macdougall musings

Sector Roars Ahead, But 2022 Will Be One To Watch For Public Biotechs

2021 delivered another record year of biotech funding across private ventures, IPOs, SPACs and follow-ons, as well as increases in both average deal size and valuations. However, as funding inflows continued to ascend, market performance of public biotech companies was relatively underwhelming as the sector underperformed the market in 2021. In fact, the Nasdaq Biotechnology Index remained flat in 2021, underperforming returns for the S&P 500 by more than 25 percentage points.

Looking Ahead

What will 2022 bring? It is certainly off to an interesting start with the rapid spread of the COVID-19 Omicron variant and an inflationary U.S. macroeconomic backdrop which is anticipated to result in multiple Fed actions over the course of the year. Equity markets have entered the year under pressure as investors adjust to a new interest rate and economic outlook, and biotech has underperformed the market year to date.

Public biotechs will be working through a period of valuation rebasing near-term, and given the sheer number of public biotechs, it will be a critical period for companies to deliver on their milestones in order to maintain premium valuations. A key bellwether for the sector this year will clearly be follow-on activity – specifically how well the class of 2019 and 2020 biotech IPOs execute follow-on transactions over the next 12 to 18 months. Many of these companies will return to markets at lower valuations than their IPOs and will need to adjust their strategic priorities (and expectations!) accordingly.

Fundamentals and Sentiment

Market dynamics aside, fundamentals of the sector remain strong on balance, and we do see room for optimism. Innovation continues to accelerate, supported by robust company and private capital formation. There is a healthy IPO backlog, and despite mixed aftermarket performance three deals were successfully executed in the first week of January.

Pipelines are advancing at record pace across high value technology areas and indications. Industry pundits anticipate a data-rich year ahead, including multiple large cap companies expected to announce high visibility data results over the course of the year.

M&A is also a wild card and could represent a net positive for performance. Large biotech and pharmaceutical companies are sitting on colossal multi-billion dollar war chests, and looking externally for innovation. A combination of lower relative valuations and positive data validations over the course of the year has the potential to catalyze a wave of pent-up demand and activity.

Navigating 2022

Now more than ever, public biotech companies need to communicate compelling stories to the market and deliver on their milestones of value creation. Negative news or periods of slow news flow will likely represent pain points to maintaining and attracting new capital in the current environment. Strong, consistent communication will be key to generating and preserving company value as we navigate these tumultuous times.

Interested in upcoming biotech IPO trends and challenges? Contact our Head of Investor Relations, Sara Michelmore, to learn more.

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