Equity capital markets - Healthcare: Q2 2022 review

Kevin Davies, Head of Healthcare Investment & Corporate Banking, and Stephen Roney, Head of Healthcare Equity Capital Markets
Kevin Davies, Head of Healthcare Investment & Corporate Banking, and Stephen Roney, Head of Healthcare Equity Capital Markets
July 7, 2022

The five stages of grief: denial, anger, bargaining, depression, acceptance.

As Q2 comes to a close, I feel like we are finally in the acceptance stage as it pertains to the biotech tape. Acceptance allows us to take measure of where we are and to contemplate a path forward. So – where are we? The XBI has tested the low 60 levels twice. We are 65% off the high water mark. Bear in mind, when the genomics bubble burst in 2001, we dropped 75%. If you examine other biotech downturns, they tend to last about 7-30 months. We are currently in month 16. Almost 70% of SMID cap biotechs are now trading with market caps less than $200m. 25% of biotechs now trade with negative enterprise value.

The above has clearly had an impact on issuance. IPO activity has dropped by 84% when compared to the same period last year, while follow on activity has dropped by 78%.

Peter Kolchinsky from RA Capital has accepted where we are and has laid out a path forward. His advice to biotechs – both public and private:

  • Preserve cash and focus only on your core R&D
  • Consider partnerships and synergistic M&A
  • If you are not a merger candidate and your program is not viable – consider returning cash
  • If you are trading below your dissolution value, buyback shares to consolidate ownership amongst your true believers
  • If you need to raise – do price discovery – find a clearing price and move on.

Peter presented this path forward on June 9. We view such an event as a sign that we are in the later innings of this onslaught. When a marquee investor like RA feels compelled to grab a torch and try to lead companies through the darkness, it signals to us that investors and issuers are coming to terms with the reality of the tape and the potential paths forward.

IPO Recap

Hillevax was able to get public by standing on the shoulders of existing investors. The Phase II novo virus vaccine developer plans to use its IPO proceeds to further development and to fund a pre-IPO convertible bond that it sold last year. Hillevax has a stellar list of supporters in Frazier, Deerfield, Lightspeed, Takeda, RA Cap and others.

Similarly, PepGen became a public company after being gently nudged from the nest by RA Capital into the net provided by…RA and other existing investors. PepGen is financing its early-stage pipeline of Duchenne muscular dystrophy (DMD). The brutal tape that they launched into required a downround from its crossover, which was executed in July of last year. Additionally, they were compelled to price their IPO below their initial marketing range of $13 - $15 (priced at $12).

Follow-On Recap

We saw 23 follow-on transactions in the 2nd quarter. I will highlight a subset but the themes are largely consistent with those of the first quarter. The majority are wall-crossed to ameliorate naked exposure to this tape. The high preponderance of pre-funded warrants signals the heavy dependence on existing investors. Many of the follow-ons were in keeping with Peter K’s advice above….discover your clearing price…raise…and move on.

Selecta (SELB) raised $38m in an offering that was composed of stock and warrants. The company issued 27.4m shares. With each share an investor received 1 warrant entitling them to purchase 0.75 shares at a price of $1.55 (a 10% premium to the public offering price of $1.41 and almost a 20% premium to the $1.30 last sale before the offering. One of Selecta’s principle shareholders (TAS Partners) supported the trade by purchasing almost 25% of the issuance. Selecta joins Geron and Sellas Life Sciences in raising capital by combining stock and warrants to attract investors. While this may be less than appealing from an issuance standpoint, Selecta is now in a position to continue to focus on more elegant therapies that treat disease while avoiding unwanted immune responses.

Nkarta (NKTX) was able to seize upon a 140% run in their stock price to raise capital. The stock spiked on positive Phase I readouts for two of its cancer-killing CAR-T drug candidates. After de-risking the transaction via wall cross, NKTX took only a 20% concession (not a bitter pill given the doubling of the shares post data) to price an upsized transaction. They took the trade from a base of $150m to > $200M.

Chinook (KDNY) Therapeutics also successfully tapped the market. Fresh from a conference in Europe, the kidney disease platform launched an oversubscribed offering (via CMPO). They marketed $75MM at launch in a range of $13.50 - $14 off a $15.11 closing price. The transaction was priced at the upper end of the range – but did require pre-funded warrants to accommodate existing investors.Wave Life Sciences (WVE) executed a $70m Registered Direct. Like the above – the use of pre-funded warrants to accommodate the support of existing investors.

Belt Tightening and Alternative Capital

Several companies took the “Preserve Cash” advice to heart and have undergone restructurings. Praxis, Athersys, Applied Molecular Transport. Agios, Spero and Solid Biosciences are just a few that have gone through the exercise of reducing staff and trimming pipeline.

Others have tapped alternative capital sources and strategic partnerships to advance their R&D. Dragonfly, Molecular Partners, IGM, Repare, Centuray, Exscientia, BridgeBio and Stoke are just a few.


Finally, we are starting to see some more meaningful M&A. Pfizer, in an effort to address the significant increase in migraine episodes associated with current market conditions, is buying BioHaven. BMS is in the process of augmenting its oncology suite by purchasing Turning Point Therapeutics. Merck may have a similar goal but on a larger scale. They are currently courting Seagen (SGEN) and, should they obtain this prize, much needed fresh capital will be available for the sector. Baker alone may have $10b of fresh powder for the sector. Raising capital if possible, synergistic M&A, belt tightening, alternative capital and significant acquisitions are all therapies that are presently being applied to the current malady. Recovery may not be swift nor linear, but one can make the case that the patient will soon be out of ICU.

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