Good news for the biotech market

After two years of crisis following the 2021 peak, investors are again showing (cautious) interest in the sector.

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A recent survey by GlobalData titled ‘The State of the Biopharmaceutical Industry 2024’ revealed that 44% of healthcare professionals surveyed globally say they are optimistic or very optimistic about the recovery of biotech financing in the next 12 months. This is a brightening of the outlook after private funding for biotech companies declined in 2022-2023.

In 2023, funding fell by 43.2 per cent compared to 2022 and 52.3 per cent compared to 2021, when the sector was hit with a hype that inflated – perhaps beyond measure – the pricing of many of its companies.

According to the report’s data, 607 US-based venture-backed companies are currently affected by the downturn in biotech funding, with more than 1,500 drugs at stake (including pre-clinical). Of these, about a third have not raised capital in the last three years.

The year 2024, however, is proving to be more favourable for biotechs, which are now the subject of cautious optimism.

Signs of recovery

According to an analysis by investment bank Jefferies, listed biotech companies have raised almost $10 billion in follow-on deals in the first two months of 2024. Their research reveals that the sector is on track to reach its highest quarterly funding peak in three years, aiming to surpass the $11 billion mark raised in follow-on deals in the first quarter of 2021.

The average size of funding rounds is also growing, having increased from $167m in January to $191m in February. Overall, in February alone, biotech and biopharmaceutical companies raised more than USD 38 billion.
According to the investment bank, this surge in funding is outlining an ‘industry recovery’.

Crisis after euphoria

The biotechnology sector has come through a difficult period, characterised by a deep financial crisis that lasted more than two years. This situation has forced many companies to undertake significant restructuring or, in the most severe cases, to cease operations altogether.

According to BioPharma Dive, in the last year alone, more than 120 listed biotechnology companies have had to reduce their workforce, with a total loss of at least 10,000 jobs.

The Covid bubble

This crisis, as often happens, actually comes after a period of euphoria – at least for some financial markets – that accompanied the Covid-19 pandemic. During the health crisis, many biotech companies experienced a period of remarkable growth, driven above all by the urgent need to develop vaccines, treatments and diagnostic tests to combat the virus.

Companies of various sizes have received significant public and private investment to accelerate research and development of solutions against Covid-19, and some, such as Moderna and BioNTech, have achieved global notoriety for developing mRNA vaccines in record time.

This success has significantly increased their market valuations, stimulating further investment in the sector. According to the Pharma Intelligence Center Deals Database, during the peak of 2021, venture capital funding for US companies with innovative drugs reached $20.7 billion, a 104% increase, a situation that prompted many early-stage biotechs to go public in the same year with inflated valuations.

A few episodes illustrate well the feverish state of interest these companies were in. Genedrive, for instance, saw its share price rise 280% in a single day on the London Stock Exchange, thanks to the proximity of its coronavirus test production. BioNTech also saw a 60% increase when it announced the start of trials for the Covid-19 vaccine in collaboration with Pfizer.

Moderna, in turn, reached a price of $450 per share in September 2021 while a year earlier it was worth only $15 (+3,000%).
‘However,’ explains GlobalData, ‘this has led to overvalued biotechs underperforming, causing a decline in investor confidence and selectivity of new investments.

In addition, recent challenges such as high inflation, high interest rates and geopolitical instability have pushed investors to become more selective’.

A rude awakening

The awakening after the hangover was indeed traumatic. The Nasdaq Biotechnology Index lost almost 30% in six months, burning billions of dollars in value. Moderna, for example, reduced its price to a third of its highs, and then fell progressively to a low of $70 a share, an overall reduction of 85%.

According to McKinsey’s data, the S&P Biotechnology Select Industry index entered the fourth quarter of 2023 down more than 50% from its peak in February 2021, and only 30 biotechs made an IPO in the first three quarters of 2023 compared to 114 in 2021. Moreover, total funding also dropped dramatically, with only $3.4 billion raised from IPOs in the first three quarters of 2023 compared to $16 billion in the first three quarters of 2021.

Seesaw effect

However, explains Pierluigi Paracchi, Co-founder and Ceo of Genenta Science, just as before, listings were pumped up by occasional investors to the tune of irrational euphoria, now the opposite effect seems to be occurring, in which many biotech companies are trading below their real industrial value and in many cases below the cash they have in their bank accounts.

This is a well-known phenomenon, because market quotations – including share prices – are the simple result of the relationship between supply and demand. Which, as Nobel Prize winner Daniel Kahneman has amply demonstrated, are anything but rational.

We are now seeing signs of recovery, but stock market prices are still far removed from the real values of companies. This is also evidenced by the fact that many financing rounds take place ‘at a premium’ rather than ‘at a discount’. This means that those who buy a large package of shares, instead of benefiting from a price discount, are forced to pay a premium (a premium) to get them.

This is a symptom that the shares actually have very cheap valuations and that the owners of the companies do not consider them appropriate to their real value.