Semper Maior: Pumping up the candor
Semper Maior:
Pumping up the candor
Wouldn’t it be better if everyone in our ecosystem were candid with one another?
After all, within companies it’s common to encourage everyone to speak their minds. If you see a problem, call it out; give honest feedback; feedback is a gift; people have a duty to dissent if they disagree with something. So, what stops this corporate if-you-see-something-say-something from going beyond managers and employees? If we normalized candor, we could learn more from one another, cross-pollinate best practices, and correct misunderstandings.
The value of candor is pretty obvious to everyone. When I recently ran a poll on social media asking what could make the biomedical innovation ecosystem better, more candor beat out more humility, more creativity, and more effort (humility, which some respondents pointed out goes hand-in-hand with candor, came second).
I think it’s possible for individuals to maximize how much candid feedback they themselves receive. Although there are many situations in which candor is useful (hiring, firing, vendor selection, board meetings, etc.), to keep this actionable, let’s just focus on the narrow case of investors sharing what they really think with management teams trying to finance.
I think that we can dramatically increase the candor in those cases. And the power to pull that off lies with executives and everyone else who influences how financings are conducted.
After that, I’ll discuss Core biotech’s performance for 2024. To be candid, it was a year that could easily be forgotten – a recovery deferred. In terms of the setup for 2025, even though this initial start to the year is notably gloomier than how 2024 started, the sector’s fundamentals feel like they did going into 2024. I think biotech is poised to do well from both pharma’s incessant need to acquire new assets and public company attrition creating a vacuum for private companies to crossover. So 2025 should be better than 2024, especially if we all manage to offer more cowbell… I mean candor.
[pdf content]:
JANUARY 11, 2025
Wouldn’t it be better if everyone in our
ecosystem were candid with one another?
After all, within companies it’s common to encourage everyone to speak their minds. If you see
a problem, call it out; give honest feedback; feedback is a gift; people have a duty to dissent
if they disagree with something. So, what stops this corporate if-you-see-something-say-
something from going beyond managers and employees? If we normalized candor, we could
learn more from one another, cross-pollinate best practices, and correct misunderstandings.
The value of candor is pretty obvious to everyone. When I recently ran a poll on social media
asking what could make the biomedical innovation ecosystem better, more candor beat out
more humility, more creativity, and more effort (humility, which some respondents pointed
out goes hand-in-hand with candor, came second).
semper maior:
Peter Kolchinsky, PhD
With an insane amount of data analysis and insights by Alex Martinez-Forte,
Jacqueline Rhuda, & Kris Shuman
how we
pump
up the
candor
Semper Maior:
How we pump up the candor January 2025
page 2
I think it’s possible for individuals to maximize how much candid feedback they themselves
receive. Although there are many situations in which candor is useful (hiring, firing, vendor
selection, board meetings, etc.), to keep this actionable, let’s just focus on the narrow case of
investors sharing what they really think with management teams trying to finance.
I think that we can dramatically increase the candor in those cases. And the power to pull that off
lies with executives and everyone else who influences how financings are conducted.
After that, I’ll discuss Core biotech’s performance for 2024. To be candid, it was a year that could
easily be forgotten – a recovery deferred. In terms of the setup for 2025, even though this initial
start to the year is notably gloomier than how 2024 started, the sector’s fundamentals feel like
they did going into 2024. I think biotech is poised to do well from both pharma’s incessant need
to acquire new assets and public company attrition creating a vacuum for private companies to
crossover. So 2025 should be better than 2024, especially if we all manage to offer more cowbell…
I mean candor.
TABLE OF CONTENTS
PART 1: Let’s be Candid .….….….….….….….….….….….….….….….….….….….….….….….….….….….……3
If investors were candid:.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….…..3
Why candor matters in 2025.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….…4
RA Capital’s approach to candor .….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….…6
A candid mouse gets a shock.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….…..8
Eliciting candor.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….10
Candor among investors.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….12
Candor can accelerate price discovery.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….……13
Calling out the naked emperors.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….15
PART 2: Core Biotech’s DéJà Vu Year.….….….….….….….….….….….….….….….….….….….….….….17
Getting to the Core.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….17
Why we do this Core Biotech analysis .….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….…22
So mean! Not really.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….23
Specialist portfolios are well capitalized and have modest burn rates .….….….….….….….….….….….….….….….….24
Core Dynamics .….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….25
Core Performance was flat in 2024.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….…..26
Brief thoughts on Sector ETFs.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….27
The Crossover Conveyor is accelerating slowly.….….….….….….….….….….….….….….….….….….….….….….….….….….….….….28
M&A in 2024: Strong pace of smaller deals, ZERO large ones .….….….….….….….….….….….….….….….….….….….….….30
A reality check on the health of our sector .….….….….….….….….….….….….….….….….….….….….….….….….….….….….….….…..32
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I’m sure you could think of other possible reasons. If you’re a biotech executive, wouldn’t you
want that feedback with ideally even more detail?
For each company, hearing the real reasons investors don’t want to invest can be more useful
and certainly cheaper than hiring consultants to evaluate a business plan.
Imagine if, in the course of ordinary fundraising, companies got the kind of feedback investors
provide when they serve as judges in a business plan competition.
Giving feedback doesn’t mean investors are right. Some might even give conflicting feedback.
But it still helps to know how they are thinking. Investors represent a marketplace, and the market
can speak directly – when it wants to.
If investors were candid:
“Thank you for allowing us to consider participating in this financing.
We have decided to pass at this time because we think that…”
1. A key trial has a low probability of success for a particular reason.
2. A target market is too small.
3. The lead target isn’t compelling and will weigh on the company; it will prevent other
investors from being interested in more compelling targets lower in the pipeline.
4. The burn rate is too high.
5. The company would struggle to raise the next round given their financing strategy.
6. The valuation is too high.
7. The management team isn’t experienced or taking certain risks (e.g., enrollment) seriously
enough.
8. Competitors have stronger data.
9. The revenue ramp is too modest or margins are too low.
10. Other investors won’t find the story compelling, so we don’t want to be stuck alone
supporting a company (especially if burn rate is high and timeline long), and we need to
see interest from other investors.
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Let’s be candid
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Even if they aren’t in the weeds of drug development in the same way operators are, investors
have seen a lot of companies, a lot of drug programs, and a lot of management teams. We
have pattern recognition, and we do have a nose for what’s fundable. So it would be useful for
companies if investors could get past polite pleasantries to express their real concerns – regardless
of whether they are buying or selling or holding a stock. That understanding might illuminate a
blind spot, influence pipeline prioritization, reveal when valuation is a sticking point, or just help
management improve their pitch.
Candor certainly isn’t about disclosing anything proprietary or confidential and it doesn’t require
sharing one’s trading strategy. Being candid doesn’t even mean investors have to share all their
reasons for passing, which can be time consuming. And time constraints aside, it’s hard to tell a
CEO to their face that you don’t think they are fit for the job and that even if they fix everything
else about the company, you still have doubts
about their ability to hire good people and lead the
company. That’s a pretty subjective judgement and
highly charged feedback. Lots of people could be
forgiven for holding back on that.
But one can still be helpful by pointing out other
issues that, if fixed, would make the company more
investible for investors who didn’t get hung up on
the CEO’s inexperience.
Candid feedback should make sense and hold
together. “Your lead indication is too small given your
valuation,” might lead to a constructive conversation
about valuation. But if the investor says, “No, we’ll
still pass,” without further explanation, then it’s clear
there’s another reason. The investor sounded candid
at first, but in the end their feedback turned out to be
pretty unsatisfying. Did the reason for passing really
even have anything to do with the lead indication
being too small for the valuation?
With enough experience, management might learn to glean the investors’ real reasons for
passing from the questions they asked and their body language. But that still involves guesswork
and takes quite a bit of experience. Must entrepreneurs gain that experience the hard way?
Why candor matters in 2025
Being interested in feedback requires humility, and downturns are humbling.
So here we are, more than three years into a difficult market. And high-quality companies working
on worthy programs need all the help they can get. Many executives would welcome clearer
insight into what it would take to be able to raise money for the programs they wish to finance.
It would be useful for
companies if investors could
get past polite pleasantries to
express their real concerns –
regardless of whether they are
buying or selling or holding
a stock. That understanding
might illuminate a blind
spot, influence pipeline
prioritization, reveal when
valuation is a sticking point,
or just help management
improve their pitch.
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Consider that many investors, when they have decided not to invest, respond to management by:
y Ghosting.
y Just saying, “We’ll pass at this time.”
y “Too early,” which sounds like candor but, if it comes after a meeting might be frustrating
if the intro email made it clear that the company was preclinical. What’s “too early” really
mean?
y Offering pleasantries and some minor reason that seems fixable and shouldn’t be an excuse
for passing (e.g., “You don’t have a CMO,” when the company is over a year from starting
the trial).
y Being outright complimentary about everything but coming up with some excuse that
makes it sound like the reason for passing has nothing to do with how awesome the
company is. “It’s not you, it’s me.”
I personally try to never ghost but I’m sure I’ve done it inadvertently (and recognize that the
recipient of ghosting doesn’t know what’s intentional and what’s not). And I’ve no doubt done the
other three at various times. But as you’ll see, my team now aspires to be much more constructive
when we pass.
The way I see it, there are three types of companies in the world.
PERFECT: A few perfect ones who can afford to be spared anyone’s constructive feedback.
You know of any?
DOOMED:
Some that can’t be fixed and are doomed to fail. I don’t claim to know for certain
which these are but with feedback, their teams might realize it sooner and pivot
to doing something more productive.
PROMISING: Some that hold promise and would be more likely to succeed efficiently if they
got more candid feedback from people who have insights to offer.
Most of the value in the world is created by the third kind. Every promising company could
be better. So when we deprive them of feedback, we’re reducing their probability of success,
potentially wasting human potential and money. A drug that might have come to market, won’t.
That’s a shame.
And it’s this third category, the companies that hold promise, that are the ones that both need the
most candor and have the power to elicit it. They can change the culture of our whole ecosystem.
If you’re an executive of what you think is a promising company, one that investors want to
invest in but could still benefit from candid feedback, then you have the power to get what you
want.
To be clear, there’s candor out there and always has been. I’m sure many biotech executives can
think of investors who they consider pretty candid. And having even a minority of investors tell a
company the real reasons why they are passing on a round can help management teams adjust
course.
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It’s because there’s already some candor out there that it’s possible to ask how we can encourage
MUCH MORE of it.
RA Capital’s approach to candor
WHEN PASSING:
At RA Capital, we strive to offer useful feedback when we
pass. If asked for more detail, we try to deliver. During
the most intense fund raising environments, time
constraints might cause us to fall short of our goals. But
we systematically train associates to write out pass notes
that offer detail on why we are passing and what it might
take for us to consider investing , particularly when we’ve
put a lot of time into diligence (and therefore have taken
more of management’s valuable time). If the company
is working on a mechanism that we’ve seen result in a
particular kind of tox, we might point out that we would
want to see data showing that their molecule doesn’t
have that tox. Or if the market for the lead molecule is too small, we might urge them to consider
a different indication. It may not be a comprehensive set of observations, but it’s enough to be
constructive.
We do this when we are sure that we are going to pass and that there’s no simple fix that will
make the company investible for us. Other than the time it takes to write the note, we see little
downside to sharing our insights. And over the years, we’ve noticed that our candor is appreciated.
People come back with their next company early in their process explicitly conveying that they
appreciated our candor the last time.
There may be some who didn’t like what we had to say and decided to carry a grudge, but that
would only be one more mark against the company and one more reason not to invest. So on the
whole we don’t regret being candid when we are confidently passing.
My own career took a turn early on because some VCs were once kind enough to be candid
with me. In grad school, I tried to help a post doc in my lab launch a startup based on his drug
discovery platform technology. We wrote a business plan, and I secured a few meetings with
investors. I particularly remember Jonathan Fleming at Oxford Biosciences walking me through
all the challenges that would make investing impractical. We killed the idea quickly, and I
learned so much from the experience that it motivated me to continue to learn the basics of
entrepreneurship (by interviewing lots of experienced people) and write up what became The
Entrepreneur’s Guide to a Biotech Startup. I wanted to spare others my mistakes.
Certainly helping entrepreneurs course correct and succeed in their businesses is a good thing.
And so is giving them the insights that let them confidently decide to kill their venture and
apply themselves to something else. After all, human capital is a finite resource and shouldn’t be
wasted.
If you’re an executive
of what you think is a
promising company,
one that investors
want to invest in but
could still benefit from
candid feedback, then
you have the power to
get what you want.
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WHEN WE MIGHT WANT TO INVEST:
But there are times when we might want to invest or at least aren’t sure we want to pass outright.
Maybe there’s an ongoing experiment we would want to see play out before deciding. Maybe the
valuation is too high and we want to see if management’s expectations will come down.
It’s in these cases that candor becomes risky. Causing offense can mean losing out on the chance
to invest. Does it benefit us to let management know what we’re really thinking?
But even in these cases, if we have a long history with an executive or independent board member
or peer investor and they ask us to hear a pitch and tell them what gives us pause, we have “full
candor mode.”
We’re explicit about it. We might say, “OK, we can offer full candor, but do you agree that this isn’t
going to come back to bite us in the ass?” When we get their agreement, they know what’s at
stake.
We ask the person asking for candor if they are confident that others they might share our
feedback with on the management team and board won’t take offense. We are trusting them
that they won’t let the relationship fall apart if someone else takes our candor poorly, especially
since something might be lost in transmission during this game of telephone. That’s not an easy
promise to make or keep, but the people we trust tend to have multiple points of overlap with us;
we work together repeatedly and the last thing they want is to renege on their promise to ensure
that we don’t regret being open with them.
For example, we trust that they will call us if there’s new data that might alter our thesis, alert
us if they start receiving term sheets so we don’t miss the chance to submit our own, and give
us a chance to invest if they sign another term sheet. And even if we don’t invest in this round,
we trust that they will remain engaged with us after the round and give us an opportunity to
compete to invest in the next round. We trust they will call us when they have another company
they are working on. Trust is a bit of a chicken and egg process since one has to extend some
faith to a person to give them the chance to show that they are as good as their word, but over
decades, one can build up a large community of trustworthy peers.
Our feedback to them might include what we think are the company’s strengths, our analysis
of their target selection, indication selection, and pipeline prioritization, and our concerns about
timelines, burn rates, slow trial enrollment, regulatory strategy, management inexperience,
valuation, market size, pricing strategy, and more.
Trust is a bit of a chicken and egg process since one has to extend
some faith to a person to give them the chance to show that they
are as good as their word, but over decades, one can build up a
large community of trustworthy peers.
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We’ll caveat everything with the
acknowledgement that we might have
misunderstood something or else might
be wrong about our facts (and are eager
to be corrected). When the company
continues to engage with us, corrects our
misunderstandings, brainstorms how to
address the legit issues we’ve raised, and
ultimately still gives us the opportunity to
invest, we know they are a team that values
unvarnished feedback.
Far from not just punishing us for our candor,
doing all these things counts as rewarding
candor, so it’s logical that we should want to
be candid with the people we trust.
What this amounts to is that being candid
with people who value candor earns us more
opportunities to invest.
Being able to invest in the companies we
want to invest in is pretty much how we earn
a living. That’s the carrot we respond to and so
it should be no surprise that we’ll respond well
to the incentives that allow us to be better at
our business.
That’s so simple that anyone might wonder
how it could be any other way.
Maybe we just need to recognize the value of
candor more explicitly. Consider that people
talk about investing time into a venture as
putting in “sweat equity.” Being constructively
candid takes time. So maybe we can recognize
“candor equity.”
And candor flows both ways; we welcome it, too.
We’ve improved over the years, individually and
as a firm, because of feedback we’ve received
from companies about what they appreciated
and didn’t appreciate about their experience
of our diligence process and working with us.
The essence of an ecosystem is that, through
our interactions, we’re all shaping what we will
become. That process is simply more efficient
when we are more candid with one another.
So why isn’t there more of it? One reason is
that candor often doesn’t pay. It takes more
time than exchanging pleasantries. It risks
revealing oneself as ignorant. Not everyone
values unvarnished feedback or even if they do,
they can’t help feeling stung by it, which may
have consequences for investors. Everyone
knows the phrase “don’t kill the messenger,”
because sometimes the messenger gets killed
A candid mouse
gets a shock
Probably every investor has at some point
been zapped for being too candid.
The first time I recall being cut out of a deal
for being candid was a few years into my
career, early in 2005, when I was hoping to
invest in a financing for a company called
Lev Pharmaceuticals. Lev was developing
a plasma-derived C1 inhibitor that had
to be administered every three-to-four
days, intravenously, to prevent hereditary
angioedema attacks. It was a very effective
drug, but not a very convenient one.
I knew about Halozyme’s hyaluronidase
technology (Enhanze), which could convert
drugs from IV to subQ. Enhanze has, since
2005, worked for many marketed products
sold by companies like JNJ, Roche, and Takeda.
But back then it was still in development.
So even before the Lev financing closed,
hoping to be helpful, I suggested to
management that they consider licensing
Halozyme’s technology to work on a life-cycle
strategy for their drug. They insisted that IV
wasn’t a problem, and I agreed with them. At
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that time, patients had no alternatives. But
I pointed out that eventually others would
work on subQ solutions for HAE, and even if
no subQ competitors emerged, having a subQ
product would expand the number of patients
who would want to seek treatment.
As the deal approached the closing date, I
learned that Lev’s management team had
given what I thought would be our allocation
to another investment firm. I spoke with the
investor who had gotten “our” allocation and
with whom I had shared my diligence, and he
shared that management was put off by my
suggestions for how to develop their drug. So
they decided to cut us out and offered him to
invest more. I couldn’t blame him for taking the
opportunity. I can’t know what management
was really thinking. But it was hard not to draw
the lesson that candor might not pay.
In 2005, I was 28 years old and still plenty
green. Who was I to share my thoughts on
drug development with a seasoned team of
executives? Maybe I was wrong. Time would
tell.
In 2008, Lev was acquired by Viropharma for
its IV HAE drug Cinryze. In 2011, Viropharma
licensed Halozyme’s Enhanze technology to
develop a subQ version of Cinryze. In 2013,
Shire acquired Viropharma and continued
to run those subQ trials. But in 2015, Shire
decided to acquire Dyax for its subQ antibody
for HAE. That drug, now called Takhzyro, is a
blockbuster that’s displaced Cinryze not only
because it’s more convenient but because of
its superior efficacy.
Would starting earlier with Halozyme’s tech
have mattered to Lev? Probably not. The
company succeeded financially, made a
difference for patients for a while, and even
a subQ Cinryze ultimately would have been
supplanted by a longer-acting, recombinant,
superior product like Takhzyro. But back in
2005, that wasn’t knowable. Without knowing
what was in management’s minds, I would
still wish they had found their way to simply
ignoring my ideas instead of punishing me for
sharing them.
The lesson for our team (which is to say Raj
and me back then, but later many others as
our team grew) was to “close the deal first if it’s
not essential to our thesis that the company
adopts any of our ideas… then maybe risk
sharing your bright ideas afterwards.” After all,
candor after the deal closes still poses a risk
that management might cut you out of their
next deal.
In the years to come, plenty of management
teams would welcome the opportunity for a
candid discussion and reward us for making
an earnest effort to be helpful by continuing to
engage with us. But the Lev experience wasn’t
an isolated incident. Candor, or a lack thereof,
is a learned behavior. The shocks kept coming
in various ways.
I recall how a company struggled to complete
its IPO and a peer investor and friend of ours
(I’ll call them Fleetwood Mac for reasons that
only they might remember) did the hard work
If you’re an executive thinking
“but I would never shock
someone for being candid,”
that’s great. The key is figuring
out how to telegraph that
clearly and convincingly to
any investor you would wish
to be candid with you.
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of convincing the management team that they needed to lower the IPO price dramatically to
get their financing done. The company finally agreed with Mac. Bankers then said all the rest
of us investors who had been just hanging around waiting for the valuation to be negotiated
down could invest but that management didn’t want Mac in the deal. It’s not like this was a
private company that had to decide whether to sign Mac’s term sheet. This was an IPO. Nothing
is contractual. We made money thanks to Mac’s willingness to tell the company what it would
take to get a deal done. Mac was the messenger and got no upside from their efforts (except our
sincere thanks). The lesson: Don’t be the bearer of bad news if you want to invest.
Heck, more than once I recall when just asking probing questions caused some offense, and we
didn’t get a chance to invest in a company we would have wanted to invest in.
Unless a stock is trading on the open market, being able to invest in a company’s financing is
not some right that everyone shares equally. When it comes to financings, companies (and, I’ll
say this until I’m purple, NOT bankers) get to decide who to allow to invest. Some management
teams deliver shocks that teach investors to play their cards close to preserve optionality.
I’m sure many investors can share similar stories. The point is that speaking your mind sometimes
doesn’t pay. And though there are many people who welcome and reward candor, a mouse only
needs to be shocked some of the time to learn to avoid being candid all of the time.
If you’re an executive thinking “but I would never shock someone for being candid,” that’s great.
The key is figuring out how to telegraph that clearly and convincingly to any investor you would
wish to be candid with you.
Eliciting candor
By deciding who to include in a roadshow, in what order to call people, who to give time to and
indulge in diligence, who to let into a financing, and who to come back to on the next financing
and the next one, management teams shape the investment community.
All investors want to know what’s happening, what deals are in the works. We all want a chance
to do diligence, a chance to invest, and ultimately to be able to invest as much as we want in any
company we want to invest in. To us, those are carrots. Show us the path to getting carrots and
you’ll see which investors will do our damned best to win those carrots.
Management teams that want candor therefore need to find a way to make it clear that they are
not the kind of people to punish anyone for being candid. Those who don’t deliver shocks have
to differentiate themselves from those who do. I think the key is to be explicit that you’re offering
carrots.
Management teams should get together and develop a candor code. Maybe even a pledge.
Maybe some kind of Spock-like greeting.
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IF THERE WERE A CANDOR PLEDGE, IT WOULD GO SOMETHING LIKE THIS:
We value candid, constructive feedback from investors. Not only won’t
any of us punish smart messengers for their candor, we’ll reward them.
And should we witness anyone taking offense at an investor’s honest,
constructive feedback (i.e., other than an actual insult), we’ll remind them
that zapping people for speaking their mind is bad for all of us. We will
prioritize candid investors over polite-but-uninformative ones when doing
roadshows and making allocation decisions. And we will be candid about it
so that investors understand that we value candor.
ACTIONABLE TIPS FOR ELICITING CANDOR:
1. When engaging with investors, tell them you’re the kind of team that values candid
feedback. “Don’t worry about hurting our feelings.”
2. Be explicit that if you think an investor is wrong about a reason for passing or even for
drilling into a particular risk, you won’t hold it against them or take offense that they don’t
understand your business but will make every effort to correct the misunderstanding.
3. Affirm that you’ll come back to them quickly if any aspect of your business changes in
a way that might address their concerns, which is especially important if you are asking
someone to be candid with you early in your process. It can take months to raise a round,
and new data emerge during that span. So if the 20th investor you speak with happens
to be the first to see compelling new data you just generated, that puts early investors
at a disadvantage unless you cycle back to them quickly. Candor should buy them that
callback so they aren’t disadvantaged compared to the 20th investor.
4. Promise to call them when you’ve started to accept term sheets so they don’t miss the
chance to battle.
5. A term sheet is the ultimate form of candor when it comes to valuations. So convey that
there’s no harm in submitting a term sheet and that even if you decide to sign another
investor’s term sheet, you’ll preferentially allocate the round (if there’s room) to those
investors who submitted a term sheet over those who hung around the hoop. Much more
on the nuances of this below.
6. Affirm that you’ll call them early in the next financing for this or another company you’re
with because you’ll value their candor.
7. Bottom line: Feedback is a gift; convey that you value candor and will reward it.
It’s worth remembering that the feedback you don’t want to hear might be more valuable than
the feedback that feels good, so be careful not to reward the latter over the former. The opposite
of candor isn’t silence, it’s misdirection.
If all companies elicited candor for a year, I think that nearly every investor would become very
candid, and our ecosystem’s culture would palpably shift. Management and boards would have
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so much more to work with when guiding
companies to success (or else seeing the
writing on the wall sooner).
And in that world, investors who don’t share
candid feedback will be free to buy and sell
on the open market or to invest in companies
nobody else wants to fund, which limits their
opportunities to generate a return. In time,
they will likely evolve or die.
When everyone is candid, candor will have
been commoditized. There will be so much
sharing of what people are actually thinking
that investors can then be solely judged
by how insightful and helpful their candid
feedback actually is.
Wouldn’t that be nice?
Candor among investors
Investors who serve on boards are actually
already among the most candid people with
one another. The people my colleagues and I
are most candid with tend to be fellow investors
who know what it is to do our jobs, who call
us when they know one of their companies
is raising money, and who ask us what we’re
really thinking about it. They might sense that
their company has issues. They might be trying
to influence management to work on those
issues. They might be gathering evidence that
making a certain change would make it easier
to raise money. So even knowing that my team
sees what they see is useful to them. They
might keep what we say to themselves if they
know that management might hold it against
us. They will use their influence to encourage
management to let us in on future financings.
And we do all the same for the peers that are
candid with us.
If you’ve ever wondered why certain investors
tend to work together, it’s often because they
can be candid with one another.
Sometimes, after a pitch, an investor who won’t
tell management the hard truth about why
they are passing will share their unvarnished
views with a peer who is on the board.
Why is that?
Because candor is easier when there’s trust. A
CEO has only so many opportunities to forge
a relationship with an investor. They may run
a company for ten years and do six-to-eight
financings, but my team might do that many
financings with a peer in a single year. We
have so many opportunities to validate each
other’s trust. It’s a two way street: We go out of
our way to work with those we can trust to be
candid with us, both executives and investors.
For example, sometimes management
eager to catalyze a financing will overstate
how much interest there is in their round.
They might claim to have received a term
sheet from some unnamed group and say
that really they would prefer to work with us.
Unless it’s true that they have received a term
sheet, this is a really unwise move. One call to
a peer involved with the company usually tells
us what’s true. Because no investor wants to
sacrifice their relationship with a peer over a
single deal. Lying doesn’t pay. Many desperate
CEOs have sacrificed their integrity this way.
They tend to be early in their careers and
probably don’t appreciate that there’s a bigger
and more durable community out there than
just the microcosm that is their company.
Constructive candor with peers doesn’t mean
that we don’t compete with other investors;
we and others withhold information per
the rules of engagement. We don’t disclose
anything proprietary or confidential, including
our trading strategies.
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We’ve engaged in many term sheet battles with our peers; that happens when we’ve found our
own way to the company. If we like a company and want to invest, we’re unlikely to share that
information with other investors who don’t know about the deal unless there’s an understanding
that we’ll collaborate and they won’t crowd
us out. They play by the same rules, and
we respect them: if a peer tells us about a
company raising a round we don’t already
know about, we respect their right to submit
a term sheet, invest what they want, and
include us in their syndicate. Violate those
terms by front-running a peer who told
you about a deal and it could cost you that
relationship.
You might correctly surmise that some
investors would then work hard to always
know about what deals are happening so
they aren’t dependent on hearing about
them from others and relegated, by the rules
of engagement, to merely getting secondary
allocations.
Most investors, therefore, care about getting
an early call about a deal.
So once again, we come back to the same
bottom line: When a promising company
prepares for a financing, the early calls are
the tastiest carrots for motivating investors to
offer constructive, candid feedback that can
benefit the company.
Candor can accelerate price discovery
Nothing will allow a promising company to complete a deal faster than simply knowing at what
price investors would be willing to invest as soon as possible. Investors have to get their diligence
done to figure that out, but once investors know what they need to know, they have a sense for
what valuations would be attractive, tolerable, or too high. If management could know those
numbers, completing a financing would be straightforward.
I’ll stick to discussing private financings and IPOs, but the concepts here apply to accelerating
price discovery for public financings, too. (Series I deck teaches how to incentivize candor in
IPO pricing).
Some private financings happen pretty fast. A company starts talking to investors, gets one or
more term sheets management and the board are happy with, signs one, notifies other investors,
When it comes to
public financings… some investors might not actually want an
early call. Their strategy might be to find out
which deals are coming together and count
on being able to get an allocation, often due to
their relationships with banks to whom their
firms pay fees. That’s why it’s so important that
management is clear that it controls allocations
and will judge investors by 1) when they give
their order (the earlier in the process, the better);
2) the size of the order (large orders are much
more compelling than flippably small ones);
and 3) the price of the indication. These rules
of engagement tend to make it clear who is a
serious investor acting on their own conviction
and who is just feeling out what deal is hot
enough to speculate on. If this sounds familiar,
that’s because it’s either common sense or
you’ve heard us talk about it before.
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some of whom step up with indications of
interest to fill out the round, the company
makes some choices, and closes the round.
Done. Lovely.
But some private financings can drag on for
months. In some cases, it’s because investors
don’t want to be the first to start talking
about valuation. They don’t want to be the
messenger that gets killed.
Sometimes the silence around valuation
reflects that investors think that a company is
worth less than its last valuation. Other times
management has tried to guide investors
to its preferred valuation or has even urged
new investors to sign onto an insider-led term
sheet with a generous valuation where all the
insiders are investing sub pro rata, a pattern
suggesting that insiders are trying to mark
up their book. Or maybe the company has a
term sheet from a strategic or other investor
that might have an ulterior motive to overpay
(e.g., a new fund that needs to establish a track
record and just wants to win some deals).
Or maybe a company is newly formed and
doesn’t have a prior valuation that could serve
to anchor expectations. And finally, a company
might actually be doing so well and be so
compelling that investors know they will have
to pay a higher price than the last valuation
and just have no idea how much higher and
don’t want to either underbid or overbid.
In all those cases, investors might wish to hang
back and not share their thoughts on valuation
until they get some sense of the price at which
management would enter a deal with them.
It’s a bit of a Catch-22. Who goes first?
And if an investor is among the first to be
called, they won’t want to overbid in case other
investors prove disinterested, which would
soften up management for a lower price. Even
if they strongly suspect that the company is
likely to have a hard time raising money, those
early-bird investors won’t want to prematurely
bid low, either, since management is not yet
softened up by the reality of the financing
being hard to raise.
These are some of the reasons and situations
when management might struggle to find out
how investors are thinking about valuation. So
what’s to be done? Reward candor, of course.
THE TERM SHEETS GET PRIORITY (TSGP)
PLEDGE:
If you submit a term sheet you
will be notified when we choose
a term sheet and given priority
in allocations ahead of those who
didn’t submit a term sheet.
I’ve seen this done and the results can be
staggering. In one case where a company
conveyed this to all investors, it got term sheets
from investors who normally never even
submit term sheets. Immediately they could
see who wanted to invest. The ones who didn’t
bother to submit a term sheet were revealed
as being disinterested. Stunning clarity.
Then it’s just a matter of selecting the term
sheet that makes the most sense, which is a
function of much more than price. How much
is the lead investor investing? What’s the
quality of the firm’s feedback? Who is joining
the board? How credibly can they purport to
support future financings, especially an IPO?
Etc. Once the preferred term sheet is signed,
the other investors who sent in term sheets
can be notified and, if they find the price
compelling and there’s room, can be given
allocations.
Sending a term sheet doesn’t guarantee an
allocation, but it doesn’t hurt compared to
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not sending a term sheet, which is the key
point. If there’s not enough money around
the table from those who sent term sheets
to fill out the round, then management can
always go to other investors, but it could be
counter-productive to let them crowd out
participation of any credible investors who
actually submitted a term sheet.
It’s possible that this process attracts some
unrealistic term sheets from what I would
call speculators. For example, imagine a term
sheet offering to lead a $70M financing with
$3M at a very high valuation that’s certainly
above where other investors would want to
invest. If a company actually selected their
term sheet, they almost certainly would not be
obliged to invest because the company would
not be able to fill out the round. So a company
would most likely never actually accept that
term sheet. So it’s a riskless way of saying “I
should count among those who submitted
a term sheet so let me into your deal on
whatever terms you do end up accepting from
a credible lead investor.”
So knowing this, just be mindful of who you
make the TSGP Pledge to. There might be a
situation where you can’t fill out the whole
round with the credible investors who gave
you a term sheet. In that case, you might prefer
to talk to other investors to see who might
want to invest rather than letting in someone
who gave an unserious term sheet. Hopefully
you’ll at least then be going to entirely new
investors who hadn’t even been called on the
original process and therefore can’t be blamed
for not sending in a term sheet. Because if
you actually renege on the pledge by going
to investors who were hanging around the
hoop and refuse to put in a term sheet despite
you making the TSGP Pledge to them, you’ll
be teaching them that it was a bluff and
weakening the pledge for everyone.
Still, if everyone used the TSGP Pledge, hoop
circlers who refused to participate would be
relegated to deals that Term Sheet givers
couldn’t fill out in full. That adverse selection
can be costly. In time, there would be fewer
such investors.
I’m not suggesting that a company make the
TSGP Pledge to every credible investor as soon
as they speak with them. It makes sense to
have an intro meeting and see who even wants
to do diligence. But if you’re not getting term
sheets nor even having productive valuation
discussions after enough investors have done
some diligence, then valuation might be the
problem, and you might consider employing
the TSGP Pledge with the set of investors you
would most want to invest and could lead the
round.
If that doesn’t work, then you know you have a
real problem. Best to go back to the smartest
investors you know who have done the best
diligence and ask them to be candid with you
about why you might be struggling to raise
money. At that point, it can’t hurt and it might
help.
Calling out the naked
emperors
How often have all the investors on a board
recognized that winter is coming and that
a company wasn’t dressed for it. They are
burning cash too fast and will fail to achieve
a value inflection before they have to raise
again. None of the insiders are eager to invest,
at least not at the last valuation. Maybe they
hope that others haven’t noticed that the
emperor is naked. If no one says anything,
then maybe the company will somehow find
some investors to invest and winter will turn to
spring. “Maybe no one will notice if I go sub pro
rata or somehow sit this one out.”
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That silence leaves management thinking that things aren’t so bad, until the financing draws
near and the insiders start coming up with reasons for why they won’t invest much or at all.
Often, the only solution is the very downround that those investors feared they might spark if
they spoke up. Winter comes and the company is naked.
The insiders really should have said something earlier. Given enough runway, the company might
have done things differently; maybe there was a way to extend the runway.
I’m not shy in the boardroom and neither are
my colleagues. And I know many peers who I’m
sure wouldn’t keep quiet if they saw a crisis on
the horizon or even the potential for one. But
I’ve heard from plenty of CEOs that this has
happened to them, so I know that many board
members aren’t as proactively candid as their
companies need them to be.
I’m proud of my colleagues for often being the
first to address the elephant in the room (yes, I’m
mixing elephants and emperors). By breaking
the silence, they often spark discussion that
reveals that others were also concerned and not
eager to invest. In some cases, these discussions
have led to major pivots while a company
still had the resources to pivot. Sometimes a
company survives and then thrives. Other times,
this final effort only confirms that shutting down is the only proper thing to do.
This isn’t easy. Feelings can really get hurt. Whether a plan is good enough is highly subjective. If
you kill a program, you might never know how it would have played out (unless a competitor has
a similar program that does play out). There are no doubt executives out there who blame us for
killing what they believe was a sure thing because we raised concerns and others agreed.
But there are far more people out there who were happy that someone ripped off the Band-Aid
(add that to emperors and elephants). They, too, sensed that things weren’t right but maybe
didn’t trust their own gut. Once the topic was broached, everyone could lean in and deal with
it openly. Cutting a program was the outcome of an active deliberation by many smart people.
Even if not everyone agreed, they contributed to the overall calculus.
Candor has many other benefits. Lots of things can be fixed if called out early. One person
admitting when they don’t understand something probably will help at least half the board who
also don’t understand it, and that means people stay aligned. There’s no shame in smart people
having the humility to admit they don’t know something. There again, humility going hand in
hand with candor.
This article series (I’ve written one twice a year for the last few years) is called Semper Maior, which
One person admitting when
they don’t understand
something probably will
help at least half the board
who also don’t understand
it, and that means people
stay aligned. There’s no
shame in smart people
having the humility to
admit they don’t know
something.
PART 2: Core Biotech’s DéJà Vu Year
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How we pump up the candor January 2025
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means “Always Better,” and it’s hard to make things better without acknowledging mistakes and
sharing lessons learned. And that’s not possible without candor and humility.
It is possible for all of us to be more candid with one another if we’re explicit that we’ll reward
candor when it’s offered, in whatever way we can reward it.
And for plenty of examples of executives and investors being candid, visit Gateway, a website we
created where experienced board members (both investors and operators) share their stories.
PART 2:
Core Biotech’s DéJà Vu Year
Getting to the Core
By now, I expect most people have read enough overviews of biotech performance in 2024,
whether in BioCentury or in sell-side reports (e.g., I like to scan Tim Opler’s weekly slides).
So here’s what you already know from reading what others have written:
y The sector started off 2024 well but basically ended flat because of a steep sell-off in November
and December, due to some combination of 1) RFK, 2) stubbornly high long-term interest
rates, and 3) M&A happening at a steady clip but without any biotech acquisitions over $5B
(so total dollar value of M&A was disappointing),supposedly because of fear of a draconian
FTC and maybe because 4) Chinese biotech is supplying pharma with all the innovation it
needs and so Western biotechs are becoming irrelevant (a view I don’t share).
y Private companies went public at only a slightly faster pace than they did in the depths of the
downturn.
y Yet there’s plenty of venture capital, maybe because science continues to frack human biology
and there’s clearly so much we can do to better prevent, treat, and even cure many diseases.
y GLP‑1 use is surging and the boom has sparked interest in many other mechanisms, which
will teach us loads about how to modulate weight, fat, and muscle in the next few years.
y Democrats losing means less fear of direct price controls but Republicans are talking about a
policy called Most Favored Nation (something a number of us involved with No Patient Left
Behind are working to avert).
We don’t like to be redundant. Our team tries to parse data in ways that others don’t. So we
won’t be talking about China or GLP-1s or even policy (for a change!), but hopefully our top-down
analysis of the public biotech universe allows all else you’ve heard to click into a useful perspective
for understanding the health of the sector and its prospects.
PART 2: Core Biotech’s DéJà Vu Year
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I’ll start with the conclusion and some caveats, offer some data and insights, and then dive into
the rest of the analysis.
Biotech is in better shape than many observers think and poised to perform well, which was
true at the beginning of 2024, didn’t pan out, and remains true today. I think public biotech
should do well in 2025 because of its solid fundamentals. See for yourself.
Caveats: Since a lot of financings are allocated selectively, specialists have opportunities to buy
that others don’t and a depressed market can offer opportunities to buy at deep discounts. And
metrics based on just public companies don’t reflect what’s happening with private companies.
Private companies may have a harder time raising than public companies but can also succeed,
even allowing specialists to generate a return from M&A so that the success doesn’t even impact
any public equity-based measures of sector performance. And specialists may hedge their public
exposure. Therefore, sector returns, whether measured by XBI or some other basket, do not
necessarily reflect specialist returns.
With all that said, let’s analyze what we can of the 2024 performance of the public segment
of the biotech universe.
The biotech sector’s
performance was flat for 2024,
which may as well have been
a correction for the sector
compared to the soaring
performance of the S&P. Sure,
those were driven by tech, but
even without the Magnificent
Seven stocks, broader markets
were up. Because there’s no
specific index that removes the
Mag7 from the S&P that reveals
their impact over a long time
(recreating and accounting for
rebalancing wasn’t worth the
work), we used the S&P ex-Tech
index, which includes some
Mag7 but removes other tech
companies. It’s not a perfect match but it’s close enough.
And of course, since YE20, near where XBI last peaked, biotech has been in a profound slump
compared to the rest of the market (SEE FIGURE 2). Compared to the rest of the market, biotech
feels abandoned for the last four years. That will weigh on anyone’s psyche.
But stepping back, we can see that there was a time when biotech exceeded S&P and even Tech.
(SEE FIGURE 3). It may yet still. Though I would expect a sector like biotech to offer more reward
-10%
0%
10%
20%
30%
40%
50%
YE23 YE24
S&P 500 S&P 500 ex-Tech S&P 500 Tech Only XBI
FIGURE 1 Performance of XBI (biotech), S&P500, S&P500 without its Tech components
(S&P500 ex-Tech), and then just its Tech components (S&P500 Tech Only). Tech led the
way in 2024, but the rest of S&P was no slouch, either. And while XBI looked like it just
might keep up with the non-tech parts of the S&P500, biotech couldn’t maintain the
pace in Q4.
SOURCE: Bloomberg
FIGURE 1:
Tech and broader markets left biotech behind in 2024
PART 2: Core Biotech’s DéJà Vu Year
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page 19
than the more staid parts of the
economy, biotech has at least
kept pace with the rest of the
non-tech S&P500 since 2011,
which is a somewhat arbitrary
and stable starting point post
the debt crisis. Indeed, if there’s
comfort in that, it’s very small.
The past is the past and people
would be right to judge a sector
by a shorter period of time than
that.
From the perspective of the
kinds of investors (pension
funds, endowments, sovereigns,
wealthy families) whose capital
passes through specialists
to fuel the biotech sector, a
conventional view might be
that there must be something
wrong with biotech. Maybe
it’s still trying to shed the
overhang of the COVID boom.
Their view may be affirmed by
seeing hundreds of companies
trading below cash or the poor
performance of some IPOs. And
while there’s no denying that
2024 wasn’t a rewarding year
overall (though some funds
did well), that’s not the same
thing as saying that biotech is
troubled.
When funds talk about
performance, they are warned
by lawyers not to claim that past performance is predictive of future returns. Indeed, they aren’t.
The present is predictive of the future. The past is merely for extracting lessons.
In the present, biotech is actually in a strong position, from the perspective of an institutional
investor, and poised for performance. The science is working, companies that make up the vast
majority of specialist portfolios are well-capitalized, and strategics, after a relatively light year
of M&A, have some catching up to do to replenish their pipelines as they face a ton of product
expirations (drugs going generic and being IRA price controlled).
FIGURE 3 Performance of XBI (biotech), S&P500, S&P500 without its Tech components
(S&P500 ex-Tech), and then just its Tech components (S&P500 Tech Only). Biotech at
times greatly outperformed the broader markets and even high-flying tech stocks, but
since the COVID boom has fallen back in line with S&P500 ex-Tech stocks.
SOURCE: Bloomberg
FIGURE 3:
Good to know it’s possible for biotech to outperform
FIGURE 2 Performance of XBI (biotech), S&P500, S&P500 without its Tech components
(S&P500 ex-Tech), and then just its Tech components (S&P500 Tech Only). Tech has
performed very well, up over 100%, and the rest of the S&P500 has done pretty well, too,
up over 50%, compared to XBI being down over ‑35%.
SOURCE: Bloomberg
FIGURE 2:
Since the COVID boom, biotech has been in
protracted slump
PART 2: Core Biotech’s DéJà Vu Year
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page 20
The key for investors who see the sector through the lens of specialist performance is to focus
on the companies that matter to them, the Core Biotech companies (ones actually owned by
one or more specialists) with a positive enterprise value. So don’t look at the whole universe (578
companies) of biotech stocks but focus on the 334 Core companies or even the 250 of those with
a positive enterprise value that make up 96% of Core by market cap. These 250 companies have
a combined $303B market cap, collectively burn about $36B/year (12% of their market cap), and
have $100B cash (~2.8 years of cash), making them, on the whole, both well capitalized heading
into 2025 and able to finance at will to extend their runway. More data like that in THE BIG TABLE
(TABLE 1).
The 244 Peripheral companies (those not owned by any specialist) represent only upside
to specialists, who hunt among them for bargain turnaround stories to buy into. Peripheral
companies could literally vanish and it would barely impact specialist performance.
I can’t predict whether 2025 is the year in which biotech specialists are rewarded for their patience.
In fact, as I write this, biotech is swooning yet again with the broader market; XBI down ‑4% in 2
days and now slightly negative for the year and Core biotech down more than ‑6% in day. Interest
rates rule the short term.
But unlike waiting for an elevator that might actually be broken, Core biotech is very much
humming, and our scientific breakthroughs have intrinsic value to the world, patients, and
pharma. So odds are good. In the meantime, average performance of the public biotech sector
hardly means average performance for specialists. The private side of the sector has almost
become its own ecosystem these last few years, with so many fewer companies going public
UNIVERSE CORE PERIPHERAL IBB XBI
2023 YE 2024 YE % Change 2023 YE 2024 YE % Change 2023 YE 2024 YE % Change 2023 YE 2024 YE % Change 2023 YE 2024 YE % Change
Total Number of <$10B
Dev-Stage Biotech Drug
Companies
604 578 ‑4.3% 328
(88.9%)
334
(91.6%) 1.8% 276
(11.1%)
244
(8.4%) ‑11.6% 158
(21.8%)
143
(21.4%) ‑9.5% 90
(68.0%)
107
(48.4%) 18.9%
(Market Cap Weighted %)
Positive Enterprise
Value: PosEV
463
(96.3%)
440
(96.0%) ‑5.0% 255
(96.7%)
250
(96.1%) ‑2.0% 208
(92.4%)
190
(95.4%) ‑8.7% 146
(21.3%)
124
(20.8%) ‑15.1% 88
(67.2%)
98
(47.5%) 11.4%
Negative Enterprise
Value: NegEV
141
(3.7%)
138
(4.0%) ‑2.1% 73
(3.3%)
84
(3.9%) 15.1% 68
(7.6%)
54
(4.6%) ‑20.6% 12
(0.5%)
19
(0.6%) 58.3% 2
(0.8%)
9
(0.8%) 350.0%
Just those with
<2 Years of Cash
361
(36.9%)
374
(28.7%) 3.6% 150
(34.0%)
168
(26.5%) 12.0% 211
(60.5%)
206
(52.8%) ‑2.4% 55
(7.8%)
50
(5.6%) ‑9.1% 32
(24.6%)
36
(13.3%) 12.5%
Cumulative Market
Capitalization ($B) $352.0B $344.6B ‑2.1% $313.0B $315.5B 0.8% $39.03B $29.16B ‑25.3% (% of Total Market Cap)Cumulative Annual
Burn: All
$54.6B
(15.5%)
$54.0B
(15.7%) ‑0.9% $43.6B
(13.9%)
$45.6B
(14.5%) 4.7% $11.0B
(28.1%)
$8.4B
(28.8%) ‑23.2%
Just those with
<2 Years of Cash ($B)
$27.1B
(7.7%)
$27.5B
(8.0%) 1.5% $19.2B
(6.1%)
$20.6B
(6.5%) 7.7% $8.0B
(20.4%)
$6.9B
(23.7%) ‑13.4%
(Count)
Cumulative Market Cap
PosEV Companies:
$338.9B
(463)
$330.9B
(440) ‑2.3% $302.8B
(255)
$303.1B
(250) 0.1% $36B
(208)
$27.8B
(190) ‑22.9%
Just those with
2+ Years of Cash ($B)
$211.5B
(186)
$235.5B
(142) 11.4% $198.7B
(143)
$223.2B
(136) 12.3% $12.8B
(43)
$12.3B
(6) ‑3.5%
Cumulative Market Cap
NegEV Companies:
$13.2B
(141)
$13.7B
(138) 4.3% $10.2B
(73)
$12.4B
(84) 21.6% $3B
(68)
$1.4B
(54) ‑54.6%
cash (NegEV) decreased slightly to 138 for the Universe and 84 in Core but these make up only 4% of their respective cumulative
market capitalization. Healthcare/biotech XBI and IBB have negligible exposure to companies trading below cash (NegEV).
Looking at weightings of NegEV companies and those with <2 YoC is helpful to appreciate that the sector is far more weighted
to better-funded companies pursuing programs that investors value (i.e., have a positive enterprise value, PosEV).
SOURCE: Bloomberg, FactSet, RA Capital
TABLE 1:
The Big Table
TABLE 1 is your one-stop shopping
for data cuts of the development-
stage, US-listed, <$10B small-mid cap
biotech universe. A few highlights are
that the Universe has slightly shrunk
but the number of Core companies
has slightly increased, both in number
and in market cap, which shows that
biotech is continuing to distill down to
Core (companies specialists hold). The
number of companies trading below
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than in the past. Private companies are born and get acquired before going public. The funds
that operate in that realm therefore have a whole separate driver of returns while they wait for
the public biotech elevator.
And it’s not that there aren’t generalists in the sector. All the specialists’ holdings don’t account
for the value of Core Biotech (we don’t all together have $300B). So we shouldn’t really talk about
generalists avoiding biotech. It’s all a matter of degrees. And because biotech is such a tiny
fraction of the overall market, it would take only a small shift of focus towards biotech to correct
valuations to the upside, as we saw at times during 2024 when the sector climbed more than 10%
in the span of a few weeks.
There’s a coiled spring within Core Biotech. While it stays tightly coiled, specialists will have a hard
time parting with their strongest companies, making it hard to come up with the cash for new
deals. The bar will remain exceptionally high on the whole (it should be high, but exceptionally
high means that some good companies may struggle to get funding). Liquidity will be key in 2025.
Every meaningful acquisition will unlock cash that will flow quickly to worthy new investments or
the strongest remaining Core holdings, but M&A is stochastic, creating liquidity in fits and spurts.
If the spring relaxes a bit (i.e., valuations climb) and it becomes easier to trim cash from holdings
of high-quality, late-stage companies, then funding will become more fluid. IPOs will become
more steady. Things will feel more normal for more companies.
Until then, we’re all on a super tightly run ship. There’s little room for error. And more candor
would help so we all waste less time figuring out the right course of action for our many worthy
projects.
Some of the key insights and data you’ll find in our Table and figures:
y DATA: At the end of 2023, the 328 Core companies (public development-stage <$10B market
cap, cash-burning, US-listed companies owned by at least one specialist) had a collective
value of $313 billion. (SEE TABLE 1: THE BIG TABLE.)
y DATA: Over the course of 2024, they burned approximately $44 billion. One would assume
that they raised about as much, which would increase their total valuation even if their share
prices stayed unchanged, which, on the whole, was the case. The market-cap weighted
performance of Core biotech was up only 1.6% for the year. (SEE TABLE 1.)
y DATA: Indeed, by the end of 2024, their combined value had increased to $364 billion
(consistent with sector performance being roughly flat but companies raising about $44B).
This includes companies that are now profitable or graduated from Core (acquired, turned
profitable, or climbed over $10B in market cap).
y DATA: But we then have to remove thirteen companies that were acquired, eight that were
delisted, one company that graduated from the Core set because they turned profitable, and
four that climbed above $10B in market cap, which have a total value of $76B, and we see that
what remains of Core is $283B. (SEE FIGURE 4.)
y DATA: And then Core got replenished with about $33B of companies (privates going public,
dev-stage companies falling below $10B or becoming unprofitable, and specialists buying/
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converting Peripherals), and we get to a new Core of 334 companies with a combined value
of $315B at YE24. (SEE FIGURE 4.)
y PERSPECTIVE: Companies have gone public at a rate that is a bit better than 2022 and 2023
but still below even the pre-COVID years. I think we’ll see a further uptick. Some will say that
biotech is being burdened with early, low-quality companies pushing themselves onto the
public markets (especially when some of them fail and/or trade down), but don’t fall for that.
Even if 60 companies went public in 2025 (closer to the pre-COVID boom norm, SEE FIGURE
8) and each joined Core with a market cap of $500M, that would be only $30B more market
capitalization, under 10% of Core’s value today. And not all companies that go public even end
up in Core; those that don’t are irrelevant to specialists.
y DATA: Strategics face considerable revenue losses, about $350B by 2030 based on sell-side
reports1
, from expiring patents and/or IRA price controls and therefore need to replenish their
pipelines.
y DATA + PERSPECTIVE: And meanwhile, Strategics are generating ~$200B of FCF this year
and that’s projected to grow, which means they could buy the entire Core set for a 100%
premium with a little over 3 years of FCF and it would cost 23% of their FCF to support
all those programs at the current burn rates. We do this math to put the modest size of
Core biotech into perspective relative to Strategics’ massive buying power and need.
(SEE FIGURE 12.)
y SPECULATION: Based on past years and assuming the dearth of large acquisitions (>$5B)
suggests that the sector is due for some of those, and given that nearly all M&A dollars flow
to Core, we might expect around $40B of acquisitions in 2025, of which about half would be
the premium that would flow as a return of about 6% ($20B premium on $315B of total Core
value) to investors. That’s the M&A tail wind that is constantly pushing up sector performance.
In 2024, the M&A premium was low, at $12.9B, which was only a 4% tailwind for the sector. But
more importantly, this M&A would be a source of liquidity, and injecting $40B of liquidity into
Core would be about as much as its annual burn rate of $46B.
Why we do this Core Biotech analysis
What makes my team’s particular analysis useful is the way that we zero in on what we call
Core Biotech to assess the health of the sector. Core biotech companies are the subset of the
development-stage, publicly traded, US-listed, sub-$10B market cap universe that is owned by at
least one specialist healthcare fund (our peer group). To understand why this subset is relevant,
know that the audience I’m doing this analysis for is the community of REAL investors that invest
in the funds that companies mistake for investors. The REAL investors are the Limited Partners
(LPs) of those funds. They are pension funds, endowments, sovereign wealth funds, high-net-
worth individuals and families and their family offices.
1 Biopharmaceutical Outlook for 2025, Stifel Healthcare, January 7, 2025
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Biotech companies rarely meet them. The sell-side reports we insiders read are often not really
written for them but for the funds with which banks do business. You can imagine therefore
what it must look like to the REAL investors to hear how there are hundreds of companies trading
below cash and many more who won’t be able to raise money.
So when we first did this analysis of Core Biotech at the end of 2022, our goal was to show that
one shouldn’t get lost in the aggregate performance of all companies or judge the sector by how
many hundreds of companies are trading below cash.
Because anyone who judges biotech by its struggling companies, many of which are in various
stages of failing, completely misses that a high rate of failure is a feature of biotech, not a bug.
Running lots of experiments is how we find the few that work. And when they work, they matter
a lot. These are companies that grow into juggernauts or else are acquired for large sums.
Biotech is highly dependent on being able to continue to raise money and therefore depends on
funds that cut checks. But those funds only have a stake in a subset of all biotech companies. So
if you want to know whether biotech is in good shape, then look at the companies that specialist
investors actually own (Core Biotech), not the ones they don’t (Peripheral).
Because although there’s a long tail of struggling companies, many aren’t even in the portfolios of
any healthcare specialists and therefore could vanish and have ZERO impact on the performance
of the funds that provide capital to innovation. Peripheral companies have a low weighting in
indices, too. And many other struggling companies, while they might be in the portfolios of one
or more specialists and therefore make it into our Core set, have such low valuations that they
make up only a tiny fraction of anyone’s portfolio.
In other words, the biotech sector that matters to institutional investors and their LPs is in much
better shape than one would think looking at the whole Universe.
If you had the CEOs of all biotech companies in a room and asked them all to talk about how
they are feeling, the mood would be dictated by the vast majority that are in charge of struggling
companies.
But if you adjusted the volume proportionally to their valuations or the amount of cash on the
balance sheet, you would hear something very different. The room would be quieter and the
voices would sound more confident. And that matters. It matters to the specialists and it matters
to their LPs.
Anyone looking at the health and viability of biotech should be focusing on the minority of
companies that are succeeding. They are the drivers of everyone’s returns.
So mean! Not really.
This no doubt sounds harsh. So be it. Call it candid. See above for how I feel about that.
I’m not saying that the struggling companies are dumb. Many tried nobly. My firm has backed quite
a few. We failed together. We shouldn’t even really view many of them as failures. If a company’s
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job was to run a trial to see if a drug worked and the trial was well run and showed that the drug
didn’t work, then it served its purpose. The stock went down and we can be disappointed. We can
feel badly for the people who enrolled in that trial and had hoped the drug would work, but we
learned. I’m glad we got to see the result of a well run experiment.
Yes, some experiments aren’t well run. Some trials are slow to enroll due to poor execution. A
badly run experiment that doesn’t even give you an answer or that costs you far more than you
planned to get to an answer is a business failure. We’ve got to do less of that.
And not all struggling companies should be given up for lost. Just because no specialists own
them now doesn’t mean that this will remain the case. As you’ll see from the analysis below,
there are plenty of companies that were peripheral at YE23 that became part of the Core set
during 2024 because some specialists invested in them. There were 38 of those companies and
their average performance in 2024 was +12.4%. So hunting for value amongst the Peripheral
companies is worth a smart investor’s time.
Specialist portfolios are well capitalized and have
modest burn rates
Biotech is cash-hungry and the big question on everyone’s minds is whether investors, specifically
dedicated specialists, can support the financing needs of all these companies. That’s why THE
BIG TABLE above includes the cumulative burn rate of all companies in the Universe.
It’s also important to point out that the specialist peer group we use to define Core is not the
only source of capital for these companies. We don’t include mutual funds, for example, because
their 13Fs are too muddled for us to know what are passive holdings versus active positions loved
by a particular manager. Fidelity’s statements, for example, co-mingle managed funds and retail
holdings.
Having specialist holders is an indicator that other fund managers might like a company. So even
though the whole Core set of companies is burning a total of $46B per year, the broader market
provides that cash (pharma partnership dollars chip in quite a bit, too).
Still, it’s fair to wonder whether the broader market, during a downturn, might leave cash-burning
companies high and dry. But a company trading at a $3B market cap hardly seems like it’s been
abandoned by investors. So burn needs to be considered relative to market cap. Consider market
cap to be a measure of investor interest. What’s dangerous is having a high burn rate with few
investors interested in your company.
To understand which companies are in trouble, consider that Peripheral companies are burning
$8.4B, which is nearly 30% of their $29B cumulative market cap, and they have ZERO specialist
holders. In fact, 206 out of 244 Peripheral companies have less than two years of cash, with a
collective burn of $6.9B and a cumulative market cap of $15.4B, which means they need to raise
almost 45% of their collective market cap soon. That sounds challenging, especially without any
specialists taking interest.
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By comparison, all 334 Core companies collectively burn $46B/year, which sounds like a lot but
is only about 15% of Core’s total market cap. So, as a group, it’s not hard for Core to finance itself.
To be fair, let’s examine the Core companies that have less than two years of cash, which is just
over half of them (168). They have a cumulative valuation of $83.5B and collectively need to
raise $20.6B. That’s almost 25% of their market cap. But they have specialist holders. They are
interesting to investors that finance companies. And even if you think those companies might
be a cause for worry, consider that these companies represent only 26% of the total market cap
of all Core.
So, the flip side of that: 74% of Core is made up of 166 companies with more than two years of cash
with a burn rate of $24.9B, which is under 11% of their collective $232B market cap.
And hence our conclusion. Specialist portfolios are largely made up of well capitalized companies
and, on the whole, those companies are readily able to finance to extend their runway when they
need to.
Core Dynamics
There were 328 companies in the Core set at the end of 2023, of which specialists sold out of
22 of them, turning them into Peripheral, 13 were acquired, eight were delisted, one graduated
by becoming profitable and therefore doesn’t count in our development-stage Universe
(congratulations to Krystal Biotech), and four graduated by climbing above the $10B upper bound
of our market cap range (they may fall back but we’ll abide by our rules and exclude them).
We don’t count development-stage companies that are valued over $10B in our Universe because
these companies are in such good shape financially, that it doesn’t make sense. In an analysis
that is trying to diagnose biotech’s health, including them will make the sector look too good.
Those four companies are Sarepta, Insmed, Summit, and Vaxcyte; their cumulative market cap
at YE24 was $47.3B, they had $4.7B of cash, and are burning $2.1B/year. So they have more than
two years of cash and are burning under 5% of their market cap.
We also had a few companies join the Core set. One was profitable but started burning, one fell
back down below $10B, 16 crossed over from the private dimension, and 36 Peripherals were
converted to Core.
So in the end, the Core set ended up slightly larger than it started the year, with 334 companies.
Since the Peripherals are peripheral, we won’t get too deep into them. But you can see from
TABLE 1 that the Peripheral set shrank the most. Their count was down ‑12% and their collective
market value was down ‑25%. There’s really no avoiding the reality that, as a class, Peripheral
biotechs (those that have not managed to attract even one specialist holder) chronically
underperform. There are gems among them, but as a class they appear to be mostly wasting
money. Fortunately, their collective burn is down ‑23% over 2024, so they are wasting less of their
investors’ money. And once again, no specialists own them, these companies are not a drag on
specialists and therefore don’t matter to specialists’ LPs.
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Core
Performance
was flat in 2024
Overall, this was a flat year.
Looking at Market Cap
Weighted (MCW) returns
in FIGURE 5, the Universe
was up slightly (+0.8%)
and Core was up a touch
more (+1.6%), illustrating
the effects of removing
the underperforming
Peripheral set. That’s
what it’s like the last few
years that we’ve done this
analysis.
Notice that in FIGURE 5,
we show returns using an
Equal Weighted Basket of
-25%
-20%
-15%
-10%
-5%
0%
5%
(n=604) (n=328) (n=276) XBI IBB
Equal Weight Returns Market Cap Weighted Returns
-6.7%
0.8% 1.6%
-5.6%
3.4%
-18.7%
1.0%
-2.4%
UNIVERSE CORE PERIPHERAL BENCHMARKS
FIGURE 5 shows the 2024 performance of the <$10B public development-stage biotech drug-
focused Universe, showing that Core significantly outperformed the Peripheral subset of
companies. We present two ways of weighting the companies and also performance of two
biotech/healthcare ETFs, XBI and IBB. Core and Peripheral classifications are based on 3Q24 13F
filings. Performance is reported through 2024.
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 5:
2024 Public Development-Stage Biotech Performance
Core outperformed but was still pretty flat
250
260
270
280
290
300
310
320
330
340
350
22
13
8
1 4
328
$313.0B
280
$282.6B
334
$315.5B
YE 2023
CORE COMPANIES
YE 2024
CORE COMPANIES
CORE TO PERIPHERAL
ACQUIRED
BECAME
PROFITABLE
DELISTED
GRADU
ATED
PERIPHERAL
TO CORE
NE
W
TRADED INTO MC RANGE
STARTED BURNING
SUBTOTAL
36
16 1 1
INCREASE DECREASE TOTAL
FIGURE 4 shows that the number of Core companies grew slightly from YE23 (which is based on 3Q23 13Fs) to YE24 (which is
based on 3Q24 13Fs) as companies went public, lost and gained specialist shareholders, were delisted, acquired, graduated out
of and into the <$10B valuation limit, or started/stopped burning cash. The Core set’s valuation also increased slightly.
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 4:
Change in Core Companies YE23-YE24
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all companies and a Market Cap Weighted (MCW) Basket. We do this to illustrate what a big
difference there can be between the two.
Going forward, to reduce the noise, we’re only going to show Market Cap Weighted performance
numbers. We’re not hiding anything – Equal Weighted just isn’t relevant. Equal Weight gives
WAY too much weight to hundreds of tiny companies that actual investors have little exposure
to. So Market Cap Weighted returns is the right way to pay attention to the performance of the
sector as experienced by fund managers and their LPs.
FIGURE 6 shows that what little positive performance Core managed in 2024 was due to
acquisitions; take those out and Core would have been down ‑1%. More on M&A later.
Brief thoughts on Sector ETFs
The sector ETFs XBI and IBB were largely flat, with XBI slightly up and IBB slightly down. It’s worth
noting that IBB only has 21% exposure to the development-stage <$10B biotech Universe and
XBI has 48%, nearly all of which is Core (both ETFs have <1% exposure to Peripherals). The rest of
each is made up of larger and/or profitable drug companies or even companies entirely outside
of therapeutics (e.g., Illumina) that we don’t count for this drug-focused analysis.
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
w/o Acquisitions XBI IBB
(n=271)
All
(n=276)
w/o Acquisitions
(n=315)
All
(n=328)
w/o Acquisitions
(n=585)
All
(n=604)
0.8%
-2.2%
1.6%
-1.0%
-5.6%
-11.9%
1.0%
-2.4%
UNIVERSE CORE PERIPHERAL BENCHMARKS
FIGURE 6 dispenses with Equal-Weight Returns and only shows MCW, and illustrates how 2024 performance of the <$10B public
development-stage biotech drug-focused Universe in Figure 2 is affected by M&A (that’s where the gains come from – without
M&A, the Universe and Core are down ‑2.2% and ‑1% in 2024, respectively). Core and Peripheral classifications are based on 3Q24
13F filings. Performance is reported through 2024.
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 6:
2024 Public Development-Stage Biotech Performance with & without Acquisitions
Core only positive thanks to M&A
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It’s worth pointing out that the composition of XBI changed pretty significantly during the
course of 2024. A year ago, the XBI was 68% weighted towards the biotech Universe, whereas
now it’s 48%. IBB held steady between 21 – 22%. So in terms of being representative of the biotech
Universe, XBI’s reweighting caused it to shift almost halfway towards being like IBB. Historically,
XBI and IBB actually tracked each other pretty closely despite having very different compositions.
At times, XBI surged ahead of IBB but then the two converged. So with the reweighting in 2Q24
making XBI look more like IBB, we wonder if they will track each other even more closely going
forward, over the long run. I used to think of XBI as IBB’s much more volatile cousin. Maybe now
it will be only moderately more volatile. This has some implications for the ease with which a
biotech fund might hedge market volatility.
The Crossover Conveyor is accelerating slowly
A year ago, I thought that 2024 was shaping up to be the year that the crossover conveyor would
get back to a normal pace, which I would consider to be closer to the levels we saw pre-COVID.
That hasn’t quite happened.
Overall, the rate at which private companies went public was modestly higher than the last few
years and is climbing towards the levels we saw pre-COVID. Notably, that’s because companies
are willing to get creative with reverse mergers (and even some SPACs, which were virtually
unheard of before the COVID boom). Straightforward IPOs, on the other hand, remained flat
year-on-year.
0
30
60
90
120
150
180
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
0
50
100
150
200
250
300
IBB XBI
IBB
XBI FIGURE 7 shows how XBI and IBB are historically correlated; going forward, we expect the two indices to stay tightly correlated,
thanks in part to XBI’s mid-2024 reweighting.
SOURCE: Bloomberg
FIGURE 7:
XBI and IBB: Closer than you would think
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But if we look at the pace
of these crossover events
throughout 2024, we see that
a lot of the activity was at the
start of the year when it felt like
2024 was going to be a great
year and then, as the biotech
sector backed off, we saw fewer
companies go public. Then we
had another surge ahead of
the election and since then it’s
cooled.
So the conveyor belt has
been operating but in fits and
spurts. 2024 feels less like one
year and more like several
segments.
That chart makes it look like
we’re seeing the “window”
opening and closing.
But I’ve never believed
in windows so much as
companies simply deciding
that they want to do their
next private round as an IPO.
Because that’s what an IPO is:
the last privately priced round
completed a split second
before a company’s stock
starts trading publicly.
We tend to think that good
companies hold off from going
public because they are unsure
whether they will be able to.
But knowing you can IPO is a
function of price discovery and
any good company has a price
at which people will eagerly
invest. So what we are really seeing in that chart is hesitation by companies that aren’t sure they
will get a price they like. That’s okay. Management should try to get a good price.
But that’s not the same as saying “We can’t IPO because the window is closed.”
0
25
50
75
100
125
2018 2019 2020 2021 2022 2023 2024
IPO SPAC RM
57
1
11
49
9
0
79
7
21
100
21
14
8
12
7
23
11
5
25
19
4
FIGURE 8 hows the slight uptick in companies going public in 2024 compared to the two
prior years was due to an increase in reverse mergers. Traditional IPOs remained flat. Data
shown for drug discovery companies listed on NASDAQ / NYSE.
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 8:
How Private Companies went Public
-4
-2
0
2
4
6
8
JAN FEB MAR ARP MAY JUN JUL AUG SEP OCT NOV DEC
-10%
-5%
0%
5%
10%
15%
20%
XBI PERFORMANCE
# OF BIOTECHS GOING PUBLIC
FIGURE 9 shows the rate of companies going public via any means (IPO, reverse merge,
and SPAC) and illustrates how the promising start to 2024 coincided with XBI strength
and then as XBI declined, so did the rate of companies going public. Then both picked
up again until XBI again reverted towards the end of the year. This shows us not to judge
a year as a whole. Data shown for drug discovery companies listed on NASDAQ / NYSE.
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 9:
Going Public in 2024, by Month
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Once private companies accept the market price for their equity, they can IPO. And that just
requires price discovery, starting with insider price discovery (see “Series I” for 5,000 slides on
that and discussion on the Series I process in RA Capital’s Gateway resource for executives and
directors).
M&A in 2024: Strong pace of smaller deals,
ZERO large ones
FIGURE 10 shows that 2024 was a light year for M&A, because there were no acquisitions of larger
public targets over $5B. In terms of activity under $5B, it was a fairly typical year. But it’s the big
acquisitions that are real drivers of both returns and liquidity.
And, as always, nearly all M&A dollars flowed to Core companies (FIGURE 11, tiny dark slice is Peripheral).
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
0
4
8
12
16
20
24
28
32
36
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
<$5B TV
ACQUISITIONS
TRANSACTION VALUE ($M)
>$5B TV <$5B TV >$5B TV <$5B TV >$5B TV
Transaction Value Transaction Value Premium Acquisitions
Total
FIGURE 10 tracks the cumulative M&A transaction value as well as the cumulative premium paid in each year, as well as the
total number of transactions, just within the public Universe (US-listed, development-stage, <$10B in market cap). Although
sub-$5 billion acquisitions kept pace with prior years, the dearth of larger deals meant 2024 was a disappointing year for M&A
watchers (and anyone hoping for better returns and more liquidity).
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 10:
M&A Dollars Flowing into the Biotech Universe by Size of Transaction (Market Cap <$10B)
TV:
TOTAL VALUE
FOR 2024
$26.8B
CORE:
97.2%
TVP:
TOTAL VALUE
PREMIUM FOR 2024
$12.9B
CORE:
97.4%
FIGURE 11:
M&A dominated by Core
FIGURE 11 Nothing new here. As with every year
we’ve analyzed, the overwhelming majority of
transaction value (right) and transaction value
premium (left) flows to Core biotech. Note that
by dividing the Total Value by the Premium, we
see that the average premium of public biotech
acquisitions in 2024 was over 100%.
SOURCE: Bloomberg, FactSet, RA Capital
TV:
TOTAL VALUE
FOR 2024
$26.8B
CORE:
97.2%
TVP:
TOTAL VALUE
PREMIUM FOR 2024
$12.9B
CORE:
97.4%
PART 2: Core Biotech’s DéJà Vu Year
Semper Maior:
How we pump up the candor January 2025
page 31
So why weren’t there any >$5B acquisitions? Some argue that the FTC was an impediment.
Their thinking goes that the FTC will now revert to being reasonable, allowing larger M&A to pick
up. Personally, I don’t think that FTC concerns explain the lack of M&A in the $5 – 10B range. Larger
deals, sure. Large commercial companies with big, mature pipelines can be tricky to absorb,
especially if the FTC suspects foul play in every drug the acquirer plans to cut from the pipeline.
But a lot of $5 – 10B acquisitions are for small companies with a single very promising drug and
a small pipeline, and even the recent FTC probably would have likely allowed most of those
through (though, yes, any uncertainty serves as deterrent to deal making). Maybe we’re just
seeing some random bunching of deals. If a couple of the bigger deals that closed near YE23 had
been pushed out a month or two, it would have smoothed things out a bit. Calendar years are
arbitrary time periods (time is a flat circle, right?). The longer we go without a >$5B acquisition,
the more existing Core companies execute and grow, and the more likely it is that we’ll see those
bigger acquisitions in 2025.
The real impetus to buy stems from the fact that strategics need to replace the $350B of revenues
they are losing, according to Stifel, in the next five years2.
2 Biopharmaceutical Outlook for 2025, Stifel Healthcare, January 7, 2025
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
2.2
1.9
2.92.9
4.0
4.4
3.6
3.3
2.6 2.6
3.5
3.33.3
4.3
5.3
4.2
3.0
3.7
3.2
2.9
2.4 2.6
UNIVERSE CORE
FIGURE 12 shows Years of Strategics’ Free Cash Flows needed to acquire the whole Biotech Universe or the Core subset for
a 100% premium. We’re not doing this to suggest that strategics would or should acquire all biotech companies for a 100%
premium; that would be silly… it should be a 200% premium. Okay, no… we’re just doing this to show how small the target pool
is relative to the cash flows that acquirers generate. We’re not even counting all the cash that strategics already have on their
balance sheets. Because this was created as part of a different historical analysis that predated the Semper Maior series, it is
based on data that exclude companies <$50M in market cap (and it’s a ton of work to redo going back to 2016), but this impact
of this is so tiny that it doesn’t change the results anyways.
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 12:
Years of Strategics’ Free Cash Flow to Acquire Smid Cap Biotechs
With a 100% Premium
PART 2: Core Biotech’s DéJà Vu Year
Semper Maior:
How we pump up the candor January 2025
page 32
Notice that the growth of Strategics’ FCF will cause the ratio to drop to a 10-year low by the end of
2025, which will be exacerbated by natural attrition of biotech companies due to failure as well as
graduation (turning profitable, exceeding $10B in market cap) and acquisitions. We think what’s
more probable is that Core will continue to re-expand, which may come from more companies
going public and/or remaining companies gaining valuation, and, to some extent, financings.
As a parting gift, we looked at the performance of companies that were Core and Peripheral at
the end of 2020 to see how they fared through the downturn. We had to consider whether to
just lock them in at their YE20 weights or rebalance for their market caps every year. Turns out,
it hardly matters.
A reality check on the health of our sector
You’ve made it to the end of this edition of Semper Maior, and you’ve probably already gleaned
what I’m about to say.
Compared to the resources and needs of Strategics, Core Biotech is small, well-funded, and has
a modest-enough burn rate that funding the Core companies that merit continued funding isn’t
challenging. We may still have some policy dragons to slay and we certainly need to do a better
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
-37.4%
-11.8%
-71.7%
-36.3%
-65.4%
-35.9%
Core Peripheral
REBALANCED BUY AND HOLD
YE20 REBALANCED BUY AND HOLD
YE20 XBI IBB
FIGURE 13 shows that you could have bought a market-cap weighted basket of Core Biotech at YE20 and just forgotten
about and it would have performed essentially the same as if you rebalanced the basket annually. Rebalancing for market
cap changes is hardly a difficult exercise, but it does reflect at least some “active” management. To see what little difference
rebalancing made over four years is interesting. Doing fundamental analysis and stock picking takes a lot more work and
definitely can make a difference .
SOURCE: Bloomberg, FactSet, RA Capital
FIGURE 13:
Market Cap Weighted Basket Returns
PART 2: Core Biotech’s DéJà Vu Year
Semper Maior:
How we pump up the candor January 2025
page 33
job of educating the public about the economics of innovation, but the biotech sector is in good
health.
Meanwhile, science and technology keeps working. The economy is strong. For all the pessimism
out there, the reality is that humanity has never been wealthier and therefore more desirous of
what we offer. Our work gives people back their lives, their time, their joy. As long as the world
doesn’t misunderstand where such wonders come from – how they make it possible with a
combination of their savings being invested to create profitable medicines and their insurance
premiums making profitable medicines affordable – there will be a need for our ecosystem to
perform its wonderful alchemy, turning science into medicines into joy.
Valuations rise and fall and rise, that’s a natural consequence of the world coming to terms with
how much it values what we do. But make no mistake. Amidst the large and to-be-expected
number of biotechs that struggle are the companies that are thriving, are well-capitalized, have
access to more capital, and are destined to change the future of medicine and all our lives. Their
success isn’t some lucky anomaly – it’s exactly what we expect to happen when we take a portfolio
of risks on science.