Unlocking the Potential of Biotech: Is the Cold Spell Fading?

Biotech stocks have endured a punishing bear market for what seems to be an eternity, making it one of the worst periods on record for the industry.

With limited access to capital and many good companies facing the tough decision to lay off employees or shutter promising clinical programs, the biotechnology industry has struggled in recent years. In response, BioSpace created a layoff tracker in 2022 and it has continued to document job losses for many companies in 2023. This has made it difficult for many biotechnology companies to start up or go public, leaving many talented professionals looking for work amidst the harsh market conditions. Despite these challenges, there are some biotechnology companies that have managed to remain afloat and are striving to make a positive impact- no matter the odds.

Biotech has seen an impressive rise in VCs funding and deals such as partnerships, co-developments and joint ventures in recent years, with double-digit growth between 2019 and 2020. However, this has experienced a steep decline since the start of 2021. Despite this, the industry has still proved itself to be invaluable, as evidenced by the average share price for biotechs increase which was more than twice that of the S&P 500 between January 2020 and January 2021. In 2021, a staggering 152 companies had successful IPOs, with over $25 billion raised in total.

As chairman, president and CEO of Fortress Biotech, I’ve had the unique perspective of experiencing the market volatility of the last year from the driver’s seat. Despite the tumultuous market, our diversified portfolio of revenue-generating pharmaceutical products and development-stage product candidates has enabled us to navigate these uncertain times and remain steadfast in our mission. It’s been quite a spectacle as the industry adjusts to the changes and works to rebuild and recover.

So, What Happened?

The COVID-19 pandemic highlighted several factors that ultimately led to a downturn in the industry. Overinflated investor enthusiasm enabled a number of companies to gain funding and go public, only for it to be revealed that their products were not adequately backed by science or they lacked the necessary progress to succeed. This created an atmosphere of overvaluation among companies that ultimately contributed to the downturn.

The downturn can be attributed to a number of factors, one of the most prominent being the success of our industry in tackling the COVID-19 crisis, which caused numerous companies to suddenly be overvalued and go public without enough foresight or due diligence. This ultimately resulted in a slew of investments built on shaky science and with limited progress.

2021 was an unprecedented year for IPOs, as countless companies took to the public markets with a much earlier development stage than ever before. Although these earlier-stage companies have the potential for great returns, they come with a much higher failure rate than those further along in the development process.

Further, the uncertainty in the global economic environment, combined with the changing of the federal guard in the U.S., created significant uncertainty and caution in the investor community. As a result, these early-stage companies faced a unique challenge when it came to fundraising.

Biotechnology ended 2021 on a sour note, with the S&P Biotechnology Select Industry Index dropping a staggering 18.2%. This performance made biotech the worst performing of the 11 S&P 500 sectors for the year, despite the total return of the S&P 500 Index increasing by 29.4%. If that wasn’t depressing enough, 2022 brought an even bigger shock, with over 20% of the Nasdaq Biotech Index’s 370 companies trading for less than cash – combined, these companies had an estimated $20 billion in cash, yet were worth just $11 billion.

The beginning of 2023 had promised a new wave of optimism, but that hope was shattered by the sudden and unexpected collapse of Silicon Valley Bank (SVB). Though the crash had little effect on the wider market, it was devastating for SVB equity holders, and provoked an even greater wariness in the venture capital community.

The biotech industry still stands strong despite a turbulent 2020, with drug approval numbers rapidly rebounding by mid-2023 as drug development costs start to climb back to pre-pandemic levels. Those who invested in gene-therapy giant Moderna five years ago have been generously rewarded for their risk-taking, having witnessed their investment double or even triple multiple times. Industry pricing remains strong in the U.S., alluding to the promise of innovation and providing the incentive investors need to remain confident in the sector.

Where Are We Now?

Despite the setbacks caused by staff reductions and pipeline disruptions, as well as decreasing IPOs, an optimistic outlook is beginning to emerge. Venture capitalists are increasingly putting their money into privately held businesses, with four such companies announcing VC-backed investments above the $70 million mark in the first half of July 2023. Things are starting to look up – an exciting time for both venture capitalists and privately held companies alike!

Biotech seems to be rebounding slowly, but it has managed to outperform the overall market in July. Investor’s Business Daily reported that biotech had received a Relative Strength Rating of 72, placing it in the top 28% of all stocks in terms of 12-month performance. And experts believe that the future of the industry is bright, as there have already been two biotech IPOs announced in the first few weeks of the second half, indicating that the number of such IPOs may increase in the coming months.

How Do We Push Forward?

The pandemic has not only created tremendous interest in investing, but it has also brought a host of new and complex challenges. As the market continues to be unpredictable, investors must carefully evaluate the underlying fundamentals and long-term potential of companies to make sure they are making the best moves possible. For a truly robust public sector rebound to come about, the IPO window must open once again so that VCs can make substantial investments with real expectations of greater returns. When the sentiment shifts and the market is more favorable, we will start to see a meaningful rebound.

Investing in the biotech sector right now presents an opportunity to reap tremendous rewards. With many public biotech companies trading below their cash values, it is a rare and ripe occasion for tremendous long-term returns. Historically, the biotech sector has demonstrated impressive resilience during economic turmoil—even emerging valiantly from the 2008 Great Recession better off than the general market. Now is the time to capitalize on the incredible science on sale and reap the rewards that come with it.

What Should Investors Look For?

At Fortress Biotech, we are bravely taking on the challenge of investing in biotech companies with clinical assets that have already yielded promising results from completed Phase II or III trials – giving them a greater chance of approval. We believe that such investments provide the highest potential for success, as Phase I trials only have average success probabilities of 10 percent, while Phase II and III have significantly higher chances at 20 and 50 percent, respectively. With our unwavering focus on de-risking assets through these stages, we are paving the way for success in the biotech industry.

Although the biopharma industry is still in a period of stagnation compared to its pre-pandemic glory days, the time is right for savvy investors to take advantage of this opportunity. As the saying goes, “Patience is a virtue, but hustle pays off in the end”. Investing wisely in this sector now could result in lucrative rewards in the near future – so don’t hesitate, seize the opportunity!

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