The horde of zombie biotechs lurching ahead and barely surviving has reached a crisis level for some investors.
Now there’s a new investment fund targeting these companies. Nicholas Johnston, a longtime healthcare banker at JP Morgan and Perella Weinberg Partners, recently launched Alis Biosciences, aiming to unlock over $30 billion in “trapped” capital on the books of an estimated 300 publicly traded biotechs.
“I’ve looked at this problem for 25 years and there’s never been a viable solution,” said Johnston, who has also done stints working in the biotech and medtech industries.
Under Johnston’s direction, Alis wants to work with C-suites and boards to make better use of that cash. The fund has a variety of possible structures, varying in complexity, but the goal is to hand back to shareholders some portion of a company’s cash.
“We are very agnostic as to what is the right outcome for shareholders, as long as shareholders are put first,” Johnston said, adding that biotech leadership teams “very rarely” have conversations centered on the shareholder.
The market’s downturn over the last few years has increased the number of biotechs trading at negative enterprise value. These are companies with cash levels that exceed their market capitalizations. Investors effectively value these companies as worse than worthless. Oftentimes, the companies are dealing with clinical setbacks that have left them grasping for what to do next.
It’s not a new phenomenon.
The New York Times
’ Andrew Pollack
wrote
about
“zombie biotechs” in the late 2000s during the last major downturn. But the size and scope of the problem has caused people like Johnston to push for a fix.
Johnston is far from alone in his irritation. In a note on Wednesday, TD Cowen analysts described the mood of biotech investors as “poor, with frustration, despair, and resignation prevalent.” On a 0 to 10 scale for their level of interest in biotech, portfolio managers and generalist investors clocked in at ‘2’ for March.
Justin Simon, a managing director of the small investment firm Jasper Capital, counts himself among the ranks of disgruntled biotech investors. In an interview, he pointed to Sutro Biopharma as an example of his frustration. The Bay Area biotech ended 2024 with $317 million in cash and equivalents, but is trading at an $85 million market capitalization.
Simon balked at the company’s
decision
last month to deprioritize its sole clinical-stage drug candidate, part with its CEO, and lay off half its staff. Instead of saying it would consider winding down, Sutro’s new CEO pitched a plan to instead focus on some of its preclinical drug candidates. Investors sent its ailing stock price
$STRO
down another 30%.
“The gross discrepancy between Sutro’s share price and the dollars of cash is emblematic of the fact that shareholders themselves are pissed off at the fact they should have had two choices,” Simon said.
He’d like to have seen an opportunity for shareholders to weigh in on the prospect of redistributing its cash, which equates to roughly $3.77 per share, or trusting its team to run another trial.
Biotechs like Sutro fit Alis’ model, although Johnston declined to provide names of its first potential targets.
Simon doesn’t know Johnston, or have any involvement in Alis, but said he views anyone making an effort to solve this problem as valuable to the ecosystem. Generalist investors have fled biotech, and he worries they won’t return if the industry can’t clean itself up.
For now, Alis is more talk than action. Johnston has put about $1 million of his own money into the fund, including paying for legal and accounting fees. But Alis hasn’t yet raised any capital.
Johnston said he’s talking with banks that could provide access to capital to facilitate deals.
Since launching a week ago
with an article in the
Financial Times
, Johnston said he’s fielded hundreds of emails and calls from interested parties, including some companies he wouldn’t name.
Still, not everyone is thrilled with the idea. Biopharma veteran Viren Mahurkar wrote on
LinkedIn
that Alis “will need to work hard to prove that this isn’t just rapacious feeding off the biotech industry’s current troubles.” He compared the firm to vultures.
Johnston said there’s “nothing vulture-y about what we are doing.” He wants Alis to take a more cooperative tact than typical activist investors like Kevin Tang’s Tang Capital, which
has regularly tried to buy out struggling biotechs
.
“We’re not picking over the bones of anything that has actually died, and more importantly, we’re not killing,” Johnston said. “We’re trying to hasten the decision-making in a way that allows it to be done properly.”
If things go smoothly, Johnston said he expects a first announcement involving a biotech in May. He said the fund could go public by the end of this year in a “conservative estimate” of the timeline.
“I just need to get one done, and then everyone will see that we are true to form,” Johnston said. “We’re not here to cause any trouble, but we will make some hard decisions.”
