“It's been, I would say, probably one of the more challenging years of my professional career.” So says Joel Drewry, a principal investor at Versant Ventures who’s been white-knuckling the rollercoaster ride, or Tower of Terror, that’s been the biotech industry in 2023.
“The way that I would describe it is something akin to ever-shifting sands,” he explained in an interview.
Now, as the year wraps up, there’s an “enlightenment,” he says. Another early-stage investor, Julia Moore, described it as a “clarity.” Yaron Werber, M.D., managing director and senior analyst at T.D. Cowen was a bit more blunt: “Capitulation has happened.”
2023 has been defined by a seemingly never-ending cascade of poor market performances and indicators. More than 180 biotechs and pharmas collectively laid off thousands of people, while others shuttered entirely. Private financing dropped substantially. A select few braved Wall Street with IPOs but the vast majority held out hoping for better signals to come. The federal government ramped up its fight against drug prices and the surveillance of biopharma deals.
The industry may have finally reached a bottom, according to Werber.
“You could just see that anything that's launching a product right now is a huge short interest,” Werber said. “These are the kind of deep, deep bear markets.”
But 2023 wasn’t actually all bad news. New treatments for PTSD and schizophrenia could be on the horizon after new drug applications were submitted by MAPS PBC and Karuna Therapeutics, respectively. Eli Lilly’s donanemab rivaled Eisai and Biogen in Alzheimer’s disease, gearing for a potential new entry into the market. And of course, the GLP-1 class has caught the eye of virtually every pharma and the broader public.
Those wins haven’t helped small to mid-cap biotechs that took the brunt of the market downturn. Data from Leerink through the third quarter of the year found that the stocks of 154 biotechs and pharmas ranging from $200 million in market cap to $10 billion have lost at least 20% of their value. Nearly 70% of those companies were biotechs between $200 million to $1 billion in market cap. Three times as many biotechs of that size saw their stocks lose at least 20% of their value than gain 20%.
Drewry said that’s allowed late-stage investors to make virtually free bets on public companies with clinical-stage assets, though such a lopsided value proposition means other new entrants are getting pummeled when they leap onto Nasdaq.
“If you actually look at the math, it's like you're kind of downside-protected,” he said. “Because if you're trading for nothing, then it's all upside.”
Meanwhile, earlier-stage, riskier biotech companies have found themselves with fewer investors willing to bite. Depreciated valuations make M&A deals and IPOs harder to execute, especially if the company clings to a previous valuation.
So even sale prices haven't been overly enticing to investors, says Gbola Amusa, M.D., chief scientific officer at healthcare investment bank Chardan. “One would expect that we'd see better performance coming off the lower base, but that's just not happening yet,” he said.
Still, more and more signs suggest that the window might be opening for IPOs. The Federal Reserve is done raising interest rates, music to the ears of biotechs clamoring for money from investment bankers. The central bank left rates unchanged in December and signaled three potential rate cuts in 2024. In the last month, the S&P XBI, an index of smaller public biotechs, has risen 19% to around $80 per share, the highest level since the beginning of September.
The backlog of companies waiting to IPO has only grown this year, with 129 biotechs having completed a crossover round but staying private as of the end of the third quarter, according to Leerink. Two years ago, there were 72 companies in such a position.
“A return of the IPO market (or more reverse merger activity) will help relieve this backlog—but also likely spur more later-stage private financings, as investors can once again see a path to liquidity in those investments,” Leerink researchers wrote.
Amusa is cautiously optimistic that’s the case, saying that his “bias is towards better performance on the IPO front,” simply because they’ve been depreciated for so long. He added that a benefit to lower valuations that may soon start to manifest is that it allows companies an opportunity to “breathe and perform.”
“And if valuations continue to come down a bit, it sets the stage for better performance.”
Lower valuations of course also bode well for pharmaceutical companies that are on the hunt for deals and acquisitions. A recent report from consulting firm PwC found that total deal value in the pharma and life science sectors totaled $222.4 billion in the 12 months ending Nov.15, a 37% increase from the same period a year earlier.
Leaders in the space expect activity to grow, according to a survey of healthcare and life science leaders conducted by FTI Consulting. Two-thirds of survey respondents said they expect M&A activity to grow in 2024, four points higher than the expectation leading into 2023. AbbVie’s fourth quarter acquisitions of ImmunoGen and Cerevel—the third and fourth-largest acquisitions of the year totaling almost $20 billion combined—certainly help make the case.
VCs not ‘pouring out’ money
The late-stage financing crunch has ultimately trickled down to earlier-stage investments. Data from Pitchbook showed that biopharmas were projected to have raised $24 billion in 2023, the lowest level in four years. It’s a nearly $13 billion drop from 2022, according to the analysis.
That’s been reflected by venture capitalists across the sector. Juergen Eckhardt, M.D., who leads Leaps by Bayer, told Fierce Biotech in an interview that his firm was no longer committed to the financing goal it had set in April 2022, which was to dole out €1.3 billion ($1.42 billion) in funds through 2024. Eckhardt was also recently appointed as head of Business Development & Licensing/Open Innovation for Bayer's Pharmaceuticals Division.
“We have slowed down a little bit with the downturn, as the whole industry has slowed down a little bit,” he said. “Way fewer deals are getting done than used to be and so we are not just pouring out the money.”
Moore, who leads early-stage VC Breakout Ventures, said the kind of investing that was based on the fear of missing out is “non-existent in this market.” Describing Breakout as being a sherpa for early entrepreneurs, Moore said she wants her companies to have 24 to 36 months cash and stick to conservative milestones. She also tries to have a lot of early discussions about how to draw in the next set of investors or partnerships.
“Because that's your next customer,” she said. “You need to know how their reality is changing. You need to know where they're feeling risk or opportunity.”
Ultimately, private investors need the IPO window to open up to see a clear exit strategy. That just didn't happen in 2023. After a record number of biotechs filed in 2021, IPOs fell to just 19 in 2022. There have been roughly the same so far this year, with few if any expected to sneak in before the clock hits midnight on Jan.1.
Drewry described the current ecosystem as “fragmented” and “functionally broken,” noting that the 2021 rush spurred a wave of investors who knew nothing about the industry. Institutional firms will now have to rebuild trust and answer, “what is IPO-able today?”
“I don’t see this ending imminently,” said Eckhardt. “But I'm confident that even in this environment, it does make a lot of sense to make selected, smart investments.”
“This may turn out to be some of the best years where you invest,” Eckhardt concluded.