After years of rich biotech investment and vaulted valuations, the landscape has broken into a dichotomy of a small number of biotechs that will make it big and many more that will likely lose their way, according to a report from accounting firm BDO.

The excitement surrounding mRNA development brought in a bevy of casual investors during the height of the COVID-19 pandemic due in part to widespread information about vaccine progress. But the fervor subsided as the long timelines of biotech advancement came into focus, and investors have drifted toward companies that can show strong clinical data for a chance at regulatory approval sooner rather than later, the report said.

IPOs are a good indicator of the confidence that biotechs have in their ability to make it to the finish line. And the number of companies leaping to the public trading floor fell precipitously to just 21 in 2022 from a height of 104 in 2021, according to the report. The Nasdaq Biotechnology Index (NBI) also fell 10% from the beginning of 2022 to the end of the year.

Because of this drop, going public during the pandemic's boom didn’t pan out for every biotech, BDO said.

"(S)ome companies that went public in 2020 and 2021 were riding the coattails of the biotech boom," the report said. "Without strong data and scientific fundamentals, some of these companies are now struggling to obtain financing on favorable terms."

Now, BDO speculates that this year will "likely reveal which biotechs have the groundbreaking research and technology to last the next 10 years and which will need to reevaluate their priorities."

Silver linings

The accounting firm highlighted three companies who IPO'd and came through the bubble deflation with healthy returns: CinCor Pharma, which was acquired by AstraZeneca; Arcellx, which is working with Gilead's Kite; and PepGen, which showed positive clinical data in Duchenne muscular dystrophy. The throughline of these success stories was a solid and distinct clinical plan.

And signals point to a potential rebound in both stock price and IPOs, BDO said. The final quarter of 2022 saw small and medium biotech stock prices stabilizing after the downhill tumble. Large biotechs, however, continued to decline, though a little slower than before.

BDO also had tips for "finding balance" within the wobbly sector, which is adjusting to "its new financial reality." First, waiting until the right moment to go public would allow for a more successful run afterward. Second, managing cash during development to support regulatory filing and commercial launch would keep the coffers full. And finally, making value creation the center of the business strategy would drive better decision making.

"2023 will not be a fundraising frenzy for biotech," the report said. "The companies that can stay focused on the research for their high-priority, late-stage candidates, while managing cash wisely, will be able to successfully bridge until the next cash influx or positive data readout."

By the numbers: Biotech's boom and bust