Financing conditions turned difficult in 2022 across all sectors of the economy, but investor pools for healthcare and life science start-ups have yet to dry up. Nick Herbert talks to Edward van Wezel at BGV
Many of the conditions that caused volatility and uncertainty in the financial markets during 2022 – geopolitics and inflation – remain largely in place for 2023 at the very least. The fall-out: capital raising in the public markets became difficult and expensive, and company valuations fell. Liquidity, however, appears to be less of a problem for promising early-stage biopharmaceutical firms.
Van Wezel, managing partner at BioGeneration Ventures (BGV), comes from a biochemistry and biochemical engineering background. He started his career as a process engineer for Chiron and subsequently worked in project management and licensing at Johnson & Johnson. From 2000, he decided to broaden his experience on the entrepreneurial side of the industry, taking on CEO roles at several life sciences companies in the Netherlands.
In 2006, van Wezel teamed up with major European life sciences VC, Forbion, to address early-stage biopharmaceutical opportunities. BioGeneration Ventures was formed as a JV with Forbion.
‘Forbion asked if I would be interested in helping them set up an early-stage operation,’ he said. ‘There was a lot of interesting science being generated, but there was little opportunity to translate that science into a commercial venture. The quality was not there to attract later-stage investors.’
Forbion wanted to make funds available to these early-stage companies, with the notion to stand as an investor across the entire investment cycle.
‘Forbion wanted to build firms from scratch in order to create a broader set of opportunities for the future.’
Fully funded
BGV manages over €250m over four funds and is currently investing out of its fourth fund, which is €140m in size. It guides companies along the path from scientific discovery to product development, with BGV shaping the companies towards an exit. As the company has developed, the strategy of investing in innovations that address a significant unmet medical need has remained intact, but its geographic focus has widened to encompass most of Europe. A small percentage of the portfolio sits outside the continent.
There is also a pre-seed funds managed by BGV through FIRST, which finances pioneering scientists in The Netherlands active in the emerging fields of regenerative medicine and cardiovascular diseases. FIRST was founded by the Dutch CardioVascular Alliance and Regenerative Medicine Crossing Borders with support of the Dutch Ministry of Economic Affairs and Climate Policy.
BGV’s team of eight source deals from university tech transfer offices, institutes and pharma companies ‘to see if they have interesting assets we could take on,’ said van Wezel. ‘We’re part of a large network in Europe and people know how to find us. It’s how we get most of our deal flow.’
As well as a potential source of assets, pharma is the most likely avenue for an exit. ‘We talk to them about what they’re looking for and what they see as new interesting trends. We try to adjust our search for new opportunities based on that information.’
Liquidity crunch
As the economic and political landscape took a turn for the worse in 2022, rising inflation and the corresponding interest rate response from central banks created volatility in equity and debt markets. Investors shunned public listings and demanded higher rates of return on their lending.
‘It has had some effect on company valuations,’ said van Wezel. But that fall in valuations is not completely attributed to the recent macroeconomic conditions. Much of the move was already underway before inflation began to take hold.
‘We need to remember that in 2020/21 valuations rose substantially ‒ sometimes higher than justified. Companies went public with preclinical assets that five or ten years ago would have been brushed aside by bankers as being completely uninteresting.’
So, while price adjustments in the public markets are having a knock-on effect in the private space, a dip in valuations does not necessarily reflect a loss of interest from the investment community.
‘We feel some pressure on valuations in our portfolio when in discussions for follow-on rounds, but it’s not huge. There are still plenty of possibilities for our companies to raise funds.’
A lot of investors still have deep pockets and there is plenty of money still needing to be deployed from funds raised during 2021 and 2022.
‘If we can present investors with opportunities of great quality they will certainly be interested.’
Future finance
While there is still quite a bit of cash around looking for opportunities, whether fund raising in subsequent years will be as easy is debatable. ‘We sense that the market may be getting a bit more difficult, particularly as institutional investors have readjusted the way they look at this particular asset class, based on the fact that their public portfolios have been significantly impaired.’
Without the support of institutional investors, raising funds is likely to become harder, but investment is not expected to dry up completely even if there is a further deterioration in macro-economic trends.
‘In healthcare and certainly in healthcare VC, the economic climate has less significance since there is ongoing demand for innovation. If you have a really worthwhile product that can have a positive impact on patients, then there will always be parties out there willing to invest.’
And having been active in the industry over more than one economic cycle, van Wezel is sanguine about the prospects in early-stage VC investing. As opposed to the landscape turning negative: ‘It may create further opportunities for those that have money to deploy,’ he said. ‘The next few years may actually be quite an interesting investment opportunity.’
That said, cheap money is unlikely to be as widely available.
‘It may not be easy for a company to refinance in the future,’ concedes van Wezel.
‘So, as an investment manager, you really need to work with management teams to make realistic plans around a reinvestment strategy.’
Investor sentiment is set to be tested, with BGV looking to raise a new fund later in the year. It is already adapting to the new economic environment by expanding its network, collaborating more closely with the whole medical and healthcare innovation ecosystem – competitors, universities, pharma companies, venture partners and service providers. Van Wezel remains optimistic.
‘I think there is a big opportunity staring us in the face over coming years,’ he said.
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