McKinsey’s Alexandra Zemp and Rachel Moss presented intriguing data and provided timely insights on where they see the markets, currently in turmoil, may go in 2022. The McKinsey partners opened with frightening stats that the biotech public markets have declined 36% since 1 Sept 2021 to May 2022. The IPO window has narrowed significantly, with funding raised down 63% compared with just 12 months ago, a meagre $8bn compared to a high of $22bn. There was rapid growth to Q1 2021, then a plateau, and now a steep descent.
There are several reasons for the tide going out: variance in company quality (perhaps too many investors backed too many poor ideas too quickly), increasing selectivity of investors (probably because of the former), generalists leaving the market (as they found they couldn’t make a quick return in biotech), and the bleak wider economic context (war in Ukraine, recession, interest rates up etc).
But the tide is receding from an all-time high: 2021 was an unprecedented year for VC funding, and the pharma industry has significant ‘dry powder’ yet to invest. But whilst pharma is sitting on cash, biotech is shifting to a ‘preserve cash’ mode. 2022 could be the year of pharma deals, especially where pharma is playing ‘catch-up’ in areas it has neglected to invest in whilst understandably focussed on covid, such as cell therapy. Most deal value will go to oncology, the usual number one area in life sciences, but areas such as CNS show much greater growth potential.
Big pharma is also doing big deals earlier, racing to secure pipeline patching innovations earlier. McKinsey stats showed in last two years that 58% of innovation bought to fill pipelines has been for assets without clinical data, which is a huge sea change since pre-covid times. That should be encouraging for biotech CEOs and CFOs counting the coins. The Pharma companies have also seen they have a better odds on bigger revenues if they go earlier in terms of M&A for innovation. 66% of revenues come from drugs from external innovation. Collaboration is also changing with much more real-person in-person collaboration, and tech exchange, not just finance. So whilst the tide may be going out in 2022, sound ships with capable crews can still sail to bright new destinations. But if you are about to set sail, you may want to wait for the weather to change.