Mar 9, 2022 - Health

Biotechs are in a funk after COVID boom

Illustration of a saline bag solution with money as the liquid in the bag.

Illustration: Aïda Amer/Axios

The biotech industry is slumping after delivering life-saving COVID treatments and attracting droves of investors early in the pandemic.

Why it matters: Biotechs keep the drug pipeline flowing with novel treatments — and make attractive M&A targets for big pharmaceutical manufacturers. But regulatory uncertainty and a return to pre-pandemic life are combining to cool interest in public and private markets, experts say.

By the numbers: The SPDR S&P Biotech ETF fund, which is often used as a proxy for the industry performance, is down more than 37% over the past 12 months, far underperforming the broader market.

  • Biotech funding in February was down 59% year-over-year, with both public market transactions and venture capital funding falling off, per Jefferies.

Zoom in: After a run of explosive growth, the industry may have been due for a correction. Biotech flourished at the height of the pandemic, but investors are now returning to other sectors, including retail and transportation.

  • Analysts say investors also have been confused by the sheer number of biotechs being funded in private markets — and are uncertain how to pick winners and losers.
  • "To me it comes down to the pace. It's been a little bit too fast and I think a lot of that is coming home to roost," Oppenheimer strategist Jared Holz said on a recent "Bio Banter" podcast.
  • There's also continued uncertainty surrounding drug pricing legislation, pharma supply chains and federal antitrust reviews. Prospective changes to the FDA's drug approval process also could be in the offing.

Yes, but: The biotechs still are churning out products for investors to put money into. Biotechs that depend on capital markets grew R&D by 20–25% last year, Jefferies estimates.

The big question: Will dealmaking pick up because the companies are cheap, or will big drug manufacturers like Johnson & Johnson, Merck and Bristol Myers Squibb build out their pipelines on their own?

  • After driving so many industry decisions the past two years, COVID is no longer the all-consuming factor, Oppenheimer's Holz said.
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