Biotech went through its IPO boom
The biotech industry is in shake-out mode after the ranks of public drug developers swelled in recent years amid an IPO boom.
A scrum for capital among the expanded pool of companies and the make-or-break nature of clinical trials drove a contraction in the number of public biotechs last year, with some scooped up by larger rivals while others shuttered. As the sector stabilises after last year’s slump, a divergence in fortunes is taking center stage.
Idiosyncratic outcomes have long been ingrained in biotech investing. But as the tables have flipped from the easy-money days of the pandemic, drug developers face a market that’s looking for meaningful data in order to be rewarded.
“I thought we would see a parting of the seas in biotech, and I continue to believe that’s what we’re seeing,” said Debra Netschert, a health sciences portfolio manager at Jennison Associates. It’s “a division of the haves and the have-nots.”
The total number of publicly traded biotechs contracted in 2022 after years of expansion, according to Wedbush Securities analysts led by Laura Chico. Their data is based on companies with a minimum $50 million in market capitalization, with most of the departures stemming from falling below that level. Others exited due to bankruptcies, M&A or other routes.
An analysis by Mizuho Securities’ Mara Goldstein also found a contraction, based on her tracking of about 450 companies.
Industry M&A
CinCor Pharma Inc. and Albireo Pharma Inc. surged earlier this year as they were snapped up by larger drugmakers. Madrigal Pharmaceuticals Inc. and Prometheus Biosciences Inc. soared in 2022 on the back of strong clinical data. On the flipside, Clovis Oncology Inc. filed for bankruptcy last year. And on Monday, Sorrento Therapeutics sank after the company filed for Chapter 11 protection.
Biotech stock gauges including the SPDR S&P Biotech ETF and Nasdaq Biotechnology Index hit zeniths in 2021 as investors were willing to take on riskier bets and were drawn to health sciences during the Covid-19 pandemic.
Then last year, a drought in fundraising prospects for those cash-hungry biotechs drove many to slash their drug development pipelines or headcount. Some filed for bankruptcy or staged reverse-mergers with other firms. With the tighter financial environment and tumbling stocks came a focus on companies with proof-of-concept data already in-hand.
The rout has left many stocks trading at depressed valuations. More than 20 companies in the Nasdaq Biotechnology Index are trading below the value of the cash on their balance sheets, according to data compiled by Bloomberg.
For biotech investor Brad Loncar the success of firms like Madrigal is a sign that the market is healthy.
“We’re still a long way — like years away — from it being rock-and-roll again, where there’s tons and tons of IPOs and everybody’s throwing money at the sector,” the chief executive officer of Loncar Investments said.
Winners and losers
A pair of initial public offerings have drawn recent attention this year, adding to signs of life in the sector. Structure Therapeutics raised $161 million through an upsized offering earlier this month. On Friday, Mineralys Therapeutics gained in its trading debut following an upsized IPO.
“If we’re right on the winners, and our companies have the ability to raise cash and survive another day, and the losers kind of go away, it just makes our companies more valuable,” Matthew Jenkin, portfolio manager at Newton Investment Management, said by phone.
Heading into 2023, investors appear cautiously optimistic about a return to green territory for the industry — but the expectation isn’t for a tide to raise all ships.
Jennison’s Netschert says that unlike the 2020 boom, the sector isn’t attracting the generalists who swooped in and bought everything in sight without really knowing what they own, which drove valuations up at a rapid pace.
“What we have,” she said, “are companies that are being rewarded in both stock price reaction and ability to finance, to get to the next step, when they show true positive proof-of-concept that the drug or platform they’re developing is doing what they’ve set out for it to do.”
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