The Impact of the COVID-19 Pandemic on the Biotech Industry.

Abstract

Human Gene TherapyVol. 31, No. 11-12 CommentaryFree AccessThe Impact of the COVID-19 Pandemic on the Biotech IndustryPhilip ReillyPhilip ReillyCorrespondence: Dr. Philip Reilly, Third Rock Ventures, Boston, MA, USA. E-mail Address: preilly46@comcast.netVenture Partner, Third Rock Ventures, Boston, Massachusetts, USA.Search for more papers by this authorPublished Online:12 Jun 2020https://doi.org/10.1089/hum.2020.29124.preAboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsPermissions Back To Publication ShareShare onFacebookTwitterLinked InRedditEmail If you own a share of stock, you own a part of a company. The companies that constitute the biotech industry can be considered in two broad categories: those that are privately held, and those that are publicly held; that is, in which shares are freely traded in any one of several markets in the United States and elsewhere. Taken as a whole, the biotech industry constitutes a tiny portion of the companies that are privately or publicly traded. Overall, the industry accounts for about 2% of the gross domestic product (GDP).Like the rest of the assets traded on the various stock exchanges, the public biotech sector entered 2020 in good health with optimistic expectations. During 2019, the NASDAQ, where most biotech stocks are listed, hosted 156 initial public offerings (IPOs) that raised over $34 billion, considerably more than did the historically larger New York Stock Exchange. Among the 156 new listings, 51 were biotech companies that raised in aggregate $5.6 billion. Although its valuations are more volatile than other sectors that are closely tied to consumption, in 2019 the biotech sector was confidently marching along with the longest bull market in the nation's history.Then, almost without warning and almost overnight, a small, highly infectious RNA virus, probably a commensal resident in a bat species in Asia, drove the market, including the biotech sector, into near free fall. The Dow Jones Industrial average fell more than 38%. In less than 2 months, 30 million people in the United States lost their jobs and filed for unemployment benefits. Millions of people became afflicted with COVID-19. As of May 1, more deaths have been attributed to it than to US casualties in the Vietnam War. In the United States, the death toll is likely to pass 100,000 in 2020.Yet in April, as the epidemic became a pandemic, schools closed for the year, and social distancing became the new norm, the stock market enjoyed its best monthly gain (∼14%) in modern history. During this tumultuous period, biotech fared relatively well, dropping less than most other sectors in March and rising along with them in April. As of March 12, the NASDAQ Biotech Index was down a comparatively modest 10%. As I write these words (May 12), the composite Biotech Stock Index is at an all-time high.How badly has the pandemic hurt the biotech industry? How long will it take to recover? It is possible to rationally address the first question because it is phrased in the past tense. A tentative answer to the second will have wide error bars.The biotech industry, one of the most innovative in our society, depends on the free flow of risk capital to support the billion-dollar journey from idea to drug approval and clinical benefit. Relatively few metrics drive valuation. The most important of these is the ever-shifting perception of whether a company's programs will complete the marathon to new drug approvals (and how long that will take). Especially for small to moderately large, highly innovative biotech companies, a few binary events determine success or failure. One need only look at the impact of the numerous bold but unsuccessful efforts to develop drugs to treat persons with Alzheimer's disease or depression to see that when a major trial fails to meet its clinical endpoint, those who have invested in the companies can lose far more money (>75% of market value) than from cross-portfolio losses triggered by global forces.Science is evidence driven. The pandemic erupted quickly and its course remains fluid. But, there are facts to assess. During the first quarter of 2020, the impact of the coming pandemic on the biotech market was relatively mild. The most important indicators—new funds raised by venture capital firms, the pace of clinical trials, mergers and acquisitions (M&A), and regulatory approvals (or rejections)—did not change much. In that quarter, there were more biotech IPOs on western exchanges than in the last quarter of 2019. Five of them each raised more than $200 million, an impressive number. During the same period, the number of FDA approvals did not markedly abate, and venture capital firms raised new funds, made new investments, and launched new companies at a reassuring rate. Remember that the purpose of the venture capital industry is to rationally deploy other people's money in the hope of generating solid returns in future years. Freezing in place is not an option, nor should it be.In late March, important dislocations occurred. Biotech companies self-quarantined (although many continued skeletal operations in their labs). Venture firms began working from home. Most important, clinical trial sites halted operations as the hospitals struggled to deal with the pandemic. According to one informed estimate, at least 1,100 clinical trials in the US and Europe slowed or stopped. For the scores of privately held biotech companies in the midst of raising new money, difficulties mounted. Fundraising slowed, and valuations accorded to new rounds were often flat. For some institutional investors, the option of buying shares in publicly traded companies with sharply lower valuations appeared more attractive than making investments in companies facing a long journey to revenue creation. Of course, each trade in the market has a winner and a loser. Huge profits can be made in a depressed market. In March, one hedge fund made perhaps the most profitable trade (> $2 billion) in history by anticipating a sharp upswing in April. The dislocations, which will probably not resolve until the end of 2020, are more or less distributed across all clinical stage companies.Although I cannot provide firm data, it appears that in the second quarter of 2020 in the private sector, “deal flow” continues at a respectable, if not robust, pace. Remember, the job of venture capital is to invest in or create companies. From April 1 through May 1, five biotechs “went public.” All are currently trading higher than on the date of their initial public offering. A few more biotechs are in queue to go public through the rest of the quarter.Predicting the future is a fool's task. But, as the editors have asked me to do so, I will hazard some guesses.The vast sums of capital needed to support the biotech industry are in place, and those who control them are eager to see them deployed. The many brilliant and innovative scientists eager to translate ideas into clinical application will continue to grow in number. The tools and techniques to probe nature's depths in the hope of developing new drugs are powerful. There will be increased M&A of companies with valuable assets yet insufficient funds, but few companies will disappear. Some venture funds will double down on their investments, committing more of their capital to existing projects rather than diluting themselves by raising outside funds at low valuations. Maturing biotech companies will continue to go public, albeit at a slower rate.Preclinical laboratory work will be delayed by one to two quarters. Clinical trials will be slowed by two to three quarters. Regulatory interactions (except, of course, regarding anything related to fighting the pandemic) will be slower for two to three quarters. However, I was heartened to hear at a panel discussion sponsored by American Society of Gene & Cell Therapy (ASGCT) on May 11 that Peter Marks, MD, PhD, Director of CBER at the FDA, spoke reassuringly that the FDA would work diligently to support clinical trials, despite numerous disruptions such as subjects missing scheduled trial visits.For most aspects of the world economy, the pandemic is having devastating effects. But, will this be true for the biotech industry? It is not fanciful to imagine that COVID-19 is providing a huge stimulus to biotech. The massive efforts to develop vaccines, deploy test kits, develop highly predictive antibody tests, repurpose existing anti-viral drugs, and develop new drugs are causing billions of dollars to flow toward many biotech companies. I regard the COVID-19 pandemic as the biotech sector's first modern challenge (akin to the development of the atomic bomb or the race to the moon). I also think that the industry's response to the challenge is likely to generate significant interest among new groups of investors. I think the industry will fare well in the markets. A year or two from now it may be regarded as a key reason why the response to the pandemic ultimately succeeded.In 2021, the biotech sector will have a valuation at or above the valuation it had in late 2019. Preclinical work will be robust. Clinical trials will be near the volume of a year earlier. The regulatory review of clinical trials will be more efficient. New biotech companies will raise needed capital, and the number of new IPOs will not be much different than in 2019. There will be an uptick in M&A activity as large pharmaceutical companies acquire smaller companies (for example, the decision announced by Alexion on May 5 that it would acquire Portola at a valuation much below that company's value in mid-2019). Most important, the contributions of talented scientists both inside academe and in the industry will continue to initiate discovery programs, many of which will lead to new drugs in our endless battle against disease.Author DisclosureThe author is a venture partner at Third Rock Ventures in Boston. He has helped to start many biotech companies, and he owns substantial equity in a significant number of them as well as in others. The views expressed above are his own.FiguresReferencesRelatedDetailsCited ByBioeconomy during the COVID-19 and perspectives for the post-pandemic world: Example from EUEFB Bioeconomy Journal, Vol. 1Snake antivenom production in Ecuador: Poor implementation, and an unplanned cessation leads to a call for a renaissanceToxicon, Vol. 202 Volume 31Issue 11-12Jun 2020 InformationCopyright 2020, by Mary Ann Liebert, Inc., publishersTo cite this article:Philip Reilly.Human Gene Therapy.Jun 2020.608-609.http://doi.org/10.1089/hum.2020.29124.prePublished in Volume: 31 Issue 11-12: June 12, 2020Online Ahead of Print:May 18, 2020PDF download