I enjoyed this post by Bruce Booth on the biopharma funding landscape. But I think we would all agree that. . .well, it’s been weird the last few years. This has been a long, long boom in the amount of money that’s flowed into this sector, and I don’t think I’ve ever seen anything like it in my own career. You can see from Bruce’s chart on equity capital funding in biotech that the cash has been coming in for ten years now – there are some ebbs and flows, but the trend just keeps on ratcheting higher.
Along the way, we’ve all had to readjust our thinking. I’ve had several periods where I thought “OK, this wave seems to be dying down, y’know, like they all do” only to be proven wrong yet again. And as the post points out, each of the last four quarters has been greater than the previous 2015 record. This has been VC money going into early-stage startups, it’s been IPOs, it’s been follow-on financing of already public companies. Investors just cannot throw enough money at biopharma.
But Bruce makes a point that he’s made before, and I think it’s pretty close to a law of nature: the more money that flows into a sector, the less disciplined it tends to be. In a rough market, people think long and hard about where their money is going, but when everything looks good, there’s a “Just go buy something” attitude that kicks in. Now, you won’t find any particular investor or fund who would say that’s what they’re doing – no, they’re all carefully deploying their assets, every last one of them. But that can’t be true. It’s a story that they tell themselves, and that we tell each other – what happens is that the definition of “careful” gets gradually rewritten.
There are plenty of other follow-on effects – here’s Booth:
In addition, the feed-forward flywheel of biotech financing psychology also happens. It goes like this: successful and/or lucky biotech firms are able raise large amounts of cash onto their balance sheets through both financings and deals. Initially, their plan was to do X, advancing new medicine(s) down the road towards patients. But in the presence of an abundance of cash, they often expand their goals to not only do X, but also Y and Z. Rather than have, say, 4-5 years of cash runway, the influx of capital changes the pace and nature of their “use of proceeds” – such that now its “just” 2-3 years of runway. Their focus gets spread over more things, and both “strategic complexity” and its distracting cousin “organizational entropy” increase. Management teams are challenged to address more things, more frequently. New eager investors encourage them to raise even more money so they can have a stake in the story. In short, the presence of more cash often makes burn rates go even higher, re-tightening runways, and requiring more follow-on financings.
This all works until it doesn’t, and then it really doesn’t work. I keep hoping that we don’t have a hard landing in all this, while recognizing that my fundamentally skeptical nature makes me biased towards bracing for one. I have an optimistic side too, and I freely admit that it seems that there are more interesting, unusual, and exciting things going on right now in drug research than at any time in the last 30 years. That really does mean something, and it’s a big part of why all this money is flowing in.
But Bruce quotes Warren Buffet that “the market is manic depressive”. If we get a big disaster or two with some of these new ideas, a lot of people might bolt for the exits, and that’s a process that feeds on itself. I very much hope that doesn’t happen, but there’s always a chance of that – it’s research after all, and God knows there are plenty of unknowns out there and plenty of things that we don’t understand. There will eventually be a landing, one way or another. May it be soft!