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How is Market Volatility Impacting Biotech?

After record-breaking investment figures in 2020 and 2021, biotech is starting to experience the impact of market volatility.

European biotech startups raised €4.1 billion of investment in 2020 alone, and in 2021, the health and biotech industry was second to only Fintech by VC investment raised – European share of VC investment was at an all-time high.

The Covid-19 crisis drove global and European biotech investment to unprecedented levels from 2020 to 2021, yet investment in European biotech dropped 67% in Q1 of 2022.

How is ongoing volatility in biotech public markets changing the expected trajectory of biotech investment?

The 2022 picture

Unlike the impressive surges in private biotech company funding last year or the nearly €10bn raised by European life science funders, 2022 is a significantly different picture for biotech.

There is now a considerably more cautious approach from venture capitalists in biotech, with investment in European biotech falling and a fall in cash going to European biotech investors in Q1 of 2022.

Clinical trial issues and regulatory setbacks have been key contributors to the slowing down of investment in biotech.

Biotechs with small-to-midsize market capitalisations have been disproportionately impacted, represented by Euronext’s Next Biotech index (BITOK) and the S&P Biotech index (XBI).

Though the markets were expected to be due for a correction after the record-breaking highs of 2020, the volatility has been more severe than expected for investors.

But how is market volatility expected to impact the biotech sector?

Changing investor sentiment

There are a number of factors that are shifting investor sentiment, such as the breadth and diversity of the sector’s growth that will reduce the broad ripple effects like those of 2020.

However, there are signs of a potential rebound – strengthening investor appetite for biotech has been uncovered in an investor survey:

  • 66% think that biotech will outperform the broader market in 2022
  • 58% plan to increase their exposure to the biotech sector
  • 64% see the biotech sector as undervalued (versus 49% that thought biotech was undervalued in survey results from 2021)

Though these attitudes might not be accurate predictions for biotech, they do indicate a renewed interest from investors rather than an entirely apprehensive picture, which could prove positive.

Mergers and acquisitions (M&A) activity are also due to be on an upward trend throughout 2022, in part due to imminent patent expirations, stronger balance sheets and the potential of a post-pandemic world.

Fewer ‘tourist’ investors

The pandemic has had a significant and sustained impact on the biotech sector, with both positive and negative results.

Many biotech companies, particularly in the US, have faced the prospect of running low on cash whilst struggling to raise fresh funds after so-called tourist investors – investors who entered the biotech sector in 2020 to seek out opportunities in companies developing ways to fight the pandemic – have taken their shares during the pandemic and abandoned the sector.

Though many of these companies raised money through IPOs under the assumption that investors could be tapped for fresh funds in subsequent share sales through the research and development process, interest from tourist investors eventually diminished.

With this, however, has come a renewed hope that M&A will be reignited in the sector, as the tourist investors move away from biotech.

Additionally, through biotech may still be considered risky due to stock volatility at present, life sciences Venture Capital (VC) is continuing to flow at record highs – as the tourist investors move away from biotech, the trend may be one of recovery.

Shifting investor interests

Though market volatility is proving to have a significant impact on the investment outlook for the biotech sector, there are shifts in investor interests within it that could prove instrumental to its recovery.

Companies developing lab automation, ophthalmological treatments, and novel foods have received Europe’s top biotech investments in February 2022.

Industrial biotech companies reached close to €100m of private fundraising due to funding flowing in the food and agri biotech sectors and technologies such as lab automation and protein manufacturing.

Though the first quarter of 2022 has seen a gradual decline for biotech investments in Europe, the areas that continue to receive investor interest are worth noting due to how this may reflect investment trends in the future.

For example, Dutch company Protix will be using €50M proceeds to scale up its insect farming technology, providing sustainable alternatives to animal feed sources.

Lab automation has also seen companies such as Scopio Labs raising high investment, specialising in the use of artificial intelligence to speed up cell microscopy.

Emphasis on scientific advances

Though market volatility may be impacting the biotech sector now, the scientific advancements of the last few years will undoubtedly continue to generate interest as they mature.

The rapid advancement of mRNA vaccines demonstrated a newer pace of discovery and shorter treatment generation time – what used to be a 5-to-7-year phase 1 trial is now around 3 years.

Gene editing, CAR-T therapies for cancer, and even the use of AI are all elements that are rising on the agenda in biotech and indicating the imminent transformation of biotech through new drug discoveries.

CRISPR gene editing is an area receiving increased attention due to the expected unveiling later this year by Intellia Therapeutics (NTLA) of test results from a drug that edits genes inside human bodies.

These are major jumps for the industry, particularly at a time when innovation will be central to the more tumultuous period that biotech is currently navigating.

In conclusion

The pandemic has continued to impact biotech, with tourist investment having a detrimental impact on the investment outlook of the sector, alongside the difficulties arising from growing inflation and even the war in Ukraine.

The outlook isn’t entirely negative, however – scientific advances continue to drive innovation and interest in the sector, and M&A is expected to be on an upward trend alongside big pharma acquisitions.

Though the outlook may seem uncertain at present and biotech has a bumpy journey ahead, there are multiple factors that could contribute to biotech’s recovery from its current period of market volatility.

To find out more about the trends impacting the life sciences industry, or for expert advice on securing top talent for your life sciences company, get in touch with the Panda team today.