Silicon Valley Bank bust slows biotech funding, but the ‘science itself has never been faster’

Silicon Valley Bank made its reputation helping information technology start-ups, and its fastest growth — and speedy collapse on March 10 — matched the biotech bubble of the last few years.

“The easy money was already drying up; this implosion of Silicon Valley Bank will make this community even more risk averse,” predicted Heath Naquin, vice president of the University City Science Center, a West Philly lab and office landlord that hosts incubator and workforce programs for the region’s biotech start-ups.

Silicon Valley Bank’s deposits tripled to $191 billion and loans doubled to $66 billion from 2019 to 2021 — years that marked a peak for biotech investments and initial public stock offerings (IPOs).

Most of the money went to start-up companies and their venture-capital backers, and most of the deposits arrived in sums above the $250,000 limit covered by the Federal Deposit Insurance Corp., forcing a controversial rescue in which the government is forcing solvent banks to ensure those big Silicon Valley depositors get paid.

» READ MORE: From 2019: Biotech IPO frenzy brings some Philly firms into the stock market before they sell products or earn profits

In public reports, the failed bank didn’t disclose how much of its business grew from biotech companies, including the kind of no-product, no-profit idea firms spun off by scientists at research universities in Boston, Northern California, Philadelphia, and other biotech centers in recent years.

But the bank acknowledged in its last annual report to shareholders and the Securities and Exchange Commission that such firms were a major part of its growth and that they had risked “deteriorating rapidly” if business conditions changed.

“I deal with a lot of biotechs that don’t make it,” said Scott Victor, managing partner and cofounder at SSG (Special Situations Group), a West Conshohocken firm that finds new funding or new owners for troubled companies, such as Retrotope, a degenerative-disease drug maker in Los Altos, Calif., and Allena Pharmaceuticals, a publicly traded developer of a gout treatment based in suburban Boston, now in bankruptcy reorganization.

“These are all typical biotech and biopharma start-ups,” Victor said. “They have some science, they have patents, they want to develop into drugs, and it costs a bloody fortune. They raise a lot of cash, and they burn it up testing. Their drugs make it through testing. Or they don’t,” and firms like SSG seeks buyers for what’s left.

With Silicon Valley Bank gone and venture investors hibernating, start-ups “must stretch their funds longer. If they think they have funding for 18 months, it has to last three years,” the Science Center’s Naquin said.

“There will be a lag before a lot of new investments happen,” Naquin predicted. “And when they do, expect that valuations will be lower. Prices were already dropping before the bank got into trouble. And some deals won’t get done.”

Meanwhile, the University City Science Center is urging tenants to pay more attention to legal agreements and cash-management practices. “Let’s get back to the fundamentals before our next fundraising,” Naquin said.

» READ MORE: What killed Silicon Valley Bank, and who will cover its losses?

As federal regulators decided to bail out Silicon Valley Bank customers on March 12, Naquin was part of a panel discussion called “What happened to Early-Stage Capital?” at the yearly South by Southwest tech-themed festival in Austin, Texas. When attendees confessed connections to various uninsured funds in Silicon Valley accounts, he came away impressed by the bank’s reach, which was from Boston to San Francisco.

“As far as we are aware, our portfolio of Penn-affiliated start-up companies experienced fairly modest exposure to the SVB banking crisis,” said Laurie Actman, a spokesperson for the Penn Center for Innovation, which helps Penn medical school professors and their colleagues turn their lab discoveries into businesses.

A few local companies that did most of their banking at Silicon Valley were “working very hard over the past week” to spread the risk, she added, expressing gratitude for the government-led rescue.

Biotech firms, in particular, were borrowing from venture investors though Silicon Valley Bank to fund capital investment in lab and manufacturing facilities, said Jeff Marrazzo, former chief executive and cofounder of Philadelphia-based gene-therapy pioneer Spark Therapeutics, which he sold to Roche in 2019.

So, with the bank’s collapse, “the single thing I’m most concerned about” is higher facility costs, he said. “It’s possible that the number of options for banks that would lend to start-up biotech for their facilities shrinks,” driving up the firms’ costs while they are already under pressure.

The threatened withdrawal of money to build labs has biotech advocates increasing their efforts to prod Pennsylvania Gov. Josh Shapiro to help subsidize or finance labs for start-ups.

“Pennsylvania should commit to a bold strategic vision that will jump-start Pennsylvania’s innovation economy and safeguard our start-ups,” said Tiffany Wilson, who heads the Science Center.

Marrazzo said: “The state can and should play a role in helping build the physical infrastructure of manufacturing spaces, so biotech companies that raise expensive capital can spend it all on research and clinical trials and hiring great scientists.”

Once built, labs make the region more attractive to biotech people, whether or not their initial occupants succeed, he noted. He cited the example of Tengion, a company that borrowed from venture capitalists to build a factory near Norristown for its synthetic bone-growth products in the late 2000s.

After that business went bankrupt, the space was taken over by Penn professor Carl June’s Tmunity, a gene-therapy development company. After Tmunity suspended a key trial following the deaths of research subjects, the space was then leased to a third company, contract biomanufacturer Resilience.

Similarly, in leading biotech centers such as Cambridge, Mass., and South San Francisco, Marrazzo said, “There is tons of stuff available to sublease from all the biotech companies that are going under and disappearing.” He noted that many Boston-area labs were built and staff trained with proceeds from a state bond sale targeted at expanding biotech employment.

But in the City of Philadelphia, “we don’t have a lot of extra lab supply,” he said. His own company, Spark, had to use venture investor dollars to build its West Philly labs.

“Biotech companies are all about how much cash you can raise and what you can accomplish before you burn it all,” Marrazzo said. “If you have to spend it on space or equipment, you have less to spend on experiments.”

Even if the financial slowdown is hurting investor attempts to profit from biotechnology, Marrazzo said bioscience itself continues to advance. “The best example may be gene editing. CRISPR machines were first developed 15 years ago. The first CRISPR-based drug will likely be approved this year. But in the past three years, the pace of science has moved far beyond — now we have prime editing, base editing, epigenetic editing.”

Commercial applications “may progress in a smaller number of start-ups. Less-strong companies in the same area may not get funded,” he said. “But I am optimistic because the pace of science itself has never been faster.”