Biotech Industry Overcomes Slump, Adapts to New Normal

Biotech is experiencing a transformative phase in 2024, with a boom in mergers and acquisitions and a resurgence of initial public offering activities. M&A activity is on track to surpass last year if the current trend continues, while funds raised via U.S. IPOs for biotech have also significantly increased compared to last year. Similarly, the biotech XBI index recently rebounded, breaking the $100 mark for the first time in two years. These trends underscore a rejuvenated market enthusiasm.

“If 2023 was the year of venture market shock and volatility, 2024 may be the year of adjustment and cautious optimism,” Silicon Valley Bank’s August 2024 report noted. Kale Frank, managing director of the bank’s life science and healthcare division, put an even more positive spin on the current economic climate, telling BioSpace that “it feels like the pendulum is swinging toward optimism.”

Experts told BioSpace that the spike in biotech mergers, acquisitions and IPOs—collectively referred to as “exits”—signifies a new era marked by strategic moves and renewed investor confidence. And as invested parties realize a return through these mechanisms and reinvest that money into other companies, it creates a favorable environment for innovation and growth, leading to a robust and healthy industry.

This new landscape represents a new normal for biotech, experts agree. Cody Powers, principal at ZS Associates, told BioSpace the current environment marks a change from the depressed biotech sector that followed the bursting of the COVID-19 “bubble.” The bubble, he explained, was driven by heightened investor enthusiasm for biotech solutions during the pandemic, but it was not sustainable. Biotech valuations soared based on the sector’s future potential rather than its performance at the time, Powers said, and eventually, the industry suffered the consequences. Toward the end of 2021, as interest in COVID-19 products waned, the market was thrown into a state of volatility, stalled IPOs, restructurings and bankruptcies.

Brad Sitko, chief investment officer at XOMA Royalty, added that when the general capital markets experienced rising interest rates, it put pressure on the innovation sector, including biotech, causing generalist investors to move to safer investments and sit out IPOs and follow-ons. But the recent increase in biotech exits signifies a transition period to market recovery, the experts agreed. “While the market hasn’t rebounded as quickly as some hoped, there’s a clear upswing,” Lain Anderson, managing director at L.E.K. Consulting, told BioSpace.

Amid the pandemic, interest rates plunged, leading many biotechs to take on more debt. 2021 saw 170 IPOs, in contrast to the historical average of about three dozen each year, said Andrew Lam, managing director and head of biotech private equity at Ally Bridge Group. Then, interest rates increased throughout 2022, and debt financing declined through 2023, when there was a surge in bankruptcies and restructuring plans among biotech companies looking to stay afloat. Last year saw a record total of 41 biotech bankruptcies, up from 20 the year prior.

Many speculative and early-stage companies faced bankruptcy or restructuring, Powers said.

Meanwhile, biotech IPOs were almost at a standstill, with only a handful of companies going public in 2023. M&A dealmaking saw an unexpected downturn in the first half of 2022, IQVIA reported, as both deal volume and value significantly declined amid the challenging market conditions and escalating geopolitical tensions.

Despite these challenges, the sector demonstrated resilience, focusing on strategic realignments and innovations, Powers said, and firms that survived the drought are now well-positioned to benefit from improved financing. M&As and IPOs have rebounded—a “correction” that “reflects a transition to a more cautious yet strategic industry,” Powers added.

Frank agreed. “I think the market is trying to reestablish a new equilibrium,” he told BioSpace.

The rise in the XBI index, which tracks the performance of biotech companies, reflects increased investor confidence and financial health within the sector. According to Lam, the XBI is up 50% since the lows of November 2023. This positive performance encourages more exits as companies and investors capitalize on favorable market conditions.

Indeed, Leerink Partners reports biopharma M&A deals more than doubled in the first quarter of this year compared with the same period last year, from six to 13 deals. “2024 is shaping up to be another record year for biotech M&A,” Lam told BioSpace.

Biotech IPOs, meanwhile, have also seen a strong uptick since the beginning of 2024, with BIO reporting 10 IPOs in the first half after 2023’s total of 16. By mid-2024, IPO proceeds had seen 37% growth year-over-year, according to an EY report. BDO USA expects to see more IPOs this year than in 2022 or 2023. “High numbers of confidential IPO filings indicate cautious optimism compared to the 2021 boom,” Lam said.

Relatedly, GlobalData found the private biotech sector saw a 46% rise in total venture financing deal value in the first quarter of 2024 compared to the fourth quarter of last year. Experts said this reflects investor confidence in the industry’s robust fundamentals and promising therapy pipelines. This year’s transition period can be described as a “fragile recovery,” Lam said.

Frank also agreed that this year is seeing a gradual return of investor confidence, spurred by a sense of economic stability and pharmaceutical companies actively seeking acquisitions.

Similarly, Anderson commented that the downsizing, restructuring and dismantling that occurred have left a mix of stronger companies with solid foundations, robust science, experienced management teams and committed investor bases. This provides a basis for future strength and stability, which Big Pharma relies on for needed M&A activity, he added.

Newly public companies, especially those with promising clinical data, often attract the attention of Big Pharma looking for acquisition opportunities as they face a looming patent cliff, with many companies nearing the end of their patent exclusivity periods. “Big Pharma seeks innovative solutions amid upcoming exclusivity losses, benefiting small-cap biotech companies,” Lam said.

There is a backlog of companies poised for IPOs due to the two-year slump, Lam noted, with many companies holding “testing the waters” meetings to gauge investor interest before officially going public. He predicts the continued acceleration of IPOs for this reason and based on the number of companies that have raised crossover funds, which bridge the gap between private and public investments. Powers described this activity as the reverse of the COVID-19 bubble, reflecting a more sustainable and deliberate process than the speculative frenzy of the pandemic.

The current M&A environment is also sending a signal of continued growth “for the better part of a couple of years,” Powers said.

Experts agree that while this year is showing a clear turnaround following the bursting of the COVID-19 bubble, the transition is still very much underway. Frank anticipates hitting the new normal mark by 2025 when he says the industry will be more stable.

Anderson added that the continued momentum around exit activity requires the participation of generalist investors. “While a lot of the world’s turmoil is still there, things have settled in a bit to a normal that may allow people to feel more comfortable” compared with the past couple of years, he said. These investors “can feel more confident investing in certain areas like biotech.”

Powers cautioned, however, that high activity may not be sustainable in the long term, as such upswings have historically lasted no more than two to three years before another market correction takes place. Sitko concurred but said that for now, “people are adapting to a new normal until rates eventually start to come back down.”