The pandemic successes of biotech companies have become an albatross around their neck as they are now running low on cash, and the numerous investors who snapped their shares are selling them in droves.
According to data from Refinitiv, biotech companies raised about $32.7 bn in 2020 and 2021 in initial public offerings. But latest reports show that more than 83% of recently listed biotech and pharma stocks are trading below their IPO price. The figure is 37 percent for biotech companies listed in 2021.
Many of these companies had drugs that had progressed through the research and development cycle and used an IPO to ensure they could raise funds. But investors are now reluctant to release fresh funds in subsequent share sales. As a result, there is a market rout for biotech stocks because retail investors and generalist money managers have become cold towards that sector.
Many analysts say that biotech stocks are in a “complete bloodbath” that cuts across the board. Since its peak in February 2021, the Nasdaq Biotechnology index has fallen by a fifth. It is as if most investors are waiting for the sector to come to the bottom and have a rebound before giving it some interest. But with the recent turbulence in the market, the bottom might be far in the future. Biotech stocks are falling, and the fall has not relented. To illustrate how dramatic the fall is, some investors give these stocks a much lower market value than their cash reserves. Recently Jeffries, an investment bank, said that about 31 listed biotech companies have a market capitalization above $100 mn but have negative enterprise values.
The beginning of this year has not been favorable to biotech stocks. Investors are seeking safer assets with expected rises in interest rates by central banks globally. Also, many believe the pandemic made biotech stocks overvalued due to positive news about vaccines and other treatments. Also, increased scrutiny of regulators to curtail adverse drug pricing and quell anti-competitive activities is counterproductive. The biotech sector needs a steady stream of dealmaking to stay relevant.
It is no surprise that some biotech companies are in a cash crunch. Jeffries has identified about 11 of them with less than one year of funds for operating expenses.
Biotech funds were once the province of specialist fund managers with scientific backgrounds and tasked with poring over trial data before picking stocks. But now, generalist funds and retail investors have had greater exposure to the sector. Pierre Kiecolt-Wahl, of the investment bank, Bryan Garnier And Co, believes that “investors who should have left the space alone are among the highest number having a washout in the sector.” Private companies going public should be cautious. Instead, they should go for smaller IPOs and follow this with a secondary offering. While those already-listed companies with research setbacks should explore alternative ways of getting funds rather than resort to secondary offerings.
The bloodbath is hurting biotech-focused funds significantly. Asymmetry Capital saw its fund fall 10.2 percent by November 2021, while Logos Global Management, a life science-focused fund, had a fall of 31.4 percent. Cormorant Asset Management, a Boston-based firm, lost 28 percent in 2021. Most fund managers with considerable investments in the biotech sector are either going to make the hard decision of selling off their assets, continue operating or shut down completely. Already, Asymmetry was forced to close last month. The same fate could befall biotech firms that depend on these investors for cash.
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