Rebound expected for biotech
Optimism at start of last fiscal quarter
This was supposed to be the year of the biotech comeback, when promising new medicines and high-dollar buyouts would reverse a sector-wide slump that dates back to 2021. Instead, biotech stocks have dramatically underperformed the broader market, and the year’s few green shoots are yet to grow into a turnaround.
The closely watched XBI biotech index has fallen more than 10 percent in 2023, while the S&P 500 rose about 13 percent in the same period. Privately held companies have struggled to raise new capital without taking a hit to their valuations, and biotech IPOs have been rare in number and inconsistent in return.
The problem, analysts and investors said, is that the generalist investors who steer trillions of dollars of capital have simply soured on biotech. The furor over novel weight loss medicines like Wegovy has largely been a Big Pharma phenomenon, and rising interest rates have steered fund managers away from risky biotech stocks. The sector has gone through boom and bust cycles in the past, and it’s difficult, if not impossible, to predict when the macro winds might change and make biotech as popular as it was in the early days of COVID-19.
“Probably the biggest frustration of being a biotech analyst is that we as specialists are skating around this little pond and we don’t know how thin or thick the ice will be at any given time because we’re not in control of the overall climate,” said Eric Schmidt, a biotech analyst at Cantor Fitzgerald in New York.
But there’s optimism heading into the last quarter of the year. In just the last two weeks, two biotechs, Neumora Therapeutics of Watertown and RayzeBio of San Diego, went public. And on Wednesday, the Federal Reserve projected that interest rates will begin to drop next year, indicating that there
may be an end in sight to biotech’s stock market malaise. “People aren’t afraid anymore that the Fed is going to raise rates forever. … That’s partially why we’ve started to see the market open,” Cooley attorney Josh Kaufman said.
Now, executives of privately held biotechs are dusting off their IPO paperwork. Attorneys in the life science sector estimate that three to five biotechs will head to the stock market before the end of the year, but predict the real action will come in 2024.
Ropes & Gray attorney Brad Flint has a couple of biotech clients who are actively preparing for IPOs. “I don’t think that at this point, they necessarily feel like there’s any guarantees,” he said. “I think we have to see how the next couple of months develop. But they’re taking affirmative steps and spending real money to be at the point of going public immediately when the window opens, because there is certainly a sense that there will be a rush to market once the window reopens.”
All eyes are on the companies that have managed to clear the IPO hurdle, and the early results are mixed: While both Neumora and RayzeBio priced at the midpoints of their price estimates and traded well on the first day on the Nasdaq, their performance since has been mixed — Neumora stock closed Friday at $11, down from its launch price of $17 per share. RayzeBio also launched with a $17 share price and is now trading around $19.62.
The sentiment has also been tempered by Acelyrin’s recent stock drop. The biotech managed to raise $500 million in an IPO this year, only to announce earlier this month that its lead drug failed in a pivotal clinical trial.
Atlas Venture Partner Bruce Booth is reasonably skeptical that there will be a bull rush of IPOs happening in the next couple of quarters. Rather, industry chatter is that many startups will lean toward reverse-mergers, wherein private companies move onto the stock market by merging with public companies that are trading below their cash reserves or have burned through their own drug portfolios, leaving them with few business options. The conversation around reverse-mergers has reached levels Booth hasn’t seen in his decades of biotech investing.
To Schmidt, who has covered biotech for more than two decades, bull and bear cycles are part of the business, whether driven by the mapping of the human genome, angst over drug prices, or the dawn of a pandemic. As long as the industry can keep coming up with new technologies that lead to powerful medicines, the long-term outlook will be bright.
“I think these are little ripples in the pond that come and go,” Schmidt said. “We can’t pay too much attention to any one-, two-, or three-month cycle. When you take a step back and look at the ocean, it’s still all really favorable.”