Positive Outlook for Post-Pandemic Biotech

Arda Ural

After the all-time highs of biotech investments and valuations over the past two years, the market is undergoing a tectonic shift, with the potential to greatly influence life sciences strategy, deal-making, and investments. But according to our recent analysis, the fundamentals of biotech across the US and European markets remain strong despite this recent correction, growing geopolitical complexities, and market volatility.

To succeed post-pandemic, biotech leaders must have a clear vision of their short- and long-term goals. A once-in-a-century global pandemic, coupled with the market downturn, demonstrated biotech’s resiliency, but moving ahead, companies must address pain points to optimize potential.

From 2015 through 2021, biotech saw dramatic revenue growth and robust financing. There was significant top-line growth in 2021 with public company revenues surging 35%, from $160.2 billion to $216.7 billion, due in large part to COVID-19 antivirals and vaccines. At the same time, while retail, hospitality, and travel sectors struggled, capital invested in biotech IPOs and funding innovation reached a record high of $104.7 billion in February 2021.

This capital came at the right time as biotech remains the biopharma industry’s growth and innovation engine. In 2020 and 2021, 50 new molecular entities were approved by FDA, up from an annual total of 29 a decade ago. Currently, biotechs are responsible for 65% of the nearly 6,000 clinical asset candidates in active development, including more than 2,000 cell and gene therapies, which are expected to experience significant growth over the next 10 years.

While all of this is cause for optimism, there are signs that the effects of the pandemic will trickle down the biotech industry. Some potential challenges include a shift in investor sentiment that began in 2021 and is continuing in 2022. Valuations have plummeted, and smaller and earlier-stage companies face a more difficult path to capital markets and access to capital. Deal-making value also decreased by 46% when compared to last year and remains slow through mid-2022.

With the pandemic largely in the rearview mirror, investors have begun moving out of biotech and into more stable sectors. This combined with rising interest rates, inflation, and a rapid acceleration in economic growth have caused biotech valuations to plunge and made access to new capital harder to come by.

We should also note the current IPO slowdown on the heels of an unprecedented year. In 2021, biotech IPOs totaled $19.3 billion with 143 deals, but now the streams have slowed and access to capital markets through IPOs and SPACs has become more challenging. There are also operational difficulties leaders must contend with, from addressing the talent shortage and anticipating policymaker-driven changes in pricing to scaling commercial infrastructure and supply chain management.

However, biopharma alliances continue to form, and M&A is typically driven by industry’s need to drive growth during a slowdown. We believe that a buyer’s market may emerge. Over $152 billion in alliances were announced in 2021, which was only slightly lower than the record broken the year before of $161.6 billion. Additionally, biopharma CEOs who previously put deals on the back burner are reconsidering acquisitions. There could be an emergence of de-risked, late-stage biotech assets and more strategic alliances over bolt-on acquisitions. While industry executives are keeping an eye out for these trends, there has been little movement in 2022 thus far.

From our perspective, the tectonic plates are not yet settled, and the industry may face more uncertainty in the coming months. The post-pandemic environment coupled with geopolitical intricacies provide new obstacles and market conditions to navigate, such as an impending healthcare staff shortage, supply chain disruption, ability to achieve scalability, and rising pressure for environmental, social, and governance issues.

Yet, even with unknown market conditions, as biotech looks ahead to the next five years and beyond, it’s to be expected that innovation will continue, and capital will follow science. Biotech’s R&D investments support a late-stage clinical pipeline that should be a key driver of the $1.4 trillion global biopharma industry. Yes, some biotechs may struggle with reduced public market access, but the sector should flourish. Industry leaders need to be primed for the challenges coming their way as well as cautiously optimistic that soon, the ground beneath their feet will settle and stabilize.