Biotech startups in Scandinavia have 460 MEUR at hand – but burn is up – and runway the shortest in 3 years

As the market continues to fluctuate and geopolitical issues continue to impact the economy, it’s important to take a closer look at the state of pre-commercial life science companies. At Sunstone, we assisted companies in our portfolio with listings and refinancing, and we’re often consulted on the topic of PIPEs in Scandinavia.Recent data shows that pre-commercial life science companies currently have 460 MEUR at their disposal but burn rates have increased and runway is at its lowest point in 3 years. Among the 73 companies classified as “Biotech Industry” on the stock exchanges in Copenhagen, Helsinki, Oslo, and Stockholm, we’ve analyzed the last three years of 51 pre-revenue companies with a market cap less than 200 MEUR.

Quarterly reports indicate that while the average cash position increased during 2021, cash reserves are now back to pre-COVID levels. Mid-2021 was undoubtedly positive for these companies, allowing them to strengthen their cash positions without significant dilution to existing shareholders. However, the situation has changed drastically as the market has cooled and retail investors have retreated.

Moving into 2023, it will be interesting to see how many of these companies will need to raise funds to maintain their activities. By combining cash positions with the latest burn rates (from public quarterly reports), we see that the average burn rate has increased since mid-2021 and is now higher than burn rates from Q4-2019 to Q4-2020.

As burn rates have risen and cash positions decreased, the average runway of these 51 listed pre-revenue companies has dropped to just 17 months, the lowest in at least 12 consecutive quarters. Since cost of cash is at a high, it seems prudent to reduce costs to accommodate for the climate – but how much can costs be reduced in companies that are in the midst of lengthy clinical trials?

These are challenging times, and it will be interesting to see how companies and investors navigate the coming quarters.

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Sunstone has over the past years continuously highlighted observations and learnings from successes in European biotech. The learnings have consolidated, tuned and verified our current investment strategy.

Sunstone is today primarily an early stage (pre-clinical/phase 1) Series A investor with a strong focus on generating value within the first EUR 50 million spent by our portfolio companies to demonstrate human safety and efficacy – simply because this is where European biotech has generated the best returns in the past 15 years.

We have previously highlighted that with a median return of around 6x per M&A transaction, a portfolio of 15 companies will need a substantial number of successful companies to return a fund 3x! Some might argue that venture capital is an outlier business, where performance is driven by the outlier transactions that return the entire fund rather than the on-average 6x transactions! Everything before and after that transaction just becomes more icing on the cake!

To find and characterize potential fund returners transactions we have studied 71 EUR >50 million M&A transactions from 2010 to 2024 extracted and processed from Pitchbook®.

The figures below show the total transaction values (the bio-$!) (left) and our best estimate of the actual transaction returns (right) subdivided into clinical stages.

In our experience a VC ownership is typically 10-15% and a small to medium sized fund will be EUR 100 to 150 million. Thus, in ballpark figures only M&A transactions above EUR 1 billion can create fund returner outcomes.

When considering the likelihood of achieving post-transactional milestone payments the number is only 8 companies of the 71 (right figure). That highlights the need for an investment strategy that also captures returns from M&A transactions below EUR 1 billion.

An important observation from our data is that only biotech companies sold at phase 2 or later achieve M&A transaction values above EUR 1 billion and a VC portfolio needs to have companies that progress to phase 2, or human efficacy studies, to be exposed to fund returners.

If the combined M&A value from all 71 transactions is distributed by clinical stages (data not shown) 23% of the value originates from preclinical and phase 1 transactions and 36% from phase 2 transactions. Nevertheless, from previous analyses we also know that return multiples before phase 2 are substantially better relative to transactions in phase 2, despite a lower total value.

In summary, an investment strategy embracing early investments with the objective to potentially achieve efficacy results in humans in phase 2 should capture the best of everything.

By no coincidence, this is exactly what we try to do at Sunstone.

And while we wait for the fund returner and enjoy the summer break, we can prep by humming the old Beach Boys hit: “Wouldn’t it be nice”:

Have a great summer break.

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