Biotech has suffered severely during the longest bear market in recent memory, prompting investors to re-examine their portfolios and consider alternative strategies.
The biotech industry has seen its fair share of suffering this past year, with BioSpace’s layoff tracker painting a dismal picture of job losses in the hundreds for dozens of companies. Though some have gone public amidst the chaos, most have been forced to make difficult decisions to shut down promising clinical programs and let go of employees in order to survive in the unsympathetic market. As we wait with baited breath for a return to prosperity, let’s remember those whose lives have been impacted by these hard times and hope that the future holds brighter days.
Biotechs surged to new heights in 2021! With 152 IPOs raising more than $25 billion, the industry demonstrated its indispensability and was rewarded by investors with double-digit annual growth in fundraising from VCs and deals such as partnerships, co-developments and joint ventures. Even the share price for biotechs increased at more than twice the rate of the S&P 500 between January 2020 and January 2021! This was quite a change from the early days of the pandemic, where the industry saw a steep decline.
It has been an awe-inspiring experience for me as Chairman, President and CEO of Fortress Biotech to witness the sector adjust and rebound amidst global market volatility. Even through this period, our business model has remained strong and resilient by leveraging a diversified pharmaceutical pipeline of revenue-generating products and early-stage product candidates. This has allowed us to stay the course and remain focused on mission success.
So, What Happened?
The industry’s progress in battling the COVID-19 pandemic triggered an abundance of overextended organizations and eager investors, which allowed for a host of companies to go public without adequate research or funds. Unfortunately, these decisions ultimately led to the downturn of the industry.
2021 has seen an unprecedented number of IPOs from companies at very early stages of operation: pre-clinical or early clinical. With the failure rate of these companies being far higher than those further along in the development process, investors have been wary this year, with a move of caution from the previous atmosphere of enthusiasm. Contributing factors to the dampening of investor sentiment include the new federal administration, a shaky economy, and the prospect of inflation.
It was an annus horribilis for biotech investors. In 2021, the S&P Biotechnology Select Industry Index plunged 18.2%, while the S&P 500 surged 29.4% higher. This trend of underperformance carried over into 2022, with over 20% of the Nasdaq Biotech Index’s companies trading for less than their combined estimated $20 billion in cash, pushing the entire sector’s overall value down to a measly $11 billion.
Early in 2023, as some started to feel hopeful that the skies were brightening, the market suffered a major blow with the sudden crash of Silicon Valley Bank (SVB). SVB had been the top bank for early-stage biotechs and the venture capitalists that supported them. Though the event had minimal effect on anyone outside of SVB equity holders, it caused even greater wariness amongst venture capitalists.
The biotech industry has seen significant turbulence due to the pandemic, but its fundamentals remain largely unchanged. Drug approvals dropped to 37 in 2022, but have since recovered, with 26 approvals in the first half of 2023. Development costs decreased during the pandemic, but are now back on the rise, reaching $2.3 billion per drug from discovery through approval in 2022. Despite the challenges, the pricing environment for innovation – particularly in the U.S. – remains strong, providing the necessary incentive for investors who, for example, have seen a significant return on their investments in Moderna over the last five years.
Where Are We Now?
Despite the dire situation in the venture capital market, with the large cuts to staff and pipelines, and the abrupt halt of IPOs, there is a faint glimmer of hope. In the first half of July 2023, four privately held companies received a burst of enthusiasm from venture capitalists, who led rounds of investments all above the $70 million mark. This has shown that despite the turbulent market conditions, venture capital’s passion for long-term investments will never waver.
Biotech has been outperforming the overall market and climbing higher in July, with a Relative Strength Rating of 72. This places them among the top 28% of all stocks in terms of 12-month performance. And the analysts seem to agree that the industry will continue on a positive trend, predicting an increase in the number of biotech IPOs in the second half of the year.Apoggee and Sagimet have already announced their IPOs in the first couple weeks of the second half, a promising sign of more to come.
How Do We Push Forward?
The IPO window is essential for VCs to make meaningful exits, but the market’s recent wild swings have made investors more cautious. To fuel a full rebound in the publicly traded sector, sentiment must change and this window must open so that VCs can feel confident investing large sums. The pandemic has spurred new interest in the market, but companies must now be assessed practicaly by examining their business models and long-term potential to truly make an impact.
Biotech stocks have consistently proven to be a resilient asset during economic downturns, such as the testament presented during the Great Recession. Now is the prime moment to invest in biotech, as many companies are trading at significantly lower prices than their cash value, providing extraordinary opportunity for considerable returns in the long run. Get in on this great bargain while it’s here—investing in biotech now is more rewarding than it’s ever been before!
What Should Investors Look For?
The biotech sector presents a unique challenge for investors looking to brave stormy conditions. Despite this, those willing to take the risk can stand to gain from identifying clinical assets that have proven themselves with positive Phase II or III data. At Fortress Biotech, we specialize in precisely this kind of venture — acquiring and furthering those clinical assets that have already displayed tangible results in the real world. On average, a product’s chance of being approved at Phase I is 10%, while at Phase II it’s 20%, and at Phase III it is 50%. This is why our approach is so focused on fostering growing technologies that have already reached later stages of clinical development.
Although the biopharma industry has seen a downturn compared to the booming success of the pandemic era, now is the time to jump in and make investments. After all, while those who wait may get lucky, it is only the hustlers who leave something for the rest! Those who take a chance now on biopharma are sure to benefit in the long run. So, don’t wait around – seizing the opportunity now is the key to gaining future rewards.