Brighter times ahead for biotech in 2024?

The biotech industry experienced heady highs in early 2021, but has since suffered from a tight financial climate that has brought bankruptcies and widespread redundancies. Ben Hargreaves examines why the industry benefitted from the pandemic, how that created its own troubles in subsequent years, and whether there are signs indicating better times in 2024.

Only a few years ago, the most popular ETF for trading the biotech industry as a whole, XBI, reached record highs. In 2021, the biotech index reached a value of more than $160, as the industry benefitted from investor enthusiasm for companies that could provide therapeutic solutions during the pandemic. However, the spike did not come entirely out of the blue, as the biotech industry’s value had been on a steady rise for a number of years.

Today, XBI is valued at approximately $89, at the time of writing, and the industry has suffered from a lasting hangover from the highs of early 2021. Following 2021, the industry suffered from a lack of available capital, as a risk-averse economic climate took hold. This meant that not only did biotechs have less funding to pursue research, but many were also forced to reduce staff numbers to retain sufficient capital to avoid going under. This downturn means that the XBI is now only valued 7% higher than the same point five years ago, a significant fall from grace after being an investor darling in the period leading up the height of the pandemic.

What goes up…

In EY’s report on the state of the biotech industry, the authors refer to the revenue generated during the height of the pandemic as a ‘sugar high’ in 2021, which was fizzling out by the end of 2022. Public biotech revenues were already 1% down on the previous year by 2022, and as sales of COVID-19 products have only fallen further still, this will only be increased in full year 2023 results.

This ‘sugar rush’ could also be attributed to not just the revenues, but the valuations of biotechs. As already noted, XBI reached its peak value leading up to early 2021, and this was the period where there were a significant number of biotechs working on potential COVID-19 therapies and vaccines. As such, the investment going into the space was high, on the presumption that biotechs, such as Moderna and BioNTech, could see success with their pipeline.

However, alongside the winners of Moderna and BioNTech, there were also countless other biotechs that did not succeed in developing a treatment option. This meant as time passed, the valuation of the entire biotech industry was always likely to return to more realistic levels, as potential vaccines and therapies failed, and investors exited their positions.

Alongside the flood of investment into biotechs working on potential COVID-19-related products, all types of biotech financing became easier to access, providing a major boost to companies looking to quickly progress their pipelines. As a general marker of health, the biotech industry saw a record-breaking 104 biotech initial public offerings (IPOs) in 2021 – representing approximately 10% of IPOs across all industries.

By contrast, the climate had changed dramatically moving into 2022. Through the course of the year, only 21 biotech IPOs took place. The economic situation contributed to an environment that was not conducive to biotechs receiving financing, with certain banks struggling to survive. After the failure of Silicon Valley Bank, a major backer of biotech companies, there was less capital available for biotechs and some companies were badly affected by the loss of funds.

Following a troubled period in 2022, the biotech IPO market fell 93% from 2021, and an estimated 29% of public biotechs in the US and Europe had less than one year of cash on hand, according to EY. The same year also witnessed a 54% decline in capital available to the sector, with the total sum of $54.6 billion raised by the industry representing the lowest annual industry investment since 2016.

A lost year?

The majority of 2023 unfolded in much the same manner for the industry. According to JP Morgan, the biotech industry by 26th December 2023 had underperformed the market index (S&P 500) by over 25%. Over the course of the entire year, XBI had essentially remained flat in its valuation, despite an overall rise in the broader market.

This lack of investor enthusiasm meant some difficult decisions had to be made across the sector. In 2023, BioPharma Dive stated that biotech lay-offs claimed at least 10,000 positions during the year. The action was taken in relation to the amount of capital left to fund operations – by reducing the size of their workforce, the biotechs were hoping to preserve enough capital to continue until the economic situation improved, or additional capital could be raised on the back of successful development programmes.

As revealed by EY’s report, the steps taken were a question of survival, when 55% of public biotechs held insufficient capital to fund operations for two years. It was no surprise, therefore, when there were a number of companies that were not able to survive the downturn, with biotechs, such as Sorrento Therapeutics and Oxurion, being forced into bankruptcy in light of capital raising issues.

Darkest before the dawn?

All is not quite as dark as appears with these difficulties during the bulk of 2023, as there were some positive signs towards the end of the year. The last two months of 2023 saw XBI rise by approximately 40%, driven by some notable approvals that sent valuations of certain biotechs soaring. Both CRISPR Therapeutics and bluebird scored approvals from the FDA for their gene therapies for sickle-cell disease, and saw an accompanying rise in their share prices. More broadly, other signs of health for the sector were pointed out by BIO, which showed that drug approvals are increasingly being driven by small companies and often by biologic medicine, an area where many biotechs tend to specialise.

The rise in XBI may well have arrived with increasing confidence that the sector could be set to rebound. With expectations that a ‘soft landing’ can be achieved and, therefore, interest rates could come down in the US, this could lead to more investment into assets classed as riskier, such as biotechs. Already in 2024, there have been three biotechs IPOs, at the time of writing, compared to a total of just 20 in the entirety of 2023, suggesting there is some confidence that investment could be returning.

This view was shared by a recent GlobalData survey of healthcare professionals, where 40% of respondents expressed an optimistic or very optimistic sentiment on biotech funding starting to bounce back in the next 12 months. In addition, 60% of surveyed professionals felt optimistic or very optimistic about the industry’s growth in 2024.

Urte Jakimaviciute, senior director of Market Research at GlobalData, stated: “Biotech’s funding and investors are faced with current market uncertainty with high inflation, high interest rates, and geopolitical challenges. As patent cliffs loom for large pharmaceutical companies, they may choose to do more partnerships, merger and acquisition deals with biotechs to enhance their drug development and innovation. Stabilising interest rates may also prompt a return for a more promising outlook.”