Investors Pump Billions into Biotech Startups, Pay Skyrocketing Prices

U.S. biotechs rounded up $19.5 billion in venture capital through Sept. 30, topping the $17.4 billion they raised for all of 2019.

Investors are pumping billions of dollars into biotechnology startups and paying skyrocketing prices for their stakes in the most-promising new drug companies.

U.S. biotechs rounded up $19.5 billion in venture capital through Sept. 30, topping the $17.4 billion they raised for all of 2019, according to PitchBook Data Inc. and the National Venture Capital Association. This year is on track to double the $12.9 billion that biotechs collected in 2017.

Innovative treatments for cancer, Covid-19 and other diseases are pulling investors to biotech, along with a roaring market for initial public offerings and a recent streak of acquirers paying giant sums for small drugmakers, venture capitalists said.

“We’re in a golden age of biotech,” said Bob More, a managing director of venture-capital firm Alta Partners.

Through Sept. 30 the median biotech pre-money valuation—a company’s value before a new venture-capital round—was $43.7 million, up from $25 million in all of 2019, according to PitchBook and NVCA. The average pre-money valuation jumped to $173.4 million through three quarters over $102.6 million in all of last year.

Some observers caution that startups could struggle to sustain high valuations if IPOs slow. Highly valued startups are more dependent on the public markets because they have priced themselves out of the range of many acquirers, said Aaron Royston, a managing partner of venture-capital investor venBio.

“If that changes, it can put some of those high valuations in a tough spot,” Dr. Royston said. “There is some risk in relying on a buoyed IPO market to be there.”

Biotechs have flooded the public markets this year and many have seen their shares prices soar in their stock-market debuts, which in turn has whipped up higher valuations for closely held companies, investors said. In addition to IPOs, an influx of special-purpose acquisition companies, which buy or merge with startups and take them public, are giving biotechs an even speedier route to the public markets.

On Wednesday, venture-backed Nuvation Bio Inc. said it would go public by joining with Panacea Acquisition Corp. , a SPAC, in a deal that includes a concurrent $500 million financing.

The deal is expected to close in early 2021 and will give New York-based Nuvation more than $850 million to develop six new cancer drugs, including a treatment for fast-growing tumors that begin in the brain or spinal cord. Nuvation expects to start testing the drug in patients early next year, said Founder and Chief Executive David Hung, who previously led cancer drugmaker Medivation Inc. to a $14.3 billion sale to Pfizer Inc. in 2016.

Valuations are shooting particularly high in biotech corners such as immuno-oncology, or drugs that spark an immune-system attack on cancer, some venture capitalists said. So lofty are prices in this sector that some investors are walking away.

“We found ourselves mostly priced out of it,” said Alex Zisson, a managing director with venture investor H.I.G. BioHealth Partners, though he added that the science in this area is exciting. Instead, his firm is targeting areas where it sees better value, including a company developing an epilepsy drug, he said.

Not all biotech startups command high valuations. While some highfliers have pulled up the average pre-money valuation, the median pre-money valuation shows that half of biotech venture financings are done at relatively modest prices, closer to those investors saw before this year’s investment boom.

What separates the most highly valued startups from similar companies with lower valuations is often the quality of their management team, said James Topper, a managing partner with venture investor Frazier Healthcare Partners. Venture investors can find value by backing startups with strong science, then fortifying the management teams, he said.

But biotech startups generally are securing higher valuations because the industry has been delivering on its promise of developing innovative medicines, said Amir Nashat, a managing partner with venture firm Polaris Partners. But that is sustainable only if that strong performance continues, he said.

“If we don’t deliver the goods, valuations will drop,” he said.

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