Leadership Matters

Perspectives on the key issues impacting senior leaders and their organizations
November 23, 2022

Biotech and BioPharma Investment, Financing & Deal-Making in 2023: Reasons for Optimism

Executive summary

Biotech is changing. After years of cheap debt, there is now a barbell shaped market, with investment now concentrated on early stage preclinical companies. Rather than focusing on Phase I/II, Pharma’s priority is now Phase III-ready assets that can fill their pipeline and generate revenue, while also seeding optionality across the market with co-development deals. Although choppy waters are expected to extend into the first half of 2023, there is no shortage of cash awaiting deployment. Private equity (PE) firms, boosted by the acquisition of venture capital (VC) funds, are now taking development risk, and there is a real appetite to invest in the cutting-edge science that will evolve into approvable medicines for patients worldwide.

Investing and financing in stressed markets

It has been a tumultuous time for healthcare. Navigating the waters of post-pandemic recovery and macroeconomic stresses is no small feat, and fluctuating investment, shifting funding levels, and changing prices continue to reshape the biotech industry. With high inflationary pressures predicted to linger in the United States and Europe expected to make a quicker recovery, budgets will need to adapt and stretch, particularly for early-stage companies.

That said, investor confidence is expected to make a slow but sure comeback. In 2021, retail investment ensured there was an overwhelmingly positive reception for biotech. These retail investors then fled, leaving public equities cheap.

Although this has been a challenging period, unlike previous downturns in the early 2000s there is certainly money available. Over the coming years we will see CRISPR, gene, and cell therapy acting as positive catalysts. Other emerging stars such as digital therapies, also herald a great deal of promise.

Pipeline potential

With the evolution of these dynamics and the shifting price of cash difficult to predict, a conservative approach to pipeline management is prudent. In light of the Inflation Reduction Act1 (IRA), it will be difficult to fund a second indication in rare disease. This has prompted Alnylam Pharmaceuticals to reveal that they will not launch a Phase III study of Amvuttra in Stargardt Disease in late 2022, as previously announced.

Under the IRA, revenues of at least $2 billion are needed to justify net present values for small molecule drug development. Pharma companies have become increasingly vocal about the headwinds arising from this legislation.2

Notable regulatory disclosures on the IRA in company filings



Eli Lilly

"One or more significant Lilly products may be selected, which would have the effect of accelerating revenue erosion … In particular it may reduce the attractiveness of investment in small molecule innovation."

Merck & Co.

"The Company anticipates [the law's provisions] and additional actions in the future will negatively affect sales and profits."

Bristol Myers Squibb

"… it is possible that these changes may result in a material impact on our business and results of operations."


"The IRA’s drug pricing controls and Medicare redesign is likely to have a material adverse effect on our sales (particularly for our products that are more substantially reliant on Medicare reimbursement), our business and our results of operations"


“Some of these changes and proposed changes could result in reduced reimbursement rates or in eliminating dual sources of payment, which could reduce the price that we or any of our collaborators or licensees receive for any products in the future”

Source: SEC filings

As Pharma endeavours to fill revenue pipelines, the arbitrage in biotech has shifted from early stage to Phase III to commercialisation. This interest in both early stage and Phase III reflects a barbell shaped market – for example, Abingworth’s investment in Sierra Oncology generated six times return. Continued interest in vaccines is likely, and so public offerings such as Vaxcyte’s $600 million IPO come as no surprise. The panellists also predicted an increase in flat VC rounds and some necessary down rounds.

Alternative investment

The panel offered several interesting insights regarding alternative investment. Special Purpose Acquisition Companies (SPACs) remain a strong option, for which failed IPOs become strong candidates. However, the SPAC redemption rights that dictate how an investor can redeem their shares pose a challenge as they create uncertainty. Nonetheless, we are seeing reverse mergers, whereby a company with cash but few assets can acquire B+ companies for 50%. Boards are seduced by the prospect of 50%, when it would, in fact, be wiser to acquire a stronger A+ company and keep 15%.

Will M&A increase?

Large-cap Pharma need to focus on revenue acquisition, so their focus will be on those biotechs with Phase III assets. By contrast, those companies with Phase I to II are less likely to be acquired. At the same time, however, Pharma will keep an eye on early-stage companies and develop more partnership deals to seed the market with future acquisition opportunities – hence the barbell-shaped market, which reflects a mix of extremely safe and extremely risky assets.

Pharma will also continue to focus on randomised, de-risked, strong clinical data that can be trusted when basing valuations. Forging relationships with these companies early on is central to understanding exactly what data is desirable and securing an acquisition deal.

Horizon scanning: So, what’s coming in the first half of 2023?

In addition to IRA headwinds, the panellists also predicted a focus on discounted cash flows, and significantly fewer FDA approvals as the bar is raised.

In the first six months of this year, though, there was somewhat of a lack of correlation between positive data and share price increases. Fund managers owned too much biotech stock and risk managers became nervous, resulting in the selling of their stakes in those public biotech companies. So even companies with positive data such as Allogene saw their share price tumble. This follows on from 70% of IPOs trading below IPO value in 2021, leaving an inordinate number of discounted companies available. This then begs the question, why would one invest in a new $200 million IPO?

In summary, we expect 2023 to be shaped by a combination of uncertainty and volatility, with managing wage inflation looming large as a key priority. There will also be a shortage of specialist talent, with CEOs focused on inspiring and keeping workforces together, whilst simultaneously managing cost and improving efficiency. PE and VC funds will be investing in talent even more, while also building relationships with middle/ senior managers to build future pipelines for C-suite talent. An increased number of bilateral deals and buyers with conviction will also do deals in 2023.