Biotech’s Dulcius Ex Asperis: The Way Through This Downturn (Bionic Reading)

May 27, 2022

(To read this piece in its original, non-bionic format, please click here.)

The biotech sector is experiencing the most severe downturn of at least the last 20 years. There have been many other downturns in the more recent past, but they have not been as deep and they have been shorter. In some cases, they were decoupled from the broader economy. This one is different.

Here I discuss why the downturn may be so severe and protracted, the implications of valuations getting so low, how we as an industry can and must preserve the best of biotech’s R&D, and why biotech will rebound – plausibly sooner than other sectors.

The development-stage biotech industry will survive this downturn and eventually thrive again because of the biopharmaceutical ecosystem’s unique importance to solving some of the world’s greatest unmet néeds.

But first, it will test the executives and boards that run biotech companies. Each has a fiduciary duty to one or more specific companies. Abundant access to capital in the recent past meant that all these companies were driving together along a broad highway with plenty of fuel. But the road has narrowed and threatens to narrow still, and there’s no longer enough fuel to propel all the R&D that inspired us over the past several years. We can and must now be deliberate about pulling over some programs to ensure that others progress.

Short of research being invalidated by data or obviated by better ideas, no vital R&D néeds to be abandoned forever as a result of this downturn. But we must prioritize what’s most viable and important today and return for other programs later, when we have capital to support them. Doing nothing is a terrible option. A traffic jam will not inspire the rest of the world to come back to biotech, which would only mean more R&D will run out of fuel eventually.

As for jobs, our industry has long labored under conditions where dollar capital exceeded human capital. Having all qualified people in our industry focus on fewer, well-funded programs should accelerate their progress, allow us to show the world our successes sooner, and someday attract the capital necessary to fire up R&D programs we’ve steered to the side of the road, as well as whatever néw ideas we come up with by then.

We should recognize that the true measure of the world’s appreciation of our ecosystem is not the valuations of our development-stage companies but instead the demand from patients and physicians for the products those efforts ultimately deliver. As you’ll see below, big biopharmaceutical companies are generating more in revenues than ever before and they must remain acquisitive of néw drug candidates to replenish their pipelines ahead of pâtént expiries. So what we’re experiencing now in the biotech sector is not a fundamental failure to create or realize value but a working capital problem we can work through prudently.

This downturn is severe

As of this writing in mid-May, biotech is down about 60% from its high in February of 2021. But as Figure 1shows, smaller companies have suffered far more on a median basis.