From left: Shelley Chu, partner at Lightspeed; Stephen Knight, president and managing partner, F-Prime Capital; Adam Koppel, managing director, Bain Capital Life Sciences; Daniel Krizek, portfolio manager, Citadel.

Covid-19 sparked a flurry of research, and the development of life-saving vaccines was a shot in the arm for the overall biotechnology sector. Riding the growing investor interest in biotech, investment firms closed large new funds. Biotech companies tapped those funds for new financing rounds, some of them laying the groundwork for IPOs to support more research that includes cell and gene therapies. But in the past six months, the financial market has cooled down considerably.

The Nasdaq biotech index is down more than 50% from its 2021 high, said Daniel Krizek, portfolio manager at Citadel. The broader economy is dealing with inflation, rising interest rates, and spillover economic effects from Russia’s invasion of Ukraine. The unfavorable economic conditions have led many companies to postpone plans for IPOs or private financings. Krizek said that some people describe the current financing environment as a nuclear winter of biotech. However, all is not lost.

“One thing I’d say, even [if] we’re in so-called nuclear winter, number one, that can change very quickly,” Krizek said. “Number two, a lot of these companies are not fundamentally impaired. The science is very sound across many of them and going forward, very strong with new advances.”

Krizek made his comments last week during the World Medical Innovation Forum in Boston, where he was a speaker on a panel about capital formation. He was joined by Shelley Chu, partner at Lightspeed; Stephen Knight, president and managing partner at F-Prime Capital; and Adam Koppel, managing director of Bain Capital Life Sciences.

Chu said that the lesson for companies from the last two years, and especially the last six months, is to take capital when it’s available. She’s seen CEOs turn down money because it did not come at a high enough valuation and they now regret it. Chu added that with cell and gene therapies, it’s important that the capital raised takes the company to one or more value-inflection points. That’s particularly important in the cell and gene therapy space where manufacturing costs are higher and potential partners will wait longer to see more validation.

Knight said that the strong balance sheet is not only for the manufacturing required of these complex therapies. These therapies are extremely complex and not yet completely understood, so companies should plan for bumps along a road that will take longer to travel than they might think.

Many of the companies raising mega-rounds of financing plan to use the capital to build manufacturing capabilities. This is particularly true of cell and gene therapies, where the product is the manufacturing process itself, and that process provides strategic value to the companies, Koppel said. He added, however, that it’s not always feasible for companies, particularly small ones, to own their own manufacturing facilities. For some companies, it may make more sense to work with a contract manufacturer or a larger partner with manufacturing capabilities. Koppel said that after companies raise money, it’s important that they spend it on the right things to make a project successful. Investors are looking for data, but not all companies are in a position to deliver.

“At my firm, we call them cartoons: The companies that go out and raise money on a couple of pages of cartoons with some molecular biology but no real human data,” Koppel said. “There’s a lot hope and hype, but it doesn’t necessarily always translate. A lot of data that has come out in the last six to 10 months has just not been positive. The hypotheses haven’s worked, and that has disappointed investors.”

Good data will be important for turning around the investment market. Positive data will lead to another crucial piece for a market turnaround: dealmaking. Koppel said that the ultimate owners of much of the innovation in life sciences are the 15 to 20 large global biopharmaceutical and medical device companies. Everyone is waiting for these larger companies to become more involved. The deals that they make lead to exits that frees up capital to be redeployed to more companies, he said.

Panelists were generally supportive of how the FDA has regulated cell and gene therapies. Knight said that from his perspective, the agency has done a good job working with companies and showing the appropriate caution. Chu said that with six cell therapies now approved, the FDA has laid out a path for other cell and gene therapy companies to follow. Regulation is not a rate-limiting step for progress, she added. Getting these therapies to treat solid tumors and developing off-the-shelf treatments are the big obstacles facing the field.

Despite the challenging market conditions, investment firms are still looking to put money into the biotech sector and in cell and gene therapy firms in particular. Chu said that she’s looking for management teams that truly understand the research and are doing something that is truly innovative. But she added that she will consider investing in interactive technologies if they address a large commercial market or an unmet medical need.

Koppel said the management team is his top priority. There are instances where a company will tell investors that an FDA interaction went well, but a different picture emerges after reading the minutes of the meeting. It’s not that the management team is trying to overtly deceive you, Koppel said. It’s usually the case that they lack experience or knowledge about regulatory interactions. A good management team will tell investors about potential pitfalls and how they plan to navigate them, Koppel said.

From Krizek’s perspective, the scientific progress has been growing exponentially while the availability of management professionals that can execute on this science has not. Consequently, many of the private companies today are led by first-time CEOs who are learning on the go, he said.

Koppel said he thinks there are too many companies, which may be a consequence of it being too easy for companies to raise money before the more recent economic slowdown. But some of these companies are projects, not companies, he said. More capital does not necessarily lead to a faster proliferation of innovation, he said. On the contrary, the constraint of capital can lead to more focus on getting the right things done while too much capital can lead companies down the wrong paths. As an example, Koppel pointed to Alzheimer’s disease. A lot of investment was poured into Alzheimer’s disease drugs, and much of it may not have gone in the right places, he said.

With 350 cell therapy companies, private or public, and more than 1,000 cell therapy clinical trials underway, Chu said she thinks that there may be too many companies.

“Each one doing something innovative—I think that’s questionable,” she said. “On the flip side, everyone at some point has to be a first time CEO, a first time CSO, a first time CMO. Of course, I love to back very experienced management teams. But it’s not they have to have done this three times and sold their previous company for $2 billion. It’s that they have to have the awareness of not just what they know but what they don’t know, and they can share that with the board so the board can help complement those skill sets.”

Photo by Mass General Brigham