnology Index is now down over 23% since the start of the year, and startup valuations are also expected to slide. Still, biotech’s stock market performance is better than the broader tech industry, especially for formerly VC-backed companies.

Declining valuations may be good news for large pharmaceutical companies that rely on acquisitions of biotech startups to fill the gaps in their drug research and development pipelines. “Most industry watchers expect a pickup in M&A activity now that everything is cheaper,” Yap said.

But a rise in life sciences acquisitions has yet to materialize.

Meanwhile, Big Pharma and biotech startups are becoming more interested in entering into partnership agreements with each other, according to Yap.

In these deals, a larger company pays a startup a predetermined amount for running a specific clinical trial in exchange for a partial value of the drug in the event of success.

Last month, Genesis Therapeutics, an Andreessen Horowitz- and Menlo Ventures-backed startup, entered into a collaboration agreement with pharma giant Eli Lilly and Company. Under the terms of the deal, Genesis will receive $20 million upfront from Lilly and be eligible to receive up to $670 million in additional capital for other trials.

According to Yap, the benefit of partnerships is that they help extend the runway when capital is scarce.

Featured image by fotograzia/Getty Images

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    Written by Marina Temkin
    Marina Temkin covered the venture capital ecosystem from 2021 to 2024, based in San Francisco. Previously with Venture Capital Journal, Marina wrote about the VC industry, and she was a reporter with Mergermarket in New York and San Francisco. She also has been a financial analyst and is a CFA charterholder. Marina received an economics degree from the University of California, Davis, and she attended the CUNY Graduate School of Journalism.
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