In a year with few biotech IPOs, ‘crossover’ financings are hard to find
16 Aug 2023
IPOPhase 3AcquisitionPhase 1
Cancer drug startup CG Oncology ticks many of the criteria biotechnology companies need to pull off an initial public offering in today’s market.
Its lead drug candidate is in a Phase 3 trial, as well as a mid-stage study together with the Merck & Co. immunotherapy Keytruda, for a stubborn form of bladder cancer. Through the end of last year, the Irvine, California-based company had raised more than $200 million in private financing.
But instead of picking out a stock ticker, CG Oncology announced in early August that it put together a $105 million Series F fundraising. Co-led by investors Foresite Capital and TCGX, this will be a “crossover” round designed to bridge the company through to an IPO.
“Because the IPO market is so much more difficult, you really need to see this broad support before,” said Michael Rome, a managing director at Foresite.
The round has made CG an outlier in the toughest financing climate young biotech companies have faced in years. Once common for startups attempting to go public, crossover rounds have become a rarer occurrence during the current shaky market.
According to a mid-year report published by Silicon Valley Bank, the total number of crossover rounds plummeted from 108 in 2021 to 33 last year. That number could fall further in 2023, as only 11 were reported between January and June. (The data are now housed under the healthcare practice of First Citizens Bank, which acquired SVB’s U.S. assets following the bank’s March collapse.)
The scarcity of crossover funds has caused a chain reaction in the way biotech startups are built and funded.
In the years leading up to the market slowdown, crossover investors often led Series A or B rounds, setting young biotechs up with “a big cash pile” to help them go public, said Jon Norris, a managing director at HSBC’s new innovation banking division.
That, in turn, led to a record run for biotech IPOs that peaked in 2021, when 104 companies went public, according to BioPharma Dive data. About three-fifths of the biotechs that went public that year were in preclinical or Phase 1 testing, highlighting the fast path crossovers paved to Wall Street.
A market correction followed. Stock prices deflated, depressing the value of many of those companies to less than their offering prices. IPOs became harder to complete, and are now more often done by companies further along in their development journeys. Crossover investors, which fund private as well as publicly traded companies, retreated from riskier biotech startups.
“The standard has changed from 2020,” said Chris Bardon, co-managing partner at MPM BioImpact. “You can’t be a big platform [company] six years from the clinic. Two clinical-stage assets are back in, because ultimately, they’re what goes on to be approved and bring in revenue.”
Venture capitalists have had to pick up the slack. A recent report from HSBC found that venture firms led 9 of the largest 12 funding rounds between January and June, a job crossovers might have handled until recently. Only one of the 44 private biotech companies that raised crossover rounds since the beginning of 2022 have since priced a public offering, SVB reported.
By SVB’s definition, Acelyrin and Mineralys Therapeutics, two of the largest biotech IPOs to date in 2023, did not raise crossover rounds.
The shift in funding has been felt by biotech startups. Early-stage funding is on pace to fall by 55% versus two years ago, according to HSBC. Venture firms are now more focused on helping their existing portfolio companies survive or investing in safer bets. That’s led companies that may have gone public in friendlier times to stay private for longer so they can make more progress.
It’s also created a backlog of potential IPO candidates. HSBC counted nearly 150 companies that had raised rounds worth at least $40 million while remaining private.
The startups trying to make do privately are facing tighter budgets. Venture firms are making smaller investments overall and they’re more likely to dole out funds in tranches to ensure a drug stays on its development track, Norris said.
And to keep afloat companies that haven’t yet produced compelling clinical data, investors are funding insider rounds and encouraging cost-cutting measures to stretch capital further.
“If you can wait to go public, you will wait,” SVB’s Spencer said, of the current climate for companies.
One way some companies are getting around the IPO logjam is by entering reverse mergers — combining with already-public companies that may be down on their luck but hold valuable slots on stock market exchanges.
There are some positive signs, too. Nine of the 14 companies that completed IPOs this year are trading close to, or above, their debut public share prices, according to BioPharma Dive data. And three of the biotechs that went public in July raised at least $80 million, signaling some degree of investor demand.
“It's just been difficult for companies to get out into the market,” Spencer said. “They really want to wait to refine that story and their capital structure before entering the public markets.”
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