Biotech is coming off an epic few years. The sector soared during the pandemic, with venture capital investment and IPO volumes hitting all-time highs.
But recently stock valuations have plummeted, part of a larger market downturn. Companies have shed programs and laid off workers — Adaptive Biotechnologies, one of the Seattle region’s largest biotech startups, cut 12% of its staff in March, citing “current market conditions.” And the number of companies going public has slowed dramatically.
The XBI biotech index fund is now down more than 55% from its high in February 2021.
“We’re definitely seeing a correction,” said Richard Ramko, a partner at Ernst & Young who consults with Seattle-area biotech companies.
But industry insiders say there is reason for optimism in the long term. There’s still opportunity to raise capital and forge partnerships, and many companies have solid cash reserves, said Ramko. And this may be the worst of the current downturn.
“I could probably make a case that the valuations are at a bottom or close to the bottom,” Ramko noted.
There are some trends that support the cautious positive outlook:
- Big pharma is prospering and ready for deals. Pfizer’s stock soared during the pandemic, buoyed by earnings from COVID-19 vaccines, and is still close to its peak in December. Shares of Bristol Myers Squibb, which has a big operation in the Seattle area, hit record-highs this week. Big pharma companies have “historic” amounts of cash on hand for deals and partnerships, said Ramko.
- New therapeutics are queued up in the pipeline. Thousands of different therapies are still in early development, spurred by advances in gene editing and cell therapy, said Ramko. “Over the next 18 to 24 months, we’ll start moving out of phase 1 and 2 [clinical trials] and into phase 3. Not all of them will make it, obviously, but that’s a tremendous pipeline,” he said.
- Newly public companies have cash: Seattle-based companies such as Nautilus Biotechnology and Sana Biotechnology went public last year early in their lifecycle, and have seen shares fall substantially. But the financing events also helped pad their balance sheets with cash reserves, extending their runways.
- Venture capital firms are also flush. Frazier Life Sciences recently raised close to $1 billion, on top of $831 million in 2021. Arch Venture Partners raised more than $1.5 billion during the pandemic, and OrbiMed and Flagship Pioneering each pulled in more than $2 billion. “We saw a little bit of a lull in the first quarter of 2022. But there’s plenty of capital to be deployed in early-stage companies,” said Ramko.
- Companies are raising funds. Seattle-area life sciences companies still raised $194 million in venture funding the first quarter of this year, compared to $255 million the first quarter of 2021, according to JLL.
Of course, this isn’t the first downturn for biotech.
Speaking at a life sciences event in Seattle last month, Bishop recalled advice one investor gave him: Figure out the science and we’ll be fine.
Bishop advised other company leaders to avoid shortcuts and stay cool. He said extra pressure about share prices should force companies to think even harder about a key question: “Am I doing everything right about the science?’”
“All that matters is good science and solving the problem you’re trying to solve, because if you work that out, it is going to work out for everyone,” said Bishop, now chairman of Sana Biotechnology and president of Altos Labs. “I think that’s true in moments like this.”
Jonathan Norris, managing director, Silicon Valley Bank Life Sciences, said in a panel discussion at the event that some companies are looking at debt financing to extend runway. And Sahaj Madhav, director of business development at Amgen, said building collaborations and partnerships with larger biopharma companies can help take off the financial load.
Despite the pain, the culling of programs and startups is part of the boom-and-bust cycle typical of biotech, said Ramko. “The technologies that have promise and have good clinical data will have no trouble getting cash,” he said. And some will fade away or be repurposed. “The process is working exactly as it should.”