Credit Markets Gain Prominence in the Biotech Industry
Biotech companies raised over $34 billion through debt financing in 2023. 2022 marked a significant shift in the biotech industry’s financial landscape. The sector experienced a 54% annual decrease in available capital compared to the previous two years of heightened financing. The IPO scene, particularly in the biotech sector, significantly transformed after the COVID-19 pandemic. In 2021, biotech companies raised nearly US$21 billion in IPO financing, which plummeted by 93% in 2022. This drastic decline was even more pronounced for smaller companies in the sector, which saw a 63% drop in follow-on public offering capital raised.
The post-IPO period proved to be challenging for these newly public companies. Of the 223 companies that went public in 2020 and 2021 and remained publicly traded at the end of 2022, 91% saw their market value at IPO drop, with an average decline of more than 50%. This major correction in biotech valuations, which had soared during the initial phases of the pandemic, posed significant challenges. As the demand reduced after the subsidence of COVID-19, the valuations dropped, making IPOs a less viable option for raising money. Consequently, debt financing gained prominence through which biotech companies raised over $34bn in 2023.
In 2023, debt financing peaked at $34.1 billion; however, the majority (74%) occurred during the first quarter of the year before improving macroeconomic conditions. Biotech companies were compelled to explore alternative financing options to sustain operations as conventional channels such as venture capital became less accessible.
Although the funding environment improved slightly in the second half of 2023, biotech faces capital constraints.
The collapse of Silicon Valley Bank (SVB), a prominent financial institution for many biotech companies, further exacerbated the credit market dynamics for biotech companies. The event prompted early-stage biotechs to reassess their liquidity policies and diversify their banking strategies. With SVB’s demise, smaller biotechs were left without alternative lending options, as many other banks raised their funding thresholds. The situation showed the importance of mergers and acquisitions (M&A) as an exit strategy, especially those focused on new modality platforms. With lower capital availability, acquisition became the obvious route for these companies.
Debt financing is an important source of funding for biotech companies. First, biotech companies often have long development cycles and require significant capital to bring products to market. Debt financing can provide the necessary capital to fund these activities without diluting ownership or control.
Read About: Avon River Ventures’ Involvement in Financing Biotech Projects
Second, debt financing can be a more cost-effective form of financing than equity financing. Interest payments on debt are tax-deductible, which can help to reduce the overall cost of capital. In addition, debt financing typically carries a lower capital cost than equity financing, as lenders view debt as less risky than equity.
Finally, debt financing can provide a source of funding when equity financing is unavailable. This can be particularly important for early-stage companies that may not have a proven track record or significant assets to use as collateral.
Leveraged Buyout (LBO) Deals in 2023
In this challenging environment, leveraged buyout deals have emerged as a critical strategy for biotech companies. Three notable examples from 2023 are the acquisitions of Estron, LOGEX, and United Digestive.
Estron, a Denmark-based company, is a leading developer and manufacturer of miniature components for hearing aids. Erhvervsinvest acquired it through an LBO in February 2023. The company’s products, including ultra-fine litz wires, detachable cables, and connector solutions, are also used in audio, security, and communication devices.
LOGEX provides advanced data analytics to enhance clinical and operational practice performance. Thoma Bravo acquired it through an LBO in March 2023. LOGEX’s technology turns data into actionable insights, allowing for financial performance and management information analysis. This helps clients make better decisions, deliver optimum patient health outcomes, and reduce costs.
United Digestive offers an integrated suite of endoscopic and infusion services encompassing anesthesia, pathology, research trials, and gastroenterology. United Digestive has over 200 providers across 80 locations in the Southeastern United States. United Digestive was formed from a partnership between Atlanta Gastroenterology Associates and Frazier Healthcare Partners in December 2018. A leading provider of gastroenterology services throughout the Southeast, United Digestive has partner practices in Georgia, Florida, North Carolina, and South Carolina. The company was acquired by Kohlberg & Company and Ares Management Corporation through a $323.30 million LBO in March 2023.
Outlook for 2024: Navigating Towards Growth
There are promising signs that the biotech sector is poised for growth and resurgence. While high interest rates and macroeconomic uncertainties persist, the industry’s inherent potential and resilience offer a beacon of hope.
Lower Interest Rates: The Federal Reserve is expected to lower rates early in the year. This should help make debt financing a key source of capital for biotech companies.
IPO Markets: Although recovery is expected in the IPO markets for biotech in 2024, it might not come very fast. Smaller biotechs may continue resorting to debt as a critical source of financing until equity markets open up.
Continued Innovation: The pipeline of innovative drugs and biologics and the resurgence in FDA approvals sets the stage for continued advancements in healthcare solutions. Biotech companies leveraging breakthrough technologies and addressing unmet medical needs will likely attract investor interest and support.
Resurgence of Deal Activity: While deal activity may have been subdued recently, there are indications of a thaw in the market. As investor confidence rebounds and economic conditions stabilize, we anticipate a resurgence in mergers, acquisitions, and strategic partnerships within the biotech ecosystem.
The biotech industry navigated significant challenges, including a sharp decline in IPO financing and the collapse of key financial institutions like Silicon Valley Bank. Biotech companies are increasingly looking at financing options such as debt financing and leveraged buyout deals to meet their funding needs. Despite the obstacles, there are promising signs for growth and resurgence in 2024. Continued innovation, a robust pipeline of healthcare solutions, and the potential for increased deal activity suggest a bright outlook for the sector.
About Avon River Ventures
Avon River Ventures LLC is an Independent Venture Funding Group and an LP-backed direct Lender that offers $1,000,000 to $50,000,000 in Non-Dilutive Funding to Lower and middle-market companies worldwide. The Private Equity Division is managed under Avon River Ventures LLC and its SPV Series LLCs. Pen Hen Group LLC operates the Consulting Arm of Avon River Ventures LLC. If you have any questions, please email connect@avonriverventures.com.
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