PEAR - SVB Financial News Could Be Genuinely Bad For Pear Therapeutics

2023-03-13 06:41:05 ET

Summary

• Pear wasn't the fastest cash burner out there, but it was still burning a decent amount, and the SVB blowup is a huge setback to the VC funding environment.
• They have another 6 months before they need more capital. Huge reflexivity risk.
• At least the government are stepping in to make depositors whole at SVB, which should lighten the blow as companies much like Pear had many assets there.
• Since reflexivity goes both ways, if these moves by government are absorbed positively by market, a more stable environment for an equity or debt raise can be expected.
• With the price having cratered more than 40% in the last few days, greater confidence in the state of VC and their associated institutions could mean a large opportunity in Pear.

Pear Therapeutics ( PEAR ) is a company that we've been following since shortly after its public markets debut. We think the company is an extraordinary first mover, but capital market conditions were already bad and have been all but destroyed for VC profile investments like this one since SVB Financial ( SIVB ) just blew up. The issue is how many startups SVB served, there is a risk that Pear is among them, but at the moment this is entirely speculative but has still weighed on the price - moreover regulatory developments render these concerns more moot and should help the stock price on market open.

More concretely, SVB affects the startup financing ecosystem, and this feeds into reflexivity dangers with Pear having about 6 more months of cash runway before problems. Our position in Pear has decayed almost entirely, so we're happy to hold as it's a small portion of the portfolio, but prospective investors must be extremely careful. There is upside in that reflexivity goes both ways. Now is a chance for the regulators to show their competence in dealing with a potential banking crisis 2.0, and if markets respond well to the news of new facilities in place to support depositors of these closed banks, the VC ecosystem could re-rate along with Pear, and create a better environment for financing in 6 months time. Moreover, these banking developments may be the reason for a Fed pivot at some point in the next 6 months, all possible catalysts for a substantial increase in Pear's now-cratered price. Still, the risks remain high as of now.

Note on SVB

The thing to note about SVB is just how many deposits it had from companies that have the same profile as Pear. SVB held substantially business deposits, way above FDIC insurance limits, which is why it's roiling the VC space so badly. It is possible that Pear has assets here, but there's no confirmation. Thankfully, it seems that depositors will be made whole at SVB as the government steps in at several regional banks to avoid panic spreading.

The very real fundamental reason for Pear's latest declines comes from what this collapse actually means for the VC space in general, the conditions of which Pear is quite dependent on in terms of finding more funding. With an SVB loan book facing lots of pretty small scale firms (21% early stage companies), and where venture debt becomes pretty common at later stages or post IPO while companies still burn cash, the fallout from a major creditor going down, responsible for a little less than 1% of the banking assets in the US, is a major shortfall in available funds for VC companies. There is also a feedback loop, which is that going concern risks, endemic to venture, only increase as venture debt dries up, therefore also risking further dry up of venture equity markets, which is the last resort line of capital raising for a company like Pear.

SVB's failure makes it more likely its loans don't perform as venture becomes a highlighted risk-zone for debt markets and hurts the entire VC market.

Bottom Line

This interacts dangerously with Pear's specific situation. The cash burn of Pear remains pretty high, even though they've stopped the development of new products and are only focusing on Somryst and the reSet products. Based on cash balances as of September 2022, they have about 6 months left at the previous run-rate cash burns before they start needing to tap the capital markets again.

Unfortunately, reflexivity will levy its full toll when this happens. The company is down more than 90% from its SPAC price, and the dilution will be very substantial for current shareholders.

The bull case for the products is pretty clear. In our last article we mentioned the incarcerated markets as being a very easy market, as well as generally good economics in terms of winning deals with major payors where prevalence of the addressed conditions by Pear will stretch across those covered lives. But with the major reflexivity risks, which was likely responsible for most of the declines we've seen so far, declines could easily continue at this clip and decimate even new investors at these low levels.

We've been invested since the beginning and have already seen the value disappear, so we are fine with hanging on, but just because the price is low should not be the only reason for new investors to get involved. Still, there are potential catalysts. This might have been the shock to the system needed for the Fed to consider a pivot at some point before Pear has to raise capital. On the other hand, the deflationary shock that allows for the pivot might still come at the expense of the most exposed parts of the markets like the VC ecosystem. Nonetheless, accommodation by government could seriously reverse reflexivity and magnify it in the other direction, and provide an opportunity for better terms in a capital raise as Pear approaches the end of its current rope of cash. A reversion to higher prices from these decimal levels could be a great opportunity for the investors with a very big appetite for risk.

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