How does the biotech aggregator model support the development of life sciences technologies?

Firstly, the high failure rate of drug development is key to understanding: 99% of things that look good in an in vivoefficacy model fail to get FDA approval, and even 90% of drugs that are brought into clinical development fail. Taking sound scientific ideas and shepherding them through to success is challenging as technology alone is not enough to get new treatments across the finish line. The key is applying expertise and discipline in the early stage of drug development and research from well-seasoned developers who have a track record of hands-on operationalexperience. We leverage our experience to fund development and play an active hand in the strategic and operational execution of our investments. It is about bringing that best practice expertise to each of our investmentsas they navigate the thousands of decisions they need to make.

What is your outlook for seed, existing, and later-stage investments?

One strategy we have in our Perceptive Xontogeny Venture (PXV) Fund is continuing investment in Xontogeny-seeded companies. For example, we were the first to invest in Peroxitech and Tellus Therapeutics, where we de-risked the programs through well-designed and executed preclinical studies and refined the overall development path. The founders were able to recognize the value created as development partners beyond capital investment, which led to a strong partnership and the ability to step up the company valuation before the Series A round. That first strategy creates a natural pipeline for PXV.

What represents a change since 2021 when we closed PXV Fund II is that we are getting invited to participate in syndicate investment rounds led by other VCs. Because the IPO window has slowed down considerably, crossover investors have focused more on their public equity investments as opposed to private equity. Consequently, there are more opportunities for firms that cannot go public in this environment but that still need private equity. We are not only seeing Series A rounds but Series A extensions. That means that many of these programs are advancedclinically, but valuations have come down, so they are compelling investment opportunities.

How do you assess the current regulatory environment in the US?

The FDA is currently trying to encourage flexibility in the type of data they will consider through the use of real-world evidence and patient-reported outcomes, along with their willingness to discuss endpoints of understudied diseases for which there is no precedent. This is good for the industry. The industry often focuses on where the FDA adds a burden to a program. For example, Project Optimist requires more dose escalation in cancer therapeutics, which adds cost, time, and complexity. Their position on less animal testing is a good thing, but the replacement methods such as in-vitro screening are hardly going to give enough information to bio-firms to de-risk their programs. The alternative replacements to animal studies are not yet ready for primetime. I remain positive as the FDA is getting more open to being a better collaborator with the industry.

How do you see 2023 unfolding for biotechs?

I believe 2023 will look similar to 2022 with more realistic valuations, fewer early-stage IPOs, and fewer total deals. It is healthy for the industry as we had a period of exuberance. In 2023, we will see more companies reducing the workforce and extending their cash runway to survive to more meaningful data inflections. The market likely has hit its bottom, so I don’t see a negative scenario, but I don’t think we are ready to rebound to the levels of 2019 and 2020. I don’t expect a strong growth period for the sector to begin until 2024, at the earliest.

What will be the focus for Xontogeny and PXV in 2023?

We will be hyper-focused on providing strong strategic guidance and operational support to our existing investments. Following a long period of significant investment in early-stage firms, our industry needs to allow existing investments across the industry to mature and show signs of success before driving a large number of new investments in preclinical-stage projects. As such, Xontogeny will slow the pace of seed investments and our PXV Fund will skew toward investments at, or near, the clinical stage.