Many biotechs continue to think that, notwithstanding that the AIM Healthcare Index has been riding the crest of a wave during Q2 2020, their long -term prospects would be better served on the US markets. The attraction of better analyst coverage, higher multiples and more sophisticated, specialised biotech investors, not to mention the potential size of the US market and the greater visibility and exposure afforded by being on Nasdaq, continue to be a big pull.
There has also been an unexpected boom in biopharma IPOs in the US so far in 2020, with 27 IPOs in the first half of the year, raising over $6 billion (£4.6bn), compared to 45 in the whole of 2019, raising just under $4.5bn.
Moreover, whereas in 2019 the US biopharma companies listing on Nasdaq tended to be companies conducting Phase I or Phase II trials, the trend in Q2 2020 has been for pre-clinical stage companies to look to the public markets. That could result in privately held UK biotechs looking to list directly on Nasdaq rather than AIM because they can see a market where specialised healthcare funds are willing to back them at an earlier stage.
For European biotechs more generally, the trend has been clear for a while: in 2019, all but one of the top eight – by value – European biotech IPOs was on Nasdaq, with the exception being Ascella Pharma, which listed on Stockholm's Nasdaq.
Longer-term impact of Covid-19
While many biotech companies, given their size and the fact that they are often conducting relatively early-stage research, have proven to be sufficiently agile to be able either to re-focus their existing activities onto Covid-related research or to run Covid-programmes in parallel, there remain concerns on the impact of the current pandemic for those companies and their pre-existing programmes in the longer term. Such companies will be nervous about the implications of having re-purposed their activities towards Covid-19 and the impact that might have on work previously carried out.
In addition, the long -term planning undertaken by biotechs should not be underestimated. A lot of time is expended by management teams on setting out their research and development roadmaps in meticulous detail around when data can be generated and how interim data may be used to extend a company's cash runway, be it though interim financings, collaborations or options to licence.
The Covid-19 pandemic has upended that planning. Collaboration agreements that may have been entered into before the pandemic are likely to have contained milestone payments upon which biotechs have usually been reliant. Such payments may not now be forthcoming if a biotech's focus has switched away from the subject of the collaboration. Noting the potential that this might have on long term cash flow, biotechs may have used the goodwill in the market to cushion any such blow by raising money while they can.
Aware of the potential headwinds, and the fact that the markets will not remain upbeat forever, it is becoming evident that management teams are now considering how they will meet future cash flow requirements beyond tapping the equity markets or moving to Nasdaq – something that may not always be possible.
A mutually beneficial collaboration with big pharma is becoming increasingly sought after in the current climate. Big pharma companies are always on the lookout for ways to replenish their pipeline, and can be willing to pay generously for investments in innovative biotech companies.
In particular, if big pharma can hedge their bets and gamble on more companies at an earlier stage, they will be able to avoid higher prices and increased competition for assets further down the line. Equally, the technical and monetary input from big pharma into a biotech's discovery and development capabilities can help to speed up progress and, if successful, lead to potentially generous milestone payments. The tension, as has always been the case in such deals, will be the size of the up-front payment.
An alternative to a collaboration could be an equity investment by big pharma into a biotech. This would not only allow the biotech to retain control over its day-to-day operations, but it would also provide a cash injection. Such a structure might also suit big pharma as, again, it would again allow them to hedge their bets by making multiple investments.
Conclusion
The general strength and stability of the AIM biotech sector at the moment is without doubt a positive in an economy and a market currently beset by uncertainty. While AIM biotechs can revel in the upward trajectory of their share prices for the time being, management teams will know only too well that there are multiple headwinds ahead: the upcoming US election and its potential knock-on effect on drug pricing could feed through the biopharma ecosystem and result in fewer investments in biotechs by big pharma,at least in the short term; supply chain issues caused by Covid-19 are likely to start rearing their head; and hopefully, at some point in the not too distant future, a cure for Covid-19 will be found, at which point it will be back to reality for many biotechs. Hopefully they are sufficiently well prepared and capitalised so that they don't hit the ground with a thud.
A version of this article was originally published by LawText in Bio-Science Law Review.