Understanding the Foundation for 2023's Biotech Slowdown: Weathering Today's Perfect Storm in Biotech Equity
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A perfect storm is often described as a particularly critical state of affairs resulting from the convergence of negative factors. In terms of the biotech public equity market, events starting well before recent interest rate hikes have contributed to what experts call the perfect storm for the industry.
The biotech market was overheating for years, and a search for returns drove investors to take more and more risk. Even when the pandemic shaped industry activity, that did not stop.
"From today's perspectives, looking back at the large amounts of capital raised and sector share performance during COVID-19, the lack of underlying growth in the biotech industry can be easily overlooked," says Ali Pashazadeh, founder of Treehill Partners. "A good portion of the sector stood still during COVID-19 from a clinical development perspective as priorities and activities were reviewed against ability to execute under pandemic restrictions.
“Despite the slowdown stemming from COVID-19, from a macro perspective interest rates remained low and investors' appetite for risk continued,” explains Pashazadeh. “The industry continued to see preclinical stage companies going public and raising hundreds of millions of dollars, based on data sets that would in earlier years not have allowed to go public yet.”
This has led to a new level of scrutiny among investors.
"Today, investors are looking for more and more validation. Any blip in that validation may lead to a loss in confidence," explains Keith Ruark, Senior Vice President at Syneos Health. "Today’s markets rarely afford any mercy or a second chance. And valuations below a few hundred million dollars make it hard for any company to raise the 50 million or more they may need to achieve their next inflection point.”
“The key issue is that many emerging biotech companies are too far from generating data driving value for investors, leaving them out at sea without enough fuel to return to shore over the next two to three years,” says Ruark. “Many companies do not have the luxury of time.”
“The market will come back, but when it does there will be lots of competition from hundreds of companies trying to raise money at the same time," says Ruark. "Even if the market came back at 8 a.m. tomorrow, it'll take months before anything has returned to normal." For emerging biotechs, weathering the storm requires the ability to shore up resources and funds now while building a value story that will stand the test of time.
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Founder | Treehill Partners
Senior Vice President, Strategic Business Development | Syneos Health