Navigating a down market for life sciences innovators


Rich data and strong fundamentals are key


After reaching some pandemic-era highs, the life sciences market saw significant declines in valuation. For small and mid-sized players hoping for a lucrative reward for their efforts, this has been a cause for concern. But while there is only so much that individual players can do in the face of larger market trends, there are steps they can take to better position themselves for success.


The boom was understandable. The urgency of vaccine development for COVID-19 directed funds toward the life sciences sector as tests and vaccines were fast-tracked. Valuations were up about 60%—peaking in early 2021. New techniques such as engineering mRNA and CRISPR gene editing promised to transform how drugs were developed, significantly shortening development times. These fundamental shifts promised to deliver substantial returns while stabilizing an inherently dynamic industry.


“Around that time, institutional investors showed interest in products which hadn’t accumulated much clinical data,” said Grant Thornton Valuation and Modeling Principal Oksana Westerbeke. “That only happens when the market is really, really hot.” 


Historically, we see IPO multiples ranging between 1.2x and 1.8x, with a median of around 1.6x, Westerbeke added, while SPAC valuations for life science companies saw these multiples increase to unsustainable levels, including double digit multiples for life sciences SPACs.


In 2022, the inevitable cooling began. Interest rates rose, then institutional funds became more cautious, and investors followed their lead. Both funding groups once again looked for companies which could show advanced clinical trials with proven results. Investors were less willing to bet on platforms such as mRNA. Emerging companies which would have been indulged with funds a few years earlier stopped attracting sufficient investors.


The NASDAQ U.S. Small Cap Biotechnology Index may be the best representation of the market’s arc. On Jan. 3, 2020, it was at 3,648; at its high on Feb. 12, 2021, it reached 7,049.87; on Feb. 12, 2024, it was back down to 3,634.43. Other indicators reinforce the sense of a flat market. The NASDAQ Biotechnology Index tracked the small cap pattern of 2021 peaks, but as expected, with less volatility. IPOs have dwindled dramatically and M&A deals dropped in 2023.


While the investment tide has subsided, there are options for smaller companies that still want to take their products to the next stage. One of the most reliable of those strategies is the M&A market. Both big biotech and pharma companies still reliably outsource their product development to smaller players. Such companies are in a very different place than investors. 


Possibly the most consequential issue for larger players is the coming “patent cliff” when over the next five years very profitable patents will expire, allowing generic manufacturers to produce these drugs and undersell their creators. AbbVie’s top-selling drug, Humira, already is facing copycat competitors such as Amgen’s Amjevita, and many other top-selling drugs, such as Merck’s Keytruda, Bristol Myers Squibb’s’ Eliquis and Opdivo and Johnson & Johnson’s Stelara have patents expiring before the decade is out.1 These manufacturers could see losses of up to $200 billion in revenue through 2030.


The loss of these patents is already guiding manufacturers to pivot their research into finding solutions for rarer diseases, where low volume can be offset by higher per-unit pricing. While these new products can replace that revenue, the last years of robust revenues from the expiring patented products could be used to fund acquisitions. Grant Thornton Valuation & Modeling Manager Ben Blieden said, “there will always be demand for outsourcing innovation.”


Grant Thornton National Industry Managing Partner for Life Sciences Zara Muradali said, “Assessing the impact of so many expiring patents and companies’ plans to replace those revenues must be a crucial consideration for any company looking at transactional growth.”


For products late in the development cycle, acquisitions may make sense, provided the product mix of the acquirer and the target complement each other. Licensing often makes more sense early in the development cycle, where capital can be directly deployed into product development. In such arrangements, the acquiring company provides much needed upfront cash as well as a series of additional payments when milestones are achieved. Because their capital directly enables further product development—whereas in acquisitions, there may be lower value appreciation since R&D is less developed—investors may feel this is a better use of their capital to achieve long-term value creation.  




A return to fundamentals


Even if they aren’t attracting the interest of a larger company, emerging life sciences companies should do all they can now to streamline their path to market. While startups typically focus on products, this means focusing on process—especially ensuring that there is sufficient documentation to provide the data demanded by skeptical investors. This would also mean starting to install the financial controls that would be required in an IPO.


Prudent diversification should also be explored. In addition to optimizing their star product, companies should also try to develop alternative products in case their lead candidate fails. This is especially important for pharma start-ups, which can more readily develop multiple candidates than biotechs. Muradali said, “Sometimes when products don’t work out, companies have other possibilities in the pipeline. They can direct attention to these.”


Blieden said, “We’ve seen early-stage companies that had their primary candidate fail to achieve an important milestone, but had backup candidates in earlier stages of product development.  In these situations, investors often expect valuations to stay flat or be at a slight down round. On the contrary, in situations where companies had their primary candidate fail, but did not have viable alternatives in the pipeline, investors often expect valuations to decline by 70% or more”.


Finally, start-ups should prioritize their efforts. This means making some strategic choices. Prioritization could mean focusing on core competences and outsourcing other functions. For example, other companies may have developed AI machine learning models or manufacturing capabilities which may be more cost-effective when outsourced, rather than developing these capabilities in-house.




Looking to rebound


Ultimately, the market will have a greater effect on valuation than anything else. And there are some signs of a rebound. While the number of deals has been flat, the average size of deals has increased. After a slow period, there appears to be a fair amount of dry powder in pharmas whose patents haven’t yet expired.


But by following best practices, small- and medium-sized companies can position themselves as attractive IPO, acquisition or licensing candidates.


Westerbeke ended on a note of cautious optimism. “Just because you’re raising capital in a down market doesn’t mean there isn’t interest in your value proposition. It simply means that there’s less overall demand so investors can get better deals.”


Of course, a new version of the bubble of 2020 and 2021 could return, especially if inflation comes down and a few successes draw investor attention to the life sciences. If that happens, companies with robust data, efficient paths to market, and smart portfolios will be even better positioned to reap the rewards.  





Oksana Westerbeke

Oksana Westerbeke is a principal in Grant Thornton’s Valuation & Modeling practice in the Boston office of the Metro New York/New England market territory.

Boston, Massachusetts

  • Healthcare
  • Manufacturing, Transportation & Distribution
  • Technology, media & telecommunications
  • Transportation & distribution
Service Experience
  • Advisory
  • Valuation
Zara Muradali

Zara is the National Industry Managing Partner of Grant Thornton’s Life Sciences practice.

Boston, Massachusetts

  • Life sciences
  • Healthcare
  • Technology, media & telecommunications
  • Private equity
Service Experience
  • Corporate Tax

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