By Matthew Pillar, Editor, BioProcess Online
When I sat down with Allan Shaw to record a recent episode of the Business of Biotech podcast on the state of capital markets in biotechnology, I painted a somewhat gloomy picture of the 2020/2021 IPO scene: new IPO records in both years, but a precipitous year-over-year decline in stock appreciation (38% in 2020, 5% in 2021).
Still optimistic, Shaw opted to shine some light on the result. Here’s a quick snippet of our conversation.
Biotech profession: At a high level, it seems that there is a lot of money going into emerging biotechnology, but not a lot coming out of it. Can you put your finger on the problem?
Shaw says there’s an inconsistency between the pace of biopharmaceutical companies and how markets measure their performance. The way you phrased it is certainly one way of looking at it. When I started to get involved in biotechnology, I often felt that the strategic vision was a long-term project. You have time horizons, you have development projects that easily last 10 years, and science sometimes has milestones and missteps. You often go parallel and sometimes you back up before you go forward. You learn from these things. Alnylam is a classic example. Think of how many decades before they were able to bring a product to market and how RNAi became fashionable, like platform shoes.
You allocate capital with very long term periods of time that you try to measure in 90 day intervals, and I’ve always thought that really doesn’t really fit with how resources are allocated and biotechnology are measured. I think, from the same perspective, when you look at IPO capital markets, you need to look at a longer time frame to better understand where we came from and where we are going. There’s a cycle here, and relative to the cycle, we’re still in an incredibly happy place by any conventional measure. When you look at it objectively, I think it’s a story of good news and bad news. In the short term, this is probably more bad news than good news. But if you go back just over a decade, there was a dearth of capital market IPOs. Indeed, nothing was done between 2008 and 2012. From 2013, we are witnessing an unprecedented golden age for biopharmacy. Things seem to have slowed down a bit, especially in the second half of 2021, but it’s been generally good, and I think you have to wonder why it’s been generally good. The tide is high, and I think it’s useful to have some historical insight into why the tide is receding a bit.
Shaw points to a few factors contributing to the current weakening of biotech capital markets. There’s a couple of dynamics that highlight the situation we’re in, we’ve been in a low interest rate environment, and low interest rates and biotech go together like peanut butter and chocolate. There has been a lot of clinical efficacy, so biotechnology is no longer a backward asset class. You look at the money being spent on biotech, you see the impact on society, how we’ve fended off COVID and helped set a relative standard that will hopefully continue to improve. There are many reasons people want to be exposed to biotech, but the low-interest environment has really helped attract generalists. When you’re in a low interest environment, you’re looking for beta, you’re looking for outsized types of returns because you’re not going to get that anywhere else. This encouraged the boom.
Obviously, with inflation coming home right now, I’ve often explained that inflation is the canary in the coal mine for biotech markets. It’s something we should continue to pay attention to, because I think it’s a bit of a barometer.
Another factor we talked about in a previous episode is the FDA and how regulatory activity was moving in the right direction. Since that conversation, the momentum at the FDA has slowed a bit, introducing a level of risk and unpredictability as the director’s seat has remained open for nearly a year. This has added to the burden on us as an industry.
There’s also a human tendency to do whatever you can until you break the camel’s back, and I don’t think that’s any different. Going back to the drought we were talking about, when money dried up and reduced the incentive to start a business, we have since seen the pendulum swing. There has been an imbalance in the demand for new businesses, which has given rise to an unprecedented boom in business start-ups and a parade of IPOs. It’s led to a point where we’ve now created such a supply of companies, and pushed them all to market, that we’ve almost created irrelevance. All of these companies are fundamentally dependent on the benevolence of the capital markets for their day-to-day operations. There’s something like 14 PDL1 checkpoints on the market right now, and I think that says it all. Why has all this money been spent on the development of these companies? Yes, it’s a huge market opportunity, but what you’re doing cannibalizes good science by trivializing these products.
Shaw says we’ll see a level of “discernment” that we haven’t seen since the start of the boom. There is no such thing as a fully funded biotech company, especially at the development stage. They must continue to return to the markets. If you think back to college, when you run out of beer, you have to pass the hat. But there are a lot of mouths to feed here, and the money isn’t as readily available as it used to be. The bar was much lower for creating and financing businesses, and I think we are entering a much more demanding environment. I think we will see a level of Darwinism as a result.
Industrial perils and binary risks are inherent in anyone who chooses to play in the biotech sandbox. Generally, it is accepted that 90% of all these experiments will fail. It’s just a consequence of the industry we love. You need a high pain threshold to play. You know what you’re dealing with, but you also know that failure is the norm. So some of the Darwinism that I anticipate will correct itself. In this environment, we’re doing high wire act, the safety net has been taken away, and I think it’s going to be a lot less forgiving on the road. Investors are the ultimate arbiters. In the end, they will lock in their investments. It will be much more of a “show me” story as opposed to a “tell me” story. When you look at the nature of many companies that have gone public, many of them were preclinical and very fictional. Now, I think investors will want to see what you actually did.
For Shaw’s advice on how emerging biopharma leaders should manage these changes in access to capital, tune in to episode 81 of the Business of Biotech podcast.