The world is falling apart and your portfolio is getting crushed. That said, you have cash to put to work and you are enticed with the plummeting valuations. Valuations are plummeting for a reason however and you and your team are well aware of that. The biotech space has historically weathered downturns quite well and outperformed in strong markets. Let's face it, a cure for cancer will be very profitable in any market. This past March, we witnessed an all time high of biopharma venture investing.
As Bruce Booth or Atlas Ventures wrote in his recent blog, " That disconnect from conventional economic cycles is one of the reasons why biopharma tends to outperform other sectors during financial recessions." He also accurately states "there are plenty of unmet needs of patients where innovative new therapeutics can have a meaningful impact. Loss-making biopharma is where many of these new drugs are discovered and/or developed today: companies that get funded, and valued, based on data which accrues over years, not weeks and months."
Part of this is due to the ability to execute an exit strategy. For the reasons stated above, biotech investors are able to exit/create liquidity via IPOs. Year to date, healthcare represents 52% of the IPO market (see below) as biotechs drove the activity. Over the last year, healthcare represented 42% of the IPO market.
Biotech IPOs in '20 have raised their initial capital raise amounts due to demand (Beam Therapeutics,Black Diamond Therapeutics,Revolution Medicines, and Schrödinger). The final results once the bell rang even exceeded the raised estimates. Performance thru 2/19 had exceeded 50% over original offering prices. Overall returns through Q1 averaged 19%. The secret is out however .. ok it wasn't really a secret. Warren Buffet's recent filings revealed he initiated a position in Biogen (BIIB). As well, the Russell 2000 weightings in healthcare continue to rise. At the end of 2016, healthcare weightings were ~ 12% . By the end of '19, the sector was the highest weighting at ~18%.(Siblis Research).
There is some concern about the overall funding in early stage biotechs. The numbers have been approximately been cut in half from 1Q2019. However, The numbers in Q12020 aren't all that concerning as annualized they would be slightly below '19. Take out some of the mega rounds and you might scratch your head but let's see how this plays out.
The drug development pipeline seems to be robust. The preclinical and phase 1 development pipeline is up 98% in '19 vs '17. The preclinical pipeline alone has seen a 116% rise in the same time period. See the chart below for a breakdown by therapy type.
There is plenty of money flowing into new biotech funds as ARCH Ventures and Flagship Pioneering closed funds worth $2.6 billion. Venbio recently raised $394 million for its third life science fund. As well, Qiming raised their own $1 billion fund. Corporate VC investments is another factor in allocation of capital into earlier rounds. Supplementing and even supplanting in-house R&D with venture investment is driving this activity. In conclusion, don't take your eye off early stage biotechs, as there is amazing new companies and technologies out there. You just have to know where to look.
Todd Bertsch, an investment banker at Weild & Co., has 25+ years of initiating and delivering sustained results and effective change. Experienced strategist, entrepreneur and startup enthusiast with a passion for building businesses and challenging the status quo. Dynamic and motivated professional with a proven record of generating and building relationships. All opinions and views are his own.