Henrik Ekman BioTech Equity Analyst

Funding still available and the stocks keeps getting cheaper
When we talk about the fascinating world of BioTech and Life Science investing, we typically think about the potential of investing in a major new drug discovery that will end up saving lives or improve the health of many people sometime in the future. Only between 5 and 10 percent of all preclinical projects (depending on the clinical area) that make it through to the market, but when it happens and you have been invested early, the financial reward can be significant.

But besides the fascinating and potentially rewarding business model, 2022 is a reminder of the ongoing ‘short-term’ part of the business model that has to do with securing the day-to-day funding of the company. Typically, Life Science and BioTech companies want to fund 12 to 18 months ahead for reasons of balancing milestone risks (from the investors point of view) with price of financing (from the company’s point of view). That is why we often end up talking about short-term funding challenge versus long term potential. And in a low-risk appetite environment it attracts even more attention.

As it can be seen below there has been a huge decline in the amount of money raised in the Life Science and BioTech sector in the second quarter of 2022. In particular, IPOs and issuance of debt which can both be associated with relatively high-risk appetite environments focused on ‘short term’ sentiment assessment, has gone to practical zero.

There are still other types of funding available, not the least the always most important type of partnership funding as well as the funding from venture capital (Private Equity funds dedicated to BioTech investing). Granted, the partnership funding from (big) pharmaceutical companies has also come down a lot and will most likely show the same development in the third quarter, but it will still be an important option for most Life Science and BioTech companies to consider.

Pharmaceutical companies and Private Equity funds both share the long-term approach to BioTech investing. And they both have a lot of cash to spend. The Private Equity fund is required to invest the money and are incentivized to do this sooner rather than later. For a pharmaceutical company, acquiring a BioTech company can bring forward a strategic ambition or fill an internal gap in a development plan, so the timing can be more flexible. Whether the pharmaceutical company choose to engage in a partnership deal instead depends on the specific circumstances, but on balance the acquisition option is more attractive now following the huge drop in average share prices. 

Contrary to other companies that can be affected by different macroeconomic and geopolitical uncertainties, the scientific and commercial potential for pipeline projects in most BioTech companies will typically not be affected. In principle, this means that if a BioTech company continues to reach its scientific milestones, time is working positively for the valuation of that company as it constantly moves closer towards the point of scientific success, regulatory approval and subsequent likely commercial launch and revenue streams.

It is always impossible to assess when stocks have become too cheap and will begin to go up. But whether you are a pharmaceutical looking to acquire a BioTech company, or a private investor with a long term investment horizon, the combined effect of huge drops in share prices, no milestone delay for almost a year (assuming that is the case for the BioTech stocks you consider investing in), and the latest relative performance suggesting BioTech no longer underperforms, puts you in a much more attractive position from a long term investment perspective than less than a year ago.