Biotech Market Funk

January 26, 2022 10:52 AM EST FinancingDealsPharma
Biotech bears are mauling stocks as 2022 opens on a bleak note for investors
Max Gelman
Editor

As the first month of 2022 draws to a close, one thing seems to be on everyone’s mind in the biopharma world: a burgeoning bear market.

While inflation and supply chain issues have sent the Dow Jones and S&P 500 tumbling — and the Nasdaq entering correction territory — in recent weeks, few sectors have been hit as hard as biotech. The Nasdaq biotechnology index and the XBI, two prominent barometers of public biotech performances, are down 15% and 20% since the start of the year, respectively, outpacing each of the three major US indices’ downswings as of Tuesday.

There have been few more visible ramifications than the relative lack of IPOs, both in biopharma and across the market. Though 2020 and 2021 saw record activity as nearly 200 biotechs went public, the pace slowed down toward the end of last year and is now at a virtual standstill. And just last week, there were no IPOs at all, in any industry, according to Renaissance Capital.

Even the biotechs that secured big raises, whether from a traditional IPO or a SPAC, are being hit hard. Sana Biotechnology, which pulled together one of the biggest-ever biotech IPO raises at $675.6 million, priced at $25 per share last February but opened below $9 Wednesday. EQRx raised $1.8 billion in a blank check deal and debuted last month but has quickly fallen into penny stock territory.

So what exactly is the root cause then?

Independent investor Brad Loncar blamed overeager crossover investors who flooded the market with a spate of small, early-stage biotechs. Many of these companies have little evidence their drugs work, and a period like what’s happening now is necessary for the market to “digest” the flurry of activity these last 18 to 24 months, he said.

“This may sound counterintuitive, but people like me are hoping that this is a terrible year for IPOs,” said Loncar, who emphasized he doesn’t do IPOs and only invests in already-public companies. “Because we believe — I don’t think this is going to happen, given how bad things are — but if there was another 100 IPOs this year, the biotech sector may not ever go up again. That’s being a little dramatic, but that’s kind of how we view things.”

The very nature of these early-stage biotechs has only compounded the downturn, Loncar adds. Most of these biotechs are so thinly traded on the stock market that institutions can’t sell their stock without driving the price down significantly, making it difficult for the companies to weather a bad market. As a result, between 80% to 90% of biotechs that went public in 2021 are trading below their IPO price, Loncar estimates.

Although Loncar didn’t name any specific firm, RA Capital Management is perhaps the most notable offender, their appearance in a VC round now an omen of a brewing S-1. Two recent examples include Janux Therapeutics and Tyra Biosciences, which each earned $100 million-plus RA-backed crossovers last year and went public a few months later. Janux is down about 15% from its debut price last June, while Tyra has sunk nearly 30% from its initial price. Neither company has a drug in the clinic.

RA co-managing partner Rajeev Shah was unavailable for comment, but his partner Peter Kolchinsky has vocally insisted a plethora of investments isn’t a bad thing. In a lengthy Twitter back-and-forth earlier this month, Kolchinsky said if a biotech raises $100 million, that “by definition” means there’s $100 million of demand.

But if those institutionals are already holders of these companies & are taking most of IPOs, then whether to IPO or fund privately is just a difference of paperwork. IPOs worth doing as long as succeed leads to more liquidity at higher prices than in private markets.

— Peter Kolchinsky (@peterkolchinsky) January 5, 2022

A managing partner at another life sciences investment firm, meanwhile, believes there’s some truth to Loncar’s point of view but points out what they describe as a subtle distinction. Though the companies are mostly operating without clinical data, the partner says the explosion of science and innovation in recent years means some early-stage companies deserve to be public while still preclinical.

“I wouldn’t paint it with a brush that these companies are too early,” the partner, whose firm is considered a crossover investor, said. “I would just paint it with the brush that, anytime there’s too many deals, some of them are not as good. And it doesn’t matter what stage they’re at, they’re just not as good.”

Covid-19 vaccines are the most extreme example of this, they added, as Moderna and Pfizer/BioNTech went from adapting clinical programs to SARS-CoV-2 in January 2020 to shots in arms by the end of the year. But even in rare disease and oncology, biotechs are moving from discovery to Phase I studies in three years today when the historical average has been seven.

In such situations, they believe it’s fine to go public because these companies could have a drug on the market within four years of starting human studies. The recent poor stock performances result much more from macro factors — not only inflation and whether the Federal Reserve will raise interest rates, they said, but the FDA running into Covid-related inspection delays and investors getting spooked over a more stringent FTC and potential drug pricing reform.

And, they note, it’s important to remember the context of the last two years. Biotech saw enormous IPO activity during the pandemic, and they say it’s too early to classify the slowdown this year as a bear market, particularly because of how bad the last two were in 2008-09 and 2015-16.

“My guess is we’ll settle out at something that I would not call a bear market,” the managing partner said. “I would assume 25 to 50 deals a year, that would be my guess. And that, to me, that’s going from bull market, or frothy markets, to business as usual.”

One CEO of a well-financed private biotech noted it’s also important to think about why companies want to go public in the first place. There’s a confluence of interests at every biotech, from needing more money to run clinical studies to investors wanting to cash out. Everyone also wants to get the timing right, as going public in poor market conditions could lead to an undervaluation.

That being said, they remain unsure why so many early-stage biotechs decided to make the public jump, as going through an IPO is a “pain in the ass.” Though they described themselves as someone who doesn’t pay too close attention to the markets, they said the sheer number of preclinical IPOs was an anomaly.

“The life science market, we’re way up, right? Way up through 2020,” the CEO said. “In the first quarter of 2021, it went up way ahead of the market. And so when the market corrects, it’s going to fall more than the market.”

They added, “I think companies were overvalued a year ago. And so whether they [went] all the way to undervalued now, I don’t know, you could say that they’re fairly valued.”

When it comes to the CEO’s own company, two things have to happen to go public: The market has to get more comfortable with investing earlier and their platform and programs need to mature a little more so the company can “sort of meet them halfway.” They also emphasized that while it may have been easy to go public in recent years, it’s much harder to stay public.

The long news droughts that accompany drug development may also have contributed to the market downswing. As observers keep waiting and waiting for data readouts to come, or other market-moving news, there’s little reason to buy stock in a biotech.

“That’s when these companies start to bleed out,” they said. “You want to be able to keep driving up demand for your shares, because that’s how you continue to reduce the cost of capital. I just think you have to have a plan. You can’t just say, ‘I’m gonna go public, and my problems are solved.’ Your problems have only just started and you have no idea.”

At the end of the day, there is one thing everyone seems to agree will get the market moving again — M&A.

Loncar took note of Pfizer’s increasingly enormous cash reserves thanks to its Covid-19 vaccines and Paxlovid antiviral pill, and said lower valuations could lead to an aggressive acquisition strategy. The managing partner described how something like one big deal or three mid-sized deals could reinvigorate the space.

And while the CEO doesn’t want to speculate on when that might happen, things will start moving very quickly again once it does.

“I don’t know how much movement it’ll take the market to make people want to push the button,” they said. “But my guess is that whatever happens, a lot of buttons are gonna get pushed, right? So I think you’re gonna see, nothing, nothing, nothing, nothing and then all of a sudden, bang, there’s gonna be a bunch of it.”