The biotech industry continues to be in something of a “hangover period” where everyone realizes that there was “probably just a little bit too much enthusiasm” in circa 2020 and 2021, said Matthias Kleinz, DVM, Ph.D., executive vice president, translational sciences at UPMC Enterprises, the innovation and commercialization arm of University of Pittsburgh Medical Center (UPMC).
“If you look at hard data in the long run, 2020-2021 was an outlier,” Kleinz said. “If you look at certain types of numbers, you’d probably see that venture financing and other financial transactions in the life sciences space at that time were two, if not three times above where they were on their historical trajectory.”
He attributes this fact to “the realization that there were a lot of really transformational innovations that happened in the 2010s.” Examples of major biomedical advances in the decade include the approval of the first gene therapy in the U.S., widespread clinical adoption of checkpoint inhibitors, rapid development and application of CRISPR gene editing technology, FDA approval of the first CAR-T cell therapies, and advances in next-generation sequencing.
This cyclical nature of the industry is par for the course, as Brian Bock, CFO of COUR Pharma, highlighted: “You see these big shake-outs every 8 to 10 years.” The type of churn the industry seeing now is “evolutionary,” he said. “You get many ‘me-too’ products drafting on innovators. For a long time, the market supported numerous similar technologies, but when capital dries up, it forces investors to pick winners.”
Despite the current biotech hangover, there are some positive signs in 2024. According to the recent article in Nature Biotechnology “Biotech financing: darkest before the dawn,” average venture capital round sizes for biotech companies are at a 15-year high in the first half of 2024. Additionally, total sums raised in biotech IPOs in 2024 have already surpassed the totals for all of 2022 and 2023, yet the pace of new IPOs remains slower than initially expected.
Navigating the post-euphoria landscape
While 2024 to date has been a bit of a disappoint compared to the positive expectations at the outset of the year, there are signs of stability. “If you look at the hard numbers right now, 2023 probably came pretty close to where venture funding was right before the pandemic, and 2024 is trending on a similar clip,” Kleinz said.
The Nature article projects that total biotech venture funding in 2024 could reach $28 billion, a substantial increase from pre-pandemic funding levels in 2019.
Still, many companies are not thriving. The “EY Biotechnology Report 2024” notes a sort of “tale of two cities” dynamic in biotech over the past 18 months. While some companies with valuable late-stage assets have achieved record premiums, others are fighting for survival. EY also notes that the sector as a whole “remains in a Darwinian environment, where survival remains an ongoing challenge for many companies.”
A pinch of reality, a world of potential
Indeed, a string of layoffs and an air of economic uncertainty have characterized the recent biotech landscape. “We’re still churning through many of those public companies that went public during the boom,” Bock said. “Valuations are depressed, making it a buyer’s market for picking winners. There’s a large pool of public biotechs with sub-$100 million market caps and less than 12 months of cash. This is driving reverse merger activity and deal-making.”
Kleinz highlights a shift in investor focus: “I think what people struggle with more is what was really hip in 2020-2021, which are these platform companies where the technology is exciting — you think you’re solving a problem, but the problem is relatively abstract and hasn’t been simplified down to what the product will look like when it enters the market six, seven, ten years from now.”
The timing of the biotech sector’s recovery is closely tied to broader economic factors. “There’s usually an inverse relationship between biotech performance and inflationary or high interest rate environments,” Bock said. “While it’s challenging to see the direct impact, it’s a rule of thumb for many institutional investors to be cautious in these conditions.”
The Inflation Reduction Act has been one source of concern for the sector, given the downward pressure it is putting on drug pricing — with a growing number of Medicare Part D drugs subject to price negotiations over time. Regarding the impact of the Inflation Reduction Act, Bock added: “Anytime there are concerns about inflation, the biotech sector, particularly drug pricing, comes into the crosshairs of legislators. However, much of the cost burden in healthcare comes from inefficiencies in drug delivery logistics, not just drug makers.”
The IPO bazaar
One key indicator of the sector’s health is the state of the IPO market. “The IPO sector has been challenging, but follow-ons and PIPE deals for already public companies have been robust,” Bock said. “At the beginning of this year, bankers were forecasting 25-30+ IPOs, but we’re now on track to close the year just under 20.” This suggests that while new public offerings are slower than initially anticipated, there’s still significant activity in the market, particularly for companies that are already public.
Kleinz adds another perspective on funding challenges: “The funny thing is right now, I think you actually find it easier to raise a seed-stage round for your company than to raise a Series B. Because what you’re seeing right now is there’s still a lot of enthusiasm for early-stage science if you can tell the story of why it matters.”
Green shoots emerging from the biotech garden
Despite these hurdles, there are reasons for cautious optimism. The EY report highlights ongoing innovation trends in the sector: “The pharmaceutical ecosystem’s innovation engines are still thriving, as new modalities and exciting scientific innovations continue to drive the sector forward.” The report also points to a shift in focus: “Life sciences companies are now generating new treatments for chronic disease areas that had fallen out of fashion in favor of rare disease; conditions that impact large patient populations, like diabetes, obesity, mental health, and Metabolic Dysfunction-associated Steatohepatitis (MASH) are all benefitting from an R&D renaissance.”
The EY report goes on to recommend that biotechs “prioritize rigorous cash management and perform a risk assessment of an unpredictable operating environment, focusing on stretching finances between venture rounds to reach the next clinical milestone.”
Kleinz advises startups to focus on clear clinical needs: “Be really clear in terms of what problem you’re actually solving. And it’s not just a technological problem, but it’s actually a clinical problem that you’re solving. I think that will make things a lot easier because that pendulum has shifted.”
Matthias Kleinz, DVM, Ph.D.
Bock offers a perspective on the long road to success in biotech, pointing to Horizon Therapeutics as a case in point. The company “sold to Amgen for $27.8 billion without ever licensing a drug of its own,” as Fortune has noted. “Horizon’s success wasn’t overnight — it took about 15 years to build from a $100-200 million IPO valuation to a $30 billion company.”
“Sometimes you have to pivot,” Bock said. “Sometimes it’s not necessarily the first business plan that succeeds.”
Potential catalysts for recovery
Another potential catalyst for a biotech bounce back is increased merger and acquisition (M&A) activity. The EY report notes that “Big Pharma acquirers are willing to pay high premiums for one simple reason: patent cliffs.” Biotech is poised to continue benefitting as pharma companies increasingly turn to acquisitions to overcome their own innovation challenges.
As for when the sector might bounce back, Bock offers a cautiously optimistic timeline: “I think it will take another 12 months to work through this. Coupled with clarity on interest rates and the outcome of the presidential election, I believe we’ll start to see a more regular, healthy biotech market in the second half of 2025.”
A phased biotech recovery more than a bounce?
EY foresees a phased recovery timeline:
- Short-term (Next 6 months): EY anticipates a shift towards lower interest rates, which could trigger initial improvements in the biotech investment climate.
- Mid-term (2024-2025): The EY Biotechnology Report 2024 report identifies 2024 as a transition year, with some persistent challenges but also signs of hope. A substantial resurgence in financing is likely contingent on sustained interest rate cuts by the Federal Reserve, a process that could extend into 2025.
- Long-term (Beyond 2025): EY envisions a “Biotech 3.0 Era” thanks to continued advances in AI and a renewed focus on chronic diseases. It expects this period to see a return to a healthier investment climate with open IPO windows and stronger venture financing.
Brian Bock
Another factor that could influence the timing of a biotech recovery is interest rates. The aforementioned Nature piece notes that interest rates, which have been rising since 2021 and pulling investors away from risky assets like biotech, now appear to be flattening or even trending downwards in 2024. This shift could bring more investors back to the sector.
Kleinz concludes with a reflection on the changing landscape of biotech challenges: “The new valley of death is not so much coming from an academic idea to starting a company, but it’s more like maintaining a company that is on the path towards turning this academic idea into an actual product development plan. You could think of it like a barbell, right?” There are signs of strength for early-stage entities doing groundbreaking research, and, on the other end of the spectrum, those with valuable assets with strong clinical data. “And there’s basically this thin little part connecting the two,” Kleinz said. “That’s where I see the challenges.”
Filed Under: Biotech
