During a casual game of poker in the early 80s, two former Bank of America employees discussed the lack of a financial institution to support the growing Silicon Valley tech startup scene. The two leisurely poker players, Bill Biggerstaff (Wells Fargo Executive) and Robert Medearis (Stanford Professor) turned their idea into reality in 1983, marking the inception of Silicon Valley Bank. 35 years later, they reached $100 billion in deposits, and only a year after that they crossed the $200 billion mark. During this span, they gained the reputation of being the friendly, progressive bank for tech startups, venture-backed or not. On March 10th, 2023 the bank collapsed, making it the largest bank failure since the financial crisis in 2008. Panic ensued, however, it was short-lived as the Federal Deposit Insurance Corporation (FDIC) stepped in.
An initial guarantee was made for customers for up to $250,000, leaving larger accounts guessing. Eventually, the US Treasury and Federal Reserve assured that all depositors would be fully protected.
Despite the guarantee from the Federal Reserve, the crash of Silicon Valley Bank has left the realm of biotech startups in disarray. Life sciences organizations made up 12% of SVB’s deposits (~$21 Billion) and it’s estimated that 50% of venture-backed life sciences startups elected to bank with SVB since 2021. This $21 billion in deposits represents 6% of the funding totals that the global biopharma sector received between 2021-2022. In the US alone, it represents ~10% of the $209 billion worth of funding in the same time frame. There are more immediate concerns among biotechs that were clients of SVB but the life sciences market is bracing for the downstream effects that will surely surface.
In an already murky economic environment, the events of the last few weeks feel like salt being thrown into the wound. After an intense period of growth fueled by the pandemic, investors exercise added caution, especially towards riskier assets. The question is, will other bank collapses lead to a similar outcome?
The challenge at hand is the increasing difficulty for life sciences organizations to acquire capital. SVB was an attractive lending partner for startups thanks to their more manageable rates and willingness to work with emerging tech companies. For the moment, we can only speculate until a buyer emerges for SVB or another bank steps in.
Biotechs who dealt with SVB will have to search elsewhere and they’re unlikely to receive the same leniency they previously benefited from. Other banking entities will probably hike funding thresholds, raising the bar for entry, especially for smaller organizations. This would make creating and growing a new biotech company considerably more expensive. Down the road, we might observe fewer startups emerging and more of the existing ones going under, not an attractive combination for VCs looking to invest.
The emerging biotech space is brimming with promising, novel therapeutic assets. With ongoing financial turmoil, the loss of a popular lending party, and heightened VC caution, does this open the door for established pharmaceutical companies to swoop in? Emerging biotech and pharma organizations don’t have the same resiliency as large pharma, which are equipped with cash-plated suits of armor. While 2023 was not forecasted to be as active as 2022 & 2021 for M&As, we might see more action than anticipated.
Pfizer’s colossal $43 billion acquisition of Seagen, just days after the collapse of SVB, was the largest biotech acquisition in 3 years. Market volatility has increased the demand for loans, while the cost of lending for banks and VCs also increases, calling for added caution from both parties. Not really what cash-starved startups need right now. All of the sudden, it’s beginning to feel like the perfect storm is brewing for M&A activity.
Collateral damage from the squall may leave emerging biotechs more vulnerable to pharma giants to acquire them at a discount. Whether or not this is an opportunity for commercial pharma is unclear. For the time being, large pharma will exhibit similar levels of caution that we’ve been seeing from lenders until there’s more clarity on the long-term impact of bank collapses and the looming recession.
Public companies are required to disclose their ties with SVB, private borrowers can decide whether or not to inform investors. It’s important to take this into account when assessing the damage because we don’t have the full picture yet. On the flip side, an interesting observation made in Zymewire was the number of emerging biotechs publishing statements to inform investors that they did not hold cash deposits or securities at Silicon Valley Bank. You can find these companies here.
The majority of events in Zymewire tied to SVB were of this nature, disclosing little to no exposure to the events in early March. While the immediate effect on those who were exposed to the crash was minimal, in the midst of the chaos this precautionary move was widespread. CROs & CDMOs were glad to see that their biotech partners still had the capacity to pay them.
The role of the outsourcing partners will be monumental in the months to follow. While all this doom and gloom around emerging and stealth biotechs may trigger CROs & CDMOs to steer clear, in reality it could be the perfect runway. The need for some form of support will be at an all-time high and with money being hard to come by, outsourcing clinical research and manufacturing could serve as an alternative. The reduced risk, economic benefits, expertise, and added nimbleness that comes with outsourcing portions of clinical trials could be even more enticing for biotech startups in the near future.
186 banks are perceived as being at higher risk of failure than SVB ever was. Additionally, Goldman Sachs recently raised the recession odds from 25% to 35% with heightened near-term uncertainty. While we can’t predict upcoming events with complete confidence, we can piece together what the future will look like to inform our own present-day strategies. Perhaps more importantly, we can use this information to consider how our partners, clients & prospects in the life sciences space will adapt.
On a similar note, we published an article dissecting how emerging biopharma companies fit into a recession, check it out. Thank you for reading!
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