2020 was a ground-breaking year for biotech and pharma, despite – and because of – the COVID-19 pandemic. It saw a record number of FDA approvals for new drugs, more than any other year apart from 2018, as well as record numbers of biotech IPOs, a notable rise in biotech M&As, record numbers of scientific achievements, and record amounts of Venture Capital biotech investment.
Early 2021 wobbles in the biotech market
In contrast, the first few months of 2021 have been something of a disappointment. A number of biotech stock price indices, including Euronext’s Next Biotech Index in Europe and the Nasdaq Biotech Index in the US, dropped significantly in February 2021. Although prices stabilized over the next couple of months, May 2021 brought another fall. A few analysts sounded a broader note of concern about the potential impact of inflation and the possibility of drug price regulation in the US, and how these could affect pharma markets.
But that said, many consider that we’re just seeing the market correct itself after such a stellar year, in which biotech ETFs reflected the sector strength.
Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More
Biotech’s long-term health remains robust
It’s generally agreed that while the current correction might last for several months, the biotech sector may be too robust to be seriously affected. Previous estimates had suggested that the biotech market in the US could grow by 9.2% CAGR through to 2027, so it’s far from its peak. The health sector is usually shielded from rising interest rates and fluctuations in consumer demand, partly thanks to health insurance, which covers the cost of many treatments, and partly because data is biotech’s main currency and it’s not governed by consumer changes.
A recent spate of high-profile biotech SPAC acquisitions, like the Soaring Eagle Acquisition Corp.’s acquisition of Ginkgo Bioworks, valued at $17.8 billion, is testimony to the health of the sector. There’ve also been other non-SPAC deals, like Thermo Fischer Scientific’s acquisition of Pharmaceutical Product Development (PPD), a clinical research organization, for $17.4 billion in April.
There’s still plenty of equity up for grabs in the market, thanks to recent stimulus deals and low interest rates. In these situations, investors tend to look closely at higher beta sector investment, hoping it will provide a better return on their investment than low-risk savings options. Big pharma companies themselves still have plenty of liquidity and are looking to spend it on smaller, up-and-coming startups which have the agility to produce cutting-edge innovation. Additionally, large venture capitalists and private equity companies learned a lesson from the last financial crisis, around a decade ago, when active buyers were the ones who emerged as winners, so they’re looking to actively invest in promising prospects.
On top of that, 2020 brought many exciting proof of concepts that show there are new treatments in the pipeline. There are also significant partnerships emerging in the biotech space in developing countries such as India, China, and Brazil, which could further drive innovation, improve production, and open more revenue within the sector.
COVID-19 is still benefiting the sector
The biotech sector experienced the silver lining to the COVID-19 pandemic cloud, and its shine hasn’t yet faded. The new discoveries and innovations that were made in the course of developing COVID-19 vaccines are powering a cohort of new treatments, such as those based on the mRNA technology used by Pfizer and Moderna. The shock of how underprepared we were for such a pandemic has pushed governments and public health organizations towards future preparedness, including investing more in the infrastructure needed to support a fast response to the next crisis.
COVID-19 accelerated digitalization in every sector, including pharma and biotech. Over the past 12+ months, companies discovered what was really possible in terms of accelerating testing timelines, ramping up R&D, and speeding time to market. There’s a new move towards virtual trials and remote monitoring for testing to involve more patients and broaden the results, thereby smoothing the path to regulatory approval. We could see a lot more new partnerships between pharma and tech companies over the next year, as the sector embraces digital adoption and modernizes its business model.
The terrible toll of long covid means healthcare providers need new treatments for a range of chronic conditions, as well as better long-term health care and remote health monitoring. This in turn accelerates the development of smart medical devices that can accurately gather health data without forcing patients to visit a clinic or stay in hospital under observation. Healthcare systems are overstretched, so there’s a need for anything that helps relieve the burden on medical staff.
At the same time, we’re seeing new interest in mental health care that’s driving demand for better solutions. Bereavement, loneliness and isolation, and the stress and fear of infection have all raised the incidence of anxiety disorders, depression, and other severe mental health issues. Domestic violence, alcohol and drug abuse, and child abuse all rose during lockdowns, with the obvious impact on mental health. This sea change is encouraging biotech companies to redouble their efforts to develop effective mental health treatments.
It’s not just Covid-19
Long-term factors were driving growth in the biotech sector before the pandemic came along, so there’s little cause to fear that 2020’s phenomenal performance was a flash in the pan. Writing in Forbes, analyst Bruce Booth attributes last year’s wave of approvals not just to the impact of COVID-19, but also to a decade of evolution in the biotech marketplace.
Quite apart from the COVID-19-induced digital acceleration, biotech companies have been finding new applications for cutting edge technology such as biosensors and smart devices as well as 3D printing using human tissue. At the moment, this extends to skin cells, heart valves, and cartilage, but there’s hope that it won’t be long before it’s possible to use 3D printing for vital organs like the liver and the heart itself. The recent innovations of biotech firms draw on a number of modalities like active site and allosteric small molecules, gene editing, cell therapy, next gen Fc-fusion biologics, and antibody-drug conjugates, indicating that biotech R&D is broadly planted across the sciences.
Pharma companies are facing a patent cliff, so they’re pushing investment in R&D to develop new, patented solutions that can drive revenue when their current lucrative patents for OTC medications expire.
Additionally, chronic conditions have been increasing for years, and the demand for personalized medicine and individualized treatments is nothing new. Patient activist groups have been lobbying for new treatments for rare disorders and cancers, and sure enough, oncology is one of the strongest biotech sub-sectors. Treatments for diabetes and auto-immune disorders are also high on the list. Out of the record new treatments approved by the FDA in 2020, two-thirds were for rare diseases, such as for rare cancers, like Trodelvy for triple negative breast cancer and Danyelza for pediatric neuroblastoma; rare chronic conditions like Duchenne muscular dystrophy and progeria; and rare infectious diseases like Ebola and Chagas.
2021 needn’t dent biotech confidence
The astonishing performance of the biotech sector in 2020 already attracted a lot of investor attention, and the market looks likely to continue to deliver a strong performance for the foreseeable future. Analysts tend to agree that the early wobbles of 2021 reflect a market correction, but may not hold the sector back from continuing to grow and expand, giving encouragement to investors who are excited by the potential of the biotech sector.
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The securities of small-capitalization companies may be more vulnerable to adverse issuer, market, political, or economic developments than securities of large- or mid-capitalization companies. The success of biotechnology companies is highly dependent on the development, procurement and/or marketing of drugs. The values of biotechnology companies are also dependent on the development, protection and exploitation of intellectual property rights and other proprietary information, and the profitability of biotechnology companies may be affected significantly by such things as the expiration of patents or the loss of, or the inability to enforce, intellectual property rights. The research and development and other costs associated with developing or procuring new drugs, products or technologies and the related intellectual property rights can be significant, and the results of such research and expenditures are unpredictable and may not necessarily lead to commercially successful products.
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