The biotechnology market is facing a Darwinian moment.

The investor spigot that peaked in 2021 has slowed to a trickle, forcing companies to find ever more creative ways to raise the capital that is the lifeblood of the industry. Combined with an IPO market that is all but dead, many are shutting down or putting themselves up for sale.

For investment bankers, this represents an opportunity, but not one many relish. Most bankers look to build companies, raise cash for them, bring them public or get them sold at a high valuation, not sell off their assets at a discount.

In recent months, at least six biotechs – Magenta Therapeutics [NASDAQ:MGTA], Aristea Therapeutics, Rubius Therapeutics [NASDAQ:RUBY], Vyant Bio [NASDAQ:VYNT], Goldfinch Bio, Theonys and others – are either shutting down or have announced they are seeking “strategic alternatives,” often a euphemism for a sale. And many more are likely to bite the dust this year, say experts.

Creative capital 

Part of the issue is that while many have promising drugs in development, they are running out of cash to develop them, especially to fund clinical trials, which can cost tens of millions of dollars.

Even companies with cash can find that boards of directors, often made up of investors, are increasingly looking to unwind companies that face drug development setbacks to conserve cash.

Magenta, for instance, announced this month it was halting drug development and looking at strategic alternatives, even though it has USD 112m in cash and equivalents on its books.

“Underlying investors are quick to strike if something goes wrong in this marketplace,” says Robert Towarnicki, CEO of SIRPant Immunotherapeutics, a biotech company that is looking to raise up to USD 100m. “Two years ago, this was really out of the ordinary.”

Towarnicki is among those that are looking for a cash-rich merger partner that may have faced drug development setbacks. More than 100 biotechs are trading below cash, meaning their market value doesn’t reflect drug development prospects and could be merger candidates, he says.

Alternative forms of financing can include raising debt, which is expensive in a higher interest rate environment, or looking farther afield, for example to sovereign wealth funds overseas. Others, like Saghmos Therapeutics, are offering royalties on future drug sales as an extra incentive to invest, according to CEO Anna Kazanchyan. Saghmos is looking to raise USD 75m, she told a recent biotech conference.

“You have to assume most of these companies [in need of capital] are going to fail,” says healthcare investor Les Funtleyder, a portfolio manager at E-Squared Capital, a family office. “A lot will probably merge or go out of business.”

Cautious optimism 

Still, there is reason for optimism, say advisors. The biotech stock markets could improve this year, pushing up valuations and cash-raising prospects for public and private companies.

And big pharma companies are still gaining regulatory approvals for products in promising areas of research, such as gene therapy and vaccines, which can bolster biotechs who are working in these areas.

“There is no shortage of innovation. This is a cycle and the markets are not going to be down forever,” says Jay Gould, an attorney of counsel to Baker Botts who specializes in advising investment funds.

For biotechs accustomed to rich valuations, those that survive will be forced to face the prospects of “down rounds,” at valuations well below what they previously traded at.

“These are challenging markets, but creative companies can survive if they can live with dilution,” says Stuart Barich, a healthcare investment banker with Raymond James. “Investors are being very cautious.”