What Investors Are Saying About Pricing, Confidence, and the Future of Biotech Stocks

Investors are removing money from biotech funds, are being lukewarm on IPOs, and have been doubtful of some startups – but why?

| June 29, 2022

Written by: Rahil Haneef

Biotech stocks have been losing ground for the last 18 months. The story is familiar: after record-breaking leaps in 2020 driven by pandemic-related research, the industry peaked in January 2021. Since then, investors have been removing money from biotech funds, have been lukewarm on IPOs, and have been skeptical of some startups. 

The question is: why? Has the quality of work declined, for instance? Are top minds in tech and medicine moving into other fields? Has the drop-off in pandemic-related development caused this whole sea change? 

Unsurprisingly, these questions are among the most frequently discussed with our clients, as they provide the context within which critical recruitment decisions are made. The same trends that cause shifts in the stock market constrain choices around which industries must be prioritized, which geographies offer expansion opportunities, and what investment strategies are employed, both long-term and short-term. We believe the prevailing sentiment among biotech executives and VC decision-makers is positive. There are three big reasons why. 

Industry or Economy?

First, this is nothing new. Biotech is a volatile industry that is intensely dependent on innovation and requires substantial up-front investment with comparatively high risks. The returns, of course, can be commensurately substantial, as a successful phase III trial can lead to massive contracts for new therapeutics or diagnostics. All of this is well-understood, resulting in predictable investment trends: investors flock to promising biotech firms when the stock market is performing well, looking to capitalize on the industry’s high potential rates of return. When the larger market is in bear territory—as we are now—many firms seek out more stable financial vehicles. The result is an across-the-board drop in biotech stocks unrelated to each company’s prospects for future growth. The complexity of the industry’s work adds to this effect, as only investors with deep scientific expertise can confidently assess the viability of any given company.

Second, that general, industry-wide pattern typically doesn’t reflect specific or well-founded concerns about the industry’s future. It’s a reaction calculated on the broadest possible scale, dealing with entire investment firms’ portfolios. When it comes to particular areas of technological and pharmaceutical innovation, investors are just as enthusiastic as they were two years ago. Digital tech and AI-driven drug discovery, intracellular imaging, liquid biopsies and cancer vaccines, psychedelics, multiomic diagnostics, and dozens of other domains remain highly competitive and richly remunerative. As my colleague noted in his article on Special Purpose Acquisition Vehicles, general conditions of economic instability have caused many industry leaders to hunker down, waiting for a moment when it will be easier to raise funds, take a company public, or make another major change. 

Supply and Demand

The final reason that the VCs we’ve talked to don’t view the industry as being in long-term trouble is that, bluntly, the technologies we’re producing remain among the most important, valuable, and fast-changing in the world. Disease and injury aren’t going anywhere. Neither is the desire for life to be more comfortable, safer, or free from pain or to have control over our health and wellbeing. The problems that biotech firms help solve are just as pressing now as they were 18 months ago. In other words, the industry’s underlying demand for high-quality products and services will always remain strong. 

At the same time, the last decade has seen a dramatic increase in biotech and related degrees being awarded, new companies forming from graduate-level research, and breakthrough technologies in every area of the industry. A stock market downturn measured in months or even years will do little to blunt this massive expansion in the industry’s expertise base, nor will it affect the quality of the underlying science or the allure the field holds for researchers. That is, our ability to generate viable therapeutics and diagnostics is unchanged. 

Predicting the Rebound

We aren’t trying to predict the timing or scale of the coming rebound, but we’re sharing our clients’ confidence that one is on the way. Biotech companies’ work is essential, life-saving, life-altering, appealing, and lucrative. While we recommend that younger companies take reasonable steps to weather the headwinds they face in capital markets, they should not expect the current slowdown to persist forever. We look forward to helping them grow with renewed vigor when the time is right. 

To discuss this topic further, we invite you to contact Rahil Haneef.

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