If you own a share of stock, you own a part of a company. The companies that constitute the biotech industry can be considered in two broad categories — those that are privately held and those that are publicly held, that is in which shares are freely traded in any one of several markets in the United States and elsewhere. Taken as a whole, the biotech industry constitutes a tiny portion of the companies that are privately or publicly traded. Overall, the industry accounts for about 1.5-2 percent of the gross domestic product (GDP).
Like the rest of the assets traded on the various stock exchanges, the public biotech sector entered 2020 in good health with optimistic expectations. During 2019, the NASDAQ, where most biotech stocks are listed, hosted 156 initial public offerings (IPOs) that raised more than $34 billion, considerably more than did the historically larger New York Stock Exchange. Among the 156 new listings, 51 were biotech companies that raised in aggregate $5.6 billion. Although its valuations are more volatile than other sectors that are closely tied to consumption, in 2019 the biotech sector was confidently galloping with the longest bull market in the nation’s history.
Then, almost without warning and almost overnight, a small, highly infectious RNA virus, probably a commensal resident in a bat species in Asia, drove the market, including the biotech sector into near free fall. The Dow Jones Industrial average fell more than 38%. In less than two months, 30 million people in the United States lost their jobs and filed for unemployment benefits. Millions of people became afflicted with COVID-19. As of May 1, more deaths have been attributed to it than to US casualties in the Vietnam War. In the United States, the death toll is likely to surpass 100,000 in 2020.
Yet, in April, as the epidemic became a pandemic, schools closed for the year, and social distancing became the new norm, the stock market enjoyed it best monthly gain (~14%) in modern history. During this tumultuous period, biotech fared relatively well, dropping less than most other sectors in March and rising along with them in April. As of March 12, the NADSAQ Biotech Index was down a comparatively modest 10%. As I write these words (May 12), that index is at an all-time high.
How badly has the pandemic hurt the biotech industry? How long will it take to recover? It is possible to rationally address the first question because it is phrased in the past tense. A tentative answer to the second will have wide error bars.
The innovative biotech industry depends on the free flow of risk capital to support the billion-dollar journey from idea to drug approval and clinical benefit. Relatively few metrics drive valuation. The most important of these is the ever-shifting perception of whether a company’s programs will complete the marathon to new drug approvals (and how long that will take). Especially for small to moderately large, highly innovative biotech companies, a few binary events determine success or failure. One need only look at the impact of the numerous bold but unsuccessful efforts to develop drugs to treat persons with Alzheimer’s disease or depression to see that when a major trial fails to meet its clinical endpoint, those who have invested in the companies can lose far more money (>75% of market value) than from cross-portfolio losses triggered by global forces.
Science is evidence driven. The COVID-19 pandemic erupted and its course remains fluid. But there are facts to assess. During the first quarter of 2020, the impact of the coming pandemic on the biotech market was relatively mild. Most important indicators — new funds being raised by venture capital (VC) firms, the pace of clinical trials, mergers and acquisitions, and regulatory approvals (or rejections) — did not change much. In that quarter, there were more biotech IPOs on western exchanges than in the last quarter of 2019. Five of them each raised more than $200 million, an impressive number. During the same period, the number of FDA approvals did not markedly abate, and VC firms raised new funds and made new investments and launched new companies at a reassuring rate. Remember that the purpose of the VC industry is to rationally deploy other people’s money in the hope of generating solid returns in future years. Freezing in place is not an option, nor should it be.
In late March, important dislocations occurred. Biotech companies self-quarantined (although many continued skeletal lab operations). VC firms began working from home. Most importantly, clinical trial sites halted operations, as hospitals struggled to deal with the pandemic. According to one estimate, at least 1,100 clinical trials in the US and Europe slowed or stopped. For the scores of privately held biotech companies in the midst of raising new money, difficulties mounted. Fund raising slowed and valuations accorded to new rounds were often flat. For some institutional investors, the option of buying shares in publicly traded companies with sharply lower valuations appeared more attractive than making investments in companies facing a long journey to revenue creation. Of course, each trade in the market has a winner and a loser. Huge profits can be made in a depressed market. In March, one hedge fund made perhaps the most profitable trade (> $2 billion) in history by anticipating a sharp upswing in April. The dislocations, which will probably not resolve until the end of 2020, are more or less distributed across all clinical stage companies.
Although I cannot provide firm data, it appears that in the second quarter of 2020 in the private sector “deal flow” continues at a respectable, if not robust, pace. Remember, the job of venture capital is to invest in or create companies. For the month of April, five biotechs went public and all are currently trading higher than on the date of their IPO. More biotechs are scheduled to go public this quarter.
Predicting the future is a fool’s task. But I will hazard some guesses.
The vast sums of capital needed to support the biotech industry are in place and those who control them are eager to see them deployed. The many brilliant scientists eager to translate ideas into clinical application will continue to grow in number. The tools and techniques to probe nature’s depths in hope of developing new drugs are powerful. There will be increased mergers and acquisitions (M&A) of companies with valuable assets, but insufficient funds, but few companies will disappear. Some venture funds will double down on their investments, committing more of their capital to existing projects rather than diluting themselves by raising outside funds at low valuations. Maturing biotech companies will continue to go public, albeit at a slower rate.
Pre-clinical laboratory work will be delayed by one to two quarters. Clinical trials will be slowed by two to three quarters. Regulatory interactions (except of course regarding anything related to fighting the pandemic) will be slower for two to three quarters. However, I was heartened to hear during the recent ASGCT virtual conference that Peter Marks, MD, PhD, Director of CBER at the FDA, said that FDA would work diligently to support clinical trials, despite numerous disruptions such as subjects missing scheduled trial visits.
For most aspects of the world economy, the pandemic is having devastating effects. But, will this be true for the biotech industry? It is not fanciful to imagine that COVID-19 is providing a huge stimulus to biotech. The massive efforts to develop vaccines, deploy test kits, develop highly predictive antibody tests, repurpose existing anti-viral drugs, and develop new drugs are causing billions of dollars to flow towards many biotech companies.
I regard the COVID-19 pandemic as the biotech sector’s first modern challenge (akin to the development of the atomic bomb or the race to the moon). I also think that the industry’s response to the challenge is likely to generate significant interest among new groups of investors. I think the industry will fare well in the markets. A year of two from now, it may be regarded as a key reason why the response to the pandemic ultimately succeeded.
In 2021 the biotech sector will have a valuation at or above the valuation it had in late 2019. Pre-clinical work will be robust. Clinical trials will be near the volume of a year earlier. The regulatory review of clinical trials will be more efficient. New biotech companies will raise needed capital, and the number of IPOs will not be much different than in 2019. There will be an uptick in M&A activity as large pharmaceutical companies acquire smaller companies (see for example, Alexion’s acquisition of Portola at a valuation much below that company’s value in mid-2019). Most important, the contributions of talented scientist both inside academe and in industry will continue to initiate discovery programs, many of which will lead to new drugs in our endless battle against disease.
Philip Reilly MD, JD, (email@example.com) is a venture partner at Third Rock Ventures in Boston. He has helped to start several biotech companies and owns equity in many of them (and others). The view expressed above are his own.
The above article was first published in Human Gene Therapy. Human Gene Therapy, published by Mary Ann Liebert, Inc., is the premier, multidisciplinary journal covering all aspects of gene therapy. The Journal publishes in-depth coverage of DNA, RNA, and cell therapies by delivering the latest breakthroughs in research and technologies. The views expressed here are those of the authors and are not necessarily those of Human Gene Therapy, Mary Ann Liebert, Inc., publishers, or their affiliates. No endorsement of any entity or technology is implied.