Lessons for Biotech During an Economic Downturn

The State of Biotech and Biopharma Worldwide

Before we can evaluate the biotech ecosystem during the COVID-19 pandemic, we must know what the global biotech landscape looks like from a financial perspective. Different geographic regions have individual biotech hubs that face various shared and unique challenges.

In the U.S., the biopharma industry has been facing a downturn of its own.

Fig. 1: XBI stock prices and VanEck stock prices from March 2021 through July 2022.

• Reduced biotech stock value: From a high of $166.78 per share in February 2021, XBI’s (biotech Exchange-Traded Fund (ETF) stock) value lost 62% of its value to a low of $63.42 per share in a year and a half. Drops in biotech ETF stock values were also observed for VanEck Biotech stocks in the same time frame. Before the fall in stock prices, a record-breaking run of biotech companies provided an initial public offering (IPO) (Gormley 2022). After the boom, these companies were, on average, trading 37% below their IPO price (Smyth et al. 2022).
• Poor-performing special-purpose acquisition companies (SPACs): SPACs are companies formed specifically to raise capital in an IPO (Lenahan et al., 2018). The capital gained from the IPO will then be used to finance the acquisition of one or more businesses after the IPO. The second half of 2021 saw SPAC agreements decline sharply due to disagreements in valuation amid a crash in biotech stock values (LaHucik, 2022). Furthermore, the SPACs that did form in 2021 and 2022 performed poorly according to a recent Locust Walk report (Locust Walk, 2022).
• Decreased venture capital (VC) financing: The VC market, a means for private investors to finance startup and early-stage companies, has also slowed in 2022. There was a 46% drop in VC financing deal values for U.S.-based biotech firms from $7.8 billion in Q1 2021 to $4.2 billion in Q1 2022 (GlobalData Healthcare 2022a). Companies specializing in oncology faced the biggest decline in VC financing with a 67% reduction, according to the same article.

Other problems and concerns are taking shape in biotech hubs around the world within the past year.

• European Union (EU): After a large rise in fundraising by VC firms earlier in the pandemic (Smith 2022a), the EU biotech industry has seen similar reductions in the number of IPOs (Locust Walk, 2022). Additionally, the cumulative value of venture financing deals in the past five years for innovator drugs continues to fall behind the U.S. biotech industry (GlobalData Healthcare 2022b). Brexit has also added to the challenges for the EU, with their exit from the EU’s research program, Horizon Europe, likely reducing the size of the $100.6 billion fund for Europe-based research (Nature 2022, O’Grady 2022).
• China: The biotech downturn looms large in China as well. The Chinese biotech ecosystem, along with the rest of its tech sector, has seen declines in VC valuations in response to inflated valuations, government crackdowns on tech giants, and stringent COVID-19 responses (Zhang 2022).
• Japan: Venture financial deals with Japanese companies continued to rise in 2022, encouraged in part by oversea investors (Smith 2022b). Despite that, the decreasing value of the Yen has led to a decline in the value of the biotech companies listed in the Nikkei 225 stock exchange – the Nikkei Biotech Companies (NBC).

Most of the global biotech ecosystem is seeing reduced private sector funding in some fashion. Characterized by reduced VC funding and lowered market values, the biotech industry faces perturbations that threaten vital medical innovations and growth. While an air of resilience and adaptability courses through the biotech landscape, any economic recession will provide an additional challenge (Winters 2022).

History on Repeat: Comparing the Current Landscape with Prior Crises

Biotech companies regularly face chatter of oncoming recessions (Lerman and De Vynck 2022, Sor 2022). Nonetheless, rises and falls in market valuations through the stock market have occurred throughout modern financing history. Over the last two decades, two notable crises have taken place: the 2008 financial crisis and the 2000 dot-com crash. By comparing the current biotech ecosystem with these crises, we can take important insights that inform us of ways to navigate the biotech industry today.

• The 2008 financial crisis: The 2008 financial crisis began with a crash in the housing market that precipitated a decline in biotech stock valuations. In the wake of the stock market crash, biotech companies saw debt levels rise substantially. This led to 120 biotech and pharma companies announcing restructuring plans or filing bankruptcy (Vandermosten 2020).
• The 2000 dot-com crash: The 2000 dot-com crisis was characterized by an internet tech bubble that burst. The rapid growth of the internet resulted in multiple startup companies seeing their market valuations rise despite many of them not having a proper business plan, product, or track record of profits (CFI Team 2022). Companies became overvalued, entering bubble territory before the bubble burst (Loncar 2021).

The current biotech financial landscape shares similarities with both the 2008 financial crisis and the 2000 dot-com crash. Like the 2008 financial crisis, the decline in XBI stock is taking place amid the war in Ukraine and an ongoing supply chain crisis (Data Evolution 2022). As with the 2008 crisis, global crises have contributed to reductions in VC funding and increased larger acquisitions within the biotech and biopharma industries (Karberg 2009, Zhang 2009). As an investor at a life science VC firm aptly stated.

 

On the other hand, the 2000 dot-com crash highlights the factors within the biotech industry that may contribute to a market valuation crash. Like the 2000 dot-com crisis, the successful development and commercialization of the SARS-CoV-2 mRNA vaccine generated substantial media buzz about the biotech industry. This resulted in the largest number of biotech IPOs emerging in the first half of 2021 (Alvarez 2022). Sixty-six percent of these startups had their medical products situated only in the preclinical or phase 1 development stage (Leclerc et al. 2022). Like the 2000 tech crisis, the current downturn saw biotech startups provide big promises, but no results (Alvarez 2022).

How the Global Biotech Industry Can Navigate the Current Downturn

The current biotech crisis has seen many startup companies lose substantial market value and investors avoid biotech investments. Nevertheless, a deeper look into the biotech market data suggests there is room for optimism. Specifically, the following industries are expected to see long-term market growth due to substantial scientific advances.

• Precision medicines: Precision medicine focuses on providing specialized medications for individuals by examining their genetics, environment, and lifestyle (Centers for Disease Control and Prevention 2022). The ability for companies to develop technologies that process electronic health records, reduce costs in whole-genome sequencing technologies, and develop personalized therapies, is driving the continued growth of this market in the next five years (Imarc 2022).
• Small molecules: The small molecule industry refers to developing medications featuring compounds with lower molecular weight (Ngo and Garneau-Tsodikova 2018). Licensing deals have continued to take place for small molecules, their value totaling $6.8 billion (J.P. Morgan 2022). For instance, Roche agreed to license a phase 2 oncology drug from Repare Therapeutics in a $1.25 billion deal (McCoy 2022).
• Gene therapy: Gene therapies aim to alter a person’s genes to treat the genetic cause of a disease (Center for Biologics Evaluation and Research 2020). Even with the ongoing biotech downturn, 2021 saw an explosion in the number and value of VC deals linked to gene editing. In 2021 alone, 29 VC deals valued at $1.3 billion were completed (GlobalData Healthcare 2022c).

Fig. 2: Venture financing for U.S.-headquartered biopharma companies in the top five therapy areas in Q1 2021 and Q1 2022. GlobalData, Pharma Intelligence Center Deals Database (Accessed May 30, 2022).

As seen above, specific sectors within the biotech industry remain steadfast with investments and innovation. The optimism and resilience of specific sectors within the biotech industry should, nonetheless, be followed by steps that companies should take to sustain long-term growth, including:

• Manage research expectations and ensure reproducibility: Up to 70% of published scientific work may not be reproducible (Baker 2016). Any company seeking to develop its product must ensure a robust experimental design and standardize all experimental procedures (ZAGENO, 2022). In turn, companies should be transparent about the status of their research and recruit capable research teams to conduct the necessary experiments. These measures will help a company sustain long-term success and minimize logistical issues in daily operations.
• Establish a science communications department to share research transparently: The COVID-19 pandemic has highlighted the need to communicate effectively more than ever, particularly with the novelty of mRNA-based vaccines to the public. To this end, biotech companies should establish a robust scientific communications department equipped with the resources to effectively communicate their research. This would help facilitate an effective public relations committee (Phillips and Beckman 2001) and ensure active communication with all stakeholders (Pusheen 2021).
• Recognize the stages of product development a product is in: Companies should also carefully assess where they are within the product development pipeline. The same life science VC firm investor notes that companies must in define clear metrics for the outcome of the experiment, decide on the number of times the experiment must be repeated, and have a clear definition of ‘done’.” Accomplishing this requires close collaborations between a company’s advisory boards, officials, and stakeholders to make decisions that maximize profitability and minimize burn rate. By having a robust examination of a product development pipeline, companies can prevent reactionary responses to fluctuations within the economic landscape.
• Scrutinize management and finances with diligence: The 2000 dot-com bubble exposed the need for companies to appropriately manage their day-to-day activities and finances. The failure to monitor their finances accurately led to many companies having no clear path to profitability, leading to unrealistically optimistic stock values (Smith 2021). Regardless of the financial ecosystem, biotech companies must ensure a viable, transparent path to profitability.

  "Every startup company should have an ‘elephant slide’ which shows cash burn rate and spend over several quarters. The company should have a good handle on what their runway is when they will need to raise more funding," notes a investor at the life science VC firm.

Conclusion

Economic downturns are inevitable in the global economy, resulting in reduced investment and financial capital. The biotech industry faces daily fallout from economic downturns, especially during the COVID-19 pandemic. Navigating through any economic downturn requires the biotech ecosystem to learn important lessons from past economic crises. Chief among these is the need to maintain financial transparency and adopt effective scientific communication approaches. Adopting these principles is essential for biotech startups to remain resilient in times of economic instability. In doing so, rapidly emerging industries such as those specializing in gene editing and biologics will continue to grow and thrive, keeping the biotech ecosystem healthy even amid a global recession.

 

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