Bubbles burst. Consider the U.S. housing bubble in 2008. The dot-com bubble in the early 2000s. Or go as far back as the Dutch tulip bubble in 1637. For biotech markets, though, a deflation from the heights of early 2021 has so far looked more like a leaky tire at cruising speed than a full-on highway blowout.
The pinnacle of the biotechnology index known as the XBI — or the SPDR S&P Biotech exchange-traded fund — hit more than $160 in February 2021. Since then, the index fell below $70 at its nadir in June this year — a noteworthy drop in value for 16 months, but not one that is particularly concerning as a long-term proposition for the industry, some say. Since that low point, the XBI has been on a mostly upward trajectory to above $80 this month.
That's still a long way down from the apex, though.
"If the bubble didn't pop, it certainly deflated," says Troy Wilson, CEO of the public biotech Kura Oncology. "In particular, what we saw was a drawdown and a pullback in asset values."
Some of the downhill momentum can be attributed to larger forces such as inflation, interest rates and the fear of recession, Wilson says.
"It's not at the heights it was a couple years ago — it's not at the depths it was six months ago," Wilson says. "But I do think people are still a little bit on pins and needles."
"We didn't see a crash. What we saw was just the air coming out of the balloon."
Troy Wilson
Kura Oncology CEO
More likely than not, the recent dip is more of a correction than a major dive from the heights of the biotech boom, says Lance Minor, principal and life sciences national co-leader at accounting firm BDO. The sector will likely return to its apogee, Minor says, but when and how it gets there is important.
"I do believe we will get back to those heights, but I'm hoping that it's a more measured growth and not as reactionary or as driven by the pandemic surge," Minor says.
Technologies like mRNA that led to COVID-19 vaccine innovation will carry on into new therapeutic areas to treat some of the more stubborn diseases of the past, for instance.
What fed the biotech bubble in the first place and what led to its demise, however temporary, is complicated, but understanding its implications can offer insights into what's ahead for the industry.
'The go-go days'
One of the contributors to the overheated biotech market was investors’ fears of missing out during the rapid rise in valuations that accompanied the beginning of the COVID-19 pandemic.
Wilson calls these times the "go-go days."
"You had very easy monetary policy from the [Federal Reserve], so investors could borrow money at essentially zero and put it into high-risk assets — the Fed intentionally or unintentionally created a series of asset bubbles," Wilson says. "We saw it in biotech, we saw it in cryptocurrency, we saw it to a certain extent in tech, we saw it in housing — investors were borrowing and making outrageous returns and the cycle repeats itself."
During these go-go days, biotechs were presenting reams of positive clinical data and attracting investors. And like a forest fire creates its own weather systems, Wilson says, so too do risky capital markets. In this case, it created a surge in demand for new companies, which inflated the bubble that quickly grew as startups that were still years away from demonstrative clinical data were going public with successful IPOs.
"A lot of investors were making outsized returns in biotech using cheap dollars, and so an ample supply of entrepreneurs and venture capitalists were willing to take companies public, and it was raising the amount of new companies that were coming to market," Wilson says.
As the supply of public company stock rose, the demand leaked out, bringing asset values down, which led investors to liquidate their positions, Wilson says. Essentially, there were more companies than there was investor support.
"We didn't see a crash," Wilson says. "What we saw was just the air coming out of the balloon."
There is still rampant inflation and the likelihood that the U.S. economy is either in a recession or entering one, Wilson says. And now, something’s got to give.
"There are more companies than the market can reasonably sustain — we don’t need seven companies pursuing the same therapeutic target," Wilson says. "Whether it's M&A activity, whether it's bankruptcies, you're going to see consolidation and you're going to see that this naturally corrects itself."
Investors are looking for the 20 to 30 companies that are going to become the next marquee names, and Wilson suspects about half of them will be in oncology.
Still, the window into the future isn't entirely fogless.
"It could take well into next year before we have clarity on where the macro picture is," Wilson says.
Cash on hand, you can stand
The companies at most risk during this deflationary time are those that are tight on cash, Minor says. Conversely, companies with some financial runway will have an easier time riding the wave back up.
"With cash reserves tightening and a reduction in the issuance of debt, it means firms need to be smarter with how they're spending money," Minor says. Of course, that biotech bubble was critical to the therapies and vaccines that were quickly approved during the pandemic — the risk taken early on paid off, even though it was an expensive way to pursue development, he says.
From an executive standpoint, Wilson agrees that the companies best positioned to snag a spot in a potential upcoming boom are companies that have a lot of cash and data catalysts before the end of the year. The calendar year is particularly important for Wall Street's fund managers, whose annual bonus depends on their position at the end of December.
On the other side of the spectrum, companies with less than two years of cash on hand and no clear data catalysts aren't attracting the attention they once did in better times.
"The pendulum swung all the way in the opposite direction, so preclinical data is really not derisking anymore in the minds of investors — they need clinical derisking events," Wilson says. "You're seeing a separation of the haves and the have-nots."
Companies who may have hit the IPO button too early during the bubble period and have struggled to show timely clinical data are now seeing Wall Street's waning interest.
Kura's IPO came through in 2015, and that was a good time to cash in, Wilson says.
"When people are handing out hors d'oeuvres, use both hands," he says. "We were fortunate to be able to access the capital markets in late 2020 to raise about $300 million."
Kura has planned inflection points coming within the next few years and their cash position gives them leeway to not depend on raising more capital.
New tech, meet big money
The biotech boom brought about many technology advances that fed the current slate of hopefuls, and those promises can help feed the larger biopharma industry as bigger companies look to bolster their own pipelines.
"Economic growth, particularly in biotech, was quite high, driven by new technology and new innovation," Minor says. "Most notably around COVID — monoclonal antibody therapeutic treatments and vaccines brought in billions."
Platforms for cell and gene therapy have also given rise to a wave of innovation that lends value to the overall sector, he says.
"I do believe we will get back to those heights, but I'm hoping that it's a more measured growth and not as reactionary or as driven by the pandemic surge."
Lance Minor
BDO principal and life sciences national co-leader
This is where consolidation is likely to come into play, as biotechs have fallen in value to the point where cash-rich pharma giants can scoop them up for a bargain.
"Tightening cash, tight runways for development, lower valuations of the smaller companies, the large cash supply that larger companies have stockpiled — it all means the smaller companies are ripe for M&A," Minor says.
The number of IPOs has dropped from their heyday during the height of the bubble, and a recent wave of deals washing upon the biotech shores of late promises better times ahead, Wilson says. In particular, rumors of a potential acquisition of cancer drugmaker Seagen by pharma giant Merck & Co. would help push that along.
"If that were to happen, it would be a great thing for two reasons," Wilson says. "It would further validate for investors this thesis that a large pharma is willing to pay a premium for innovation, and it would unlock $40 billion in capital that could then be redeployed and reinvested into other companies."
For now, the best advice Wilson has for these more meager times in biotech: "Don't assume the market is going to step in and rescue you."
The outlook for biotech could improve in 2023 — but it also could be worse, Wilson says.
"You have to have a game plan that says, I can still be successful if the go-go days don't come back," Wilson says. "I hope we return to those halcyon days, but I think we're going to see more pain in the economy before things get better."
