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During this episode of Biotalk, Geoff Meyerson, CEO of Locust Walk, unpacks our Q2 2024 Report: Global Trends in Biopharma Transactions Report. Each quarter, Locust Walk’s deal team compiles key statistics and trends showcasing the current state of global private and public capital markets, strategic partnerships, and M&A in the biopharma sector.

In this episode, Geoff provides valuable insights into our report, focusing on critical areas such as:

Biotech capital markets: The XBI remained flat in Q2, diverging from the bullish S&P 500, with fewer IPOs but more capital for later-stage companies.

Private biotech markets: Venture financing rebounded with $5.5 billion across 44 deals, though the industry is divided between companies able to raise capital and those struggling.

Strategic transaction activity: M&A and licensing deal values stayed consistent with Q1, focusing on Phase 2 companies and notable ex-US acquisitions.

Market outlook and advice for the months ahead: Locust Walk expects continued positive momentum, advises careful cash use, notes non-dilutive capital accessibility, and predicts gradual recovery through 2024 with a stronger 2025.

We invite you to listen to our podcast and read our report and welcome the opportunity to discuss its contents with you. Subscribe or follow Biotalk on Apple Podcasts | Spotify.   

Timestamps:

0:39 Deal Context, Quarter Highlights and Key Takeaways, and Future Outlook

8:31 Our Advice for the Current Market

Transcription:

Welcome to Biotalk. My name is Geoff Meyerson, CEO and Co-founder of Locust Walk, and you are listening to Biotalk, our podcast for biotech deal makers. This episode of Biotalk is focused on Locust Walk’s 2024 Second Quarter market conditions Report, in which we apply the latest data to analyze current activities in the biopharma deal landscape. Locust Walk maintains proprietary transaction and finacning databases and each quarter our deal team compiles key statistics and trends showcasing what is happening in the global private and public capital markets and strategic partnering and M&A activity.

Deal Context, Quarter Highlights and Key Takeaways, and Future Outlook

To provide some structure, I will first cover biotech capital markets, touching on both public and private market performance over the past quarter. I will then transition into strategic transaction activity, covering both M&A and licensing. Please note, the full report published on the Locust Walk website is over 60 slides, so while I will do my best to summarize, as always, I encourage you to check out the full report for additional detail. To download this report, please go to locustwalk.com and go to our “Insights” page.

The XBI traded relatively flat across the second quarter, diverging meaningfully from the broader S&P 500, which saw bullish gains. Key drivers of this divergence were the XBI being more impacted by the higher-than-anticipated CPI reading in April relative to the S&P 500 and the record-breaking growth of AI/tech companies. One stunning non-biotech stat to consider: Nvidia alone accounts for more than a third of the S&P 500’s gains in 2024.

In terms of public fundraising, IPO activity slowed in the second quarter, with only 3 such deals. The weakened macroeconomic outlook and generally poorer performance of first-quarter IPOs reduced market demand for new companies. From my perspective, public biotech markets remain closed to all except a selection of late-stage companies with de-risked approaches, ideally accompanied by insider support and sufficient near-term news flow. Follow-on market activity also cooled from Q1, but interestingly, the average capital raised ($178M) in Q2 is up over 47% relative to the 2023 quarterly average, highlighting the accessibility of large chunks of capital for more de-risked later stage companies with strong data.

Venture financing continued its rebound from Q1, with the 44 deals summing to $5.5B in raised capital marking the best quarter for venture financing since Q3 2021.While Xaira’s notable $1B Series A was the talk of the venture community, the quarter also saw a $400M Series A raised for a NewCo spinning out Jiangsu Hengrui’s incretin drug pipeline led by Atlas, Bain, Lyra and RTW, and a $372M Series D for Formation Bio lead by a16z. These deals ultimately represent just 3 of the 18 companies that raised over $100M during the quarter.

Q2 saw a more even investment split across development stages, but 2024 activity in aggregate remains bifurcated, focusing on lower-risk, clinically validated opportunities (e.g., Phase 2+) and promising, nascent preclinical/discovery opportunities led by exceptional teams. Similarly to public financings, average round size continued to increase this quarter to $126M (i.e., 53% increase over average deal value from Q1 to Q2), with new investor participation in Series B and later deals reaching highest levels seen in the last 12 months. While the robust overall value and high-profile financings may signal positive investor sentiment and belief in private investment exit potential, the larger average deal sizes with flat deal volume in Q2 highlight the dichotomy between the haves vs. have nots. Outside of the U.S., there seem to be very few “haves”, as venture financing remained depressed in terms of deal volume and value, with no sign of a similar recovery as in the US. For those able to raise capital, the money is flowing. For those that are struggling to raise, it feels like a depression. The contrast couldn’t be more stark as the industry continues to work through it’s excess inventory of private companies.

In terms of strategic transaction activity, aggregate M&A and licensing deal value was on par with the relatively limited activity seen in Q1, with volumes lower than any quarter in 2021 – 2023. Discovery and preclinical deals continue to dominate the majority of licensing deal value, whereas M&A has continued Q1’s trend of increased exposure to earlier-stage opportunities (vs. late-stage/commercial focus in 2022/23), with most of Q2 deal value concentrated in Phase 2 companies. M&A premiums continue to remain elevated, reflecting the increased scarcity for post-Ph 2 companies with the lower risk validation profile desired at the current point in time. From the ex-US perspective, two Japanese pharmas, Ono and Asahi Kasei, made major acquisitions in Q2 of Deciphera and Calliditas, respectively. These acquisitions came despite the weak Yen, marking a trend to watch for the second half of 2024. On the European side, 3 of the 4 M&A deals this quarter were greater than $1B in deal value and centered around mid-clinical stage opportunities, supporting the trend seen in the US/global market, while suggesting some initial appetite for earlier stage opportunities with greater risk profiles. We continue to see larger numbers of $1B+ acquisitions, which is great for companies to achieve an exit. The total value of deals is still down signifying that either the best deals have been picked through and more data needs to be generated or that pharma is waiting for direction on the market from both the federal reserve and the US election. Since plenty of dry powder exists, our view on the reason for lower activity is that many pharmas are in asset shedding mode as much as they are in acquisition mode, putting a ceiling on dealmaking.

In non-deal related biopharma updates, Q2 saw a long-awaited win for DLL3 and novel modalities, as Amgen’s DLL3 bispecific T cell engager IMDELLTRA received accelerated approval based on the encouraging response rate and duration of response data. Insmed, Rezolute, and Merus notched wins for their later clinical stage programs in neutrophil mediated diseases, DME and head & neck cancer respectively. Two of the hottest modalities at the moment, B cell depleting cell therapies and radioligand therapeutics, saw lukewarm clinical readouts. Kyverna’s autoimmune CD-19 CAR-T reported a relapse in a patient that initially responded to the treatment in a Phase 1/2 trial, while JNJ’s Anti-hK2 radioligand demonstrated meaningful tolerability concerns, even for the oncology space, accompanying its robust initial clinical efficacy in a Phase 1.

Our Advice for the Current Market

So, what is our best advice for the current market?

We believe that the second half of the year will continue to carry positive momentum based on the robust activity in both the private and public financing seen in Q2, along with the recent June inflation report that provides a strong path for the Fed to begin cutting interest rates. Obviously, this may be subject to change as we’ve seen interest rate outlook change on a dime and uncertainties around the upcoming election, but we believe 2024 will continue to be a better year than 2023. Our perspective is investor sentiment continues to improve and the exits seen in Q4 of last year have returned liquidity to investors, supporting the strong private financing activity in Q2 and the case for future improvement in conditions. However, companies need to remain vigilant with their use of cash and should continue to be cognizant of the level and type data required as we saw capital raising mainly accessed by the haves vs. have nots – those with strong PoC or post-PoC data and exciting emerging technologies backed by superstar teams. The number of biotechs trading below cash continues to trend down, which is positive but, in our view, remains quite elevated compared to baseline. It will be painful at times and non-linear, but we are clearly continuing down the path of recovery through the remainder of 2024, and I firmly believe 2025 will be a stronger year for the sector.

Although strategic licensing deal activity was limited last quarter compared to prior years, we saw aggregate upfront deal value double compared to Q1, highlighting that non-dilutive capital has become more accessible. We’re seeing large pharma continue to seek smaller and less risky bets compared to expensive M&A deals. On the flip side, we’re seeing large pharma continuing to take on smaller bite-sized acquisitions in the single digit billions range as well as risk-appetite opening to earlier stages of development, mainly Phase 2 pre-POC.

The Asian markets remain challenging with the continued trend of low financing activity in both the Japan and China market. Macroeconomic conditions in both geographies play a key role and suggest that deal activity and investor risk tolerance will continue to remain limited in the near-term. Given these challenges, Asian companies should continue to seek opportunities to obtain non-dilutive capital through global ex-Asia out-licensing and remain capital efficient through this downturn.

Overall, positive momentum continues to build across US public and private markets, and we expect the second half of 2024 to continue to outperform recent years, particularly in terms of financing activity. The road to recovery will be gradual and can be accelerated based on key factors such as cooling inflation.