As AI pervades biotech, what are investors looking for in 2023?

As AI pervades biotech, what are investors looking for in 2023?

Silicon Valley law firm Cooley recently reported that it “handled 298 disclosable venture capital financings for Q3 2022, representing $8.1 billion of invested capital, continuing a downward trend for both metrics and representing the lowest for both since Q4 2019.”

The firm said that deal volume, dollar volume and deal size for financings of life sciences companies also continued to decline in Q3 2022 compared to Q2 2022 and 2021.

Yet, November was also when U.S. bank JP Morgan chose to announce the launch of its healthcare venture capital practice, which will invest in early- to growth-stage companies in the space.

JP Morgan’s announcement comes at a time when, in the words of B Capital general partner and head of healthcare Robert Mittendorff MD, “public market biotechs are dramatically down as interest rates rise and the focus on near-term development outweighs the promise of longer-term results and approvals.”

Mittendorff isn’t alone in feeling this way. Six active biotech investors we surveyed recently told us that the macro environment has definitely had a big impact on dealflow, valuations and M&A in biotech.

Where does that leave private biotechs? Mittendorff says that startups in the space are “considering the reprioritization of their assets, deciding whether to partner second or third assets with strategics, and evaluating structure in tranched financings to reach their fundraising targets.”

However, Big Pharma’s M&A appetite isn’t as strong as people expected, said Lux Capital principal Shaq Vayda.

“While the broader capital markets were forecasting a highly acquisitive appetite from the top pharma companies due to depressed valuations, in practice, it appears they prefer partnerships plus royalty agreements for the later-stage programs and corporate VC as a tool for earlier-stage involvement.”

This isn’t necessarily bad news for venture capitalists, who seize opportunities that others aren’t even looking at. For instance, Mittendorf noted that he and his B Capital colleagues “view market sentiment as overly negative.”

Among the opportunities biotech VCs are seeing, it is more and more common for an AI component to be involved. “The ubiquity of AI in pitches that I see is striking,” Decisive Point health & human performance principal James Coates told TechCrunch.

You may already have heard of AI being involved in drug discovery, but there’s more, said Conviction founder Sarah Guo.

“We’ve seen amazing progress over the past few years in AI models for protein folding and docking — key scientific problems. But when we look to the commercial side, there are also opportunities for richer use of data and smarter software workflows to increase efficacy and efficiency across the board in healthcare: from diagnostics, telemedicine, clinical trials, patient engagement and clinician decision support to revenue cycle management and claims processing,” she said.

However, investors are also being more thorough in their due diligence than in previous years, and not just because of Theranos. For instance, Elaia Partners partner Franck Lescure said that his firm saw “an exponential increase in concern about climate and environmental issues, whatever the project is – which used to be only a ‘nice to have’.”

Among other trends, the impact of worsening U.S.-China relations is on investors’ minds. “We already have seen CFIUS impacting some of the deals we have participated in,” Humboldt Fund general partner Francisco Dopazo confirmed.

If U.S. sanctions on China were to extend to biotech, Dopazo said that “the impact could go from financing (e.g., companies will not be able to tap strong and strategic Chinese capital) and scaling (e.g., more difficult access to sophisticated CROs) to business development and commercialization (e.g., fewer options for business development deals). Clearly a negative short-term/mid-term impact to the industry as a whole.”

To find out more about how investors are thinking about the implications of U.S sanctions on China, what startups should consider when capital from government bodies, how to pitch these investors, and more, read the full survey here.

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