Life sciences investor Catalio Capital Management has been on a fundraising tear since it spun out of private equity firm Camden Partners Holdings slightly more than two years ago. If dealmaking continues to founder in a sputtering economy, Catalio will be well positioned to take advantage of declining valuations.
Biotech valuations in the public markets have dropped dramatically since the start of 2022 amid soaring inflation, investor expectations of further interest rate hikes by the Federal Reserve and recession fears. The Nasdaq Biotechnology Index is down 24 percent from early January. That has dealt a serious blow to IPOs in biotech and other high-risk sectors, which are expected to eventually hit private biopharma valuations, whose strength in recent years has been buoyed by sunny exit prospects led by IPOs.
Just as the 10-plus-year boom in biotech was fed largely by a bigger risk appetite among mega-asset managers like BlackRock on the back of low interest rates, the drop in public market valuations “has corresponded to those groups reducing their exposure to early-stage biotech companies,” says Richard Murphey, founder of research firm Bay Bridge Bio, which works closely with VC-backed biotechs and tracks the overall market.
“To the extent that those groups are changing their asset allocations in response to expectations around interest rate environments, then I would say the outlook for interest rates is a big factor in how these biotech stocks have traded, and private companies as well.”
Catalio’s timing on its fundraising could not have been any better. It recently closed on $381 million for Nexus Fund III, beating its $300 million target and increasing its assets under management to more than $1 billion. Its previous funds include Nexus Funds I and II, which closed in 2017 and 2020 for $15 million and $100 million, respectively. Among its other strategies are co-investment vehicles that invest alongside Nexus. Catalio also has one Credit Opportunities fund, which invests in corporate debt and is still raising capital.
The multistrategy life sciences investor makes investments in early-stage and growth companies, with a focus on developing new medical technologies in partnership with a range of scientific entrepreneurs.
Formerly known as Nexus Management, Catalio spun out of Camden Partners Holdings in January 2020 after being established as part of the private equity firm in 2016. Today it has 45 companies in its active portfolio.
Co-founders and managing partners George Petrocheilos and R. Jacob Vogelstein both came from Camden. Petrocheilos served as a general partner at Camden from January 2015 to June 2020, while Vogelstein was a managing partner at Nexus from January 2016 to June 2020, according to their LinkedIn profiles. Both earned degrees at John Hopkins University, with a bachelor’s in financial economics for Petrocheilos and a doctorate in biomedical engineering for Vogelstein.
The firm recently hired Chau Khuong, a longtime partner at OrbiMed Advisors, to be a general partner and serve on the investment committees of its flagship private equity strategy, Nexus, and its credit opportunities strategy, it said in a press release.
Catalio’s latest Nexus fund received significant backing from current Catalio investors and new, global institutional investors, foundations and endowments, the firm said in a press release.
“The strong support we received for our third fund demonstrates the confidence our investors have in our strategy of partnering with the top scientists and entrepreneurs in the world to bring innovative, game-changing, and life-saving therapies to market,” Catalio Capital’s head of marketing, Brandon Matz, said in a statement.
The firm’s partners declined to comment for this article.
In addition to its own portfolio investments, Catalio has had its hand in other high-profile biomedical VC efforts. These include leading Octant’s $80 million Series B funding round, together with Andreessen Horowitz and Bristol Myers Squibb, to accelerate the advancement of precision medicines for complex diseases. It also seeded and co-led the $76 million Series A funding round for cancer-therapy company Pheast Therapeutics. Both funding rounds occurred in April.
Since its launch, Catalio has racked up an impressive 11 exits, including five public offerings and six acquisitions. One big exit came when portfolio company Thrive Earlier Detection Corp was acquired by Exact Sciences (Nasdaq: EXAS) for cash and stock totaling $2.15 billion in January 2021.
Public offerings of Catalio portfolio companies include Atai Life Sciences (Nasdaq: ATAI) in June 2021, Recursion Pharmaceuticals (Nasdaq: RXRX) in April 2021, AbCellera Biologics (Nasdaq: ABCL) in December 2020 and Compass Pathways (Nasdaq: CMPS) in September 2020.
Catalio is flush with capital just as the market is tightening for biotech start-ups. We won’t know how Q2 compares with Q1 until the end of June, but market watchers say they expect to see the numbers come down.
With the exception of a $3 billion deal in January, biopharma venture investment has steadily declined since hitting a high in March 2021, said Murphey of Bay Bridge Bio. He estimated that investment is down 61 percent from March 2021 to March of this year.
“The prevailing narrative in biopharma is that while the biotech IPO market has ground to a halt and public markets have crashed, the private market has remained robust,” Murphey wrote in a recent report. “While the amount of private funding is still near all-time highs, the significant drop since last year means that a lot of recently funded start-ups will have trouble raising their next round.”
The likelihood of scarcity in capital for start-ups could foster a lucrative investing environment for general partners in VC firms who are able to identify companies experiencing challenging financial conditions or that are under valuation pressure but have very strong fundamentals, Murphey said in an interview with Venture Capital Journal.
“It seems like a lot of GPs are not quite at the point yet where they’re going bargain-hunting but are still more in defense mode,” he said. “So it will be interesting to see how the GP universe responds to this in terms of deciding where to deploy their capital – in their current portfolio versus in new companies.”
It’s hard to tell whether there are certain pockets of the private biotech market that may prove more resilient in the face of overall market pressure. Murphey sees companies that have performed well and others that have done poorly across all aspects, from various therapeutic areas to different types of technology focus to different funding stages.
When it comes to M&A demand, pharma companies have been acquiring a lot of biotech start-ups with more advanced clinical products, he noted. That is consistent with what occurred in the wake of the global financial crisis and the dot-com bust, when companies with drugs in later stages of clinical development fared better than those with early pre-clinical platforms. In addition, companies “with a focus on differentiated products to address severe unmet needs” tend to perform best in down markets, Murphey said.
In the first quarter of this year, 27 biopharma M&A deals were announced, totaling $9.9 billion in value for the 12 that disclosed it – versus $34.8 billion a year earlier – with four reaching or exceeding $1 billion, according to a report by Informa Pharma Intelligence. But only three biopharma start-up acquisitions were signed, none of which disclosed their value.
The story is even worse for biotechs IPOs, which are down sharply from the first half of last year. VC-backed bio pharma companies raised a record $12 billion through US IPOs from January through August of 2021, double what they raised in the same period a year earlier, Murphey said in a February interview with Sage Intacct.
But the second half of 2021 slowed dramatically and the market has remained tepid. Roughly $1.5 billion was raised in IPOs for venture-backed biotech companies in the last four months of 2021, which was down sharply from $4.4 billion in the same period the year before, Murphey said.
“There’s this huge supply-demand mismatch, and there’s going to be a lot of companies competing for scarce IPO dollars, and that’s going to have important consequences for the funding strategies for these companies,” Murphey told Sage Intacct.
That competition has only become stiffer as this year progresses, Murphey told VCJ. Last year, when more than $30 billion was invested into biotech start-ups, many of the companies that raised funds did so in the expectation of a quick IPO. But in 2022 “the IPO market has dropped to a virtual standstill,” he says.
“We’re back at levels of IPO volume that we haven’t seen maybe even since 2016 or earlier. The big generalist investors are allocating less fire to IPOs,” Murphey says. “A lot of the crossover investors and hedge funds that support the IPO market are looking at a 50 to 60 to 70 percent drawdown in their public portfolios, so there’s a lot of pain in and around the biotech IPO market. And as you’d expect, the supply of capital toward investing in IPOs has dropped in response to the challenging market conditions.”