The United States is in the early days of a recession and the biotech industry is in a bit of a slump. CEOs can take heart, however, by applying the lessons of previous recessions to business today and understanding what is different about the current situation.
“This downturn isn’t that much different from previous downturns, except that capital is available today,” Ed Kaye, M.D., CEO of Stoke Therapeutics, told BioSpace. “In the Great Recession (2007-2009), there was little available capital because of the banking crisis. Today, however, investors have money and are looking to deploy capital, but they’re much more conservative than they have been. They’re not looking for early-stage, hypothesis-driven companies, but for companies that are generating revenues or companies that are close to data so they can derisk their investments.”
A notable example would be Merck, which was reportedly awaiting a data readout from Seagen’s bladder cancer drug Padcev before moving ahead with plans to acquire the company.
“A Healthy Pipeline”
Dusan Perovic, a partner at Two Sigma Ventures, commented on the differences in today’s situation.
“What was unique about some of the prior downturns is that they were driven by high valuations – people getting excited about biotech – but some of the translation (into drug approvals) wasn’t there,” he told BioSpace.
“The FDA has approved an average of about 50 new drugs each year between 2018 and 2021,” Perovic elaborated. “That’s up from about an average of about 38 between 2011 and 2018. “That suggests a healthy pipeline.”
That doesn’t mean fundraising is easy. People who have been in this industry a long while know that downturns are cyclical and tend to prepare.
In 2019, Kaye anticipated an economic downturn, so, “I was very focused on raising money to make sure we had the capital to continue development.” In the current downturn, he advised companies to shepherd their cash and invest in their research (versus a beautiful facility), at least until they are generating a steady revenue flow. In this way, they are more likely to have the funds to reach the next inflection point.
One strategy involved keeping a tight rein on hiring. Kaye linked hiring to reaching milestones. “If we reached a milestone, we would hire people appropriately,” he said, which minimized the risk of having to lay people off if those milestones were delayed.
Perovic likewise counseled biopharma companies to “try to extend the runway,” by concentrating on the assets or approaches that are most likely to succeed. “That is healthy in that it contributes to a founder or CEO being much closer to the data and therefore paying more attention earlier on to what’s showing promise and what’s not.”
Gaining earlier insights also means “being smart about how you generate the data,” Perovic added. That could mean partnering strategically to obtain data points sooner or relying on the increasing number of publicly available sources to supplement in-house data.
Historically, downturns usually have lasted a couple of years. “I think this will be shorter than the Great Recession,” Kaye said, which he said ended around 2012 for biotech. He said he’s optimistic for improvement in the fourth quarter of 2022, “although there are a lot of external events that we can’t control,” like inflation, the response of the Federal Reserve Bank and the repercussions of the Inflation Reduction Act on the pharmaceutical industry.
Already he sees indications that the recession may be bottoming out. For example, the SPDR S&P Biotech ETF (XBI) dropped below $63 in May, and now is in the low $90s. (The 52-week high is above $136.) Likewise, the seasonally adjusted inflation rate held steady at 8.5% in July, according to the Bureau of Labor Statistics.
M&A is Starting to Pick Up
“There’s a feeling that people are getting more comfortable,” Kaye said, as shown by the financings, mergers and acquisitions that still are occurring.
Perovic said he also thinks the economy may be turning the corner to better times. “We’re starting to see a little bit more M&A activity than in the first half of the year. A lot of large pharma companies have a lot of cash,” he pointed out, and that’s very different from prior downturns. “Now, they’re thinking about the next therapeutic, realizing that the pandemic is somewhat behind us.”
Just in the past two weeks, Merck has invested heavily in partnerships with Cerevance and Orna Therapeutics, for Alzheimer’s disease and circular RNA-based vaccines and therapeutics respectively. Pfizer made a statement in the sickle cell disease space with its $5.4 billion buy out of Global Blood Therapeutics and Amgen bolstered its inflammation and nephrology position by acquiring ChemoCentryx for $4 billion.
Venture capitalists, however, are still being cautious. They are concerned about ensuring they have the capital for follow-on financing for their existing portfolios. Therefore, Perovic said, “They are saving some of their assets for that, rather than investing in new companies.” Consequently, the bar to attract venture funding is higher than it was a few years ago. “People are asking more questions about when the asset will enter the clinic and its path to commercialization, whereas a few years ago it was more about the big idea and the science behind it.”
The lessons from prior economic downturns are, at their heart, simply good business:
– Always be prepared for a downturn.
– Know how you will respond.
– Spend wisely.
– Hire based on milestones achieved.
– Be a good steward.
Despite the downturn, “Deals are happening, and there’s definitely a lot of activity,” Perovic said, though not at the same levels as last year. Companies have cash to invest but are being cautious about where to invest. “Downturns are cyclic.”