Semper Maior: Time to Reboot Biotech
By Peter Kolchinsky, PhD
Peter Kolchinsky is a founder and Managing Partner at RA Capital Management and author of The Great American Drug Deal.
With huge thanks to RA Capital's Alex Martinez-Forte and Jacqueline Rhuda for extensive data analysis.
January 3, 2023
Feb 10th, Ed. Note: This piece has been well read and we felt it was worthy of some more discussion, so we recently held an interactive webinar for RApport subscribers to discuss its analysis and conclusions. Check out that episode of RApport’s FutureCast series here.
Every week, we hear about the worrisome number of companies trading below cash and how much all of them will need to raise in the next year. The implication is that biotech has been abandoned by many investors and the few who remain won’t be able to save the sector, already precariously positioned, from a further reckoning.
I think such stats obscure what at least some specialists already recognize: biotech is on much firmer footing.
Here I’ll try to convince you of that. And once I do, I hope you’ll look ahead with me and consider the operating system with which we should reboot biotech in the next cycle, because the last one had some… glitches.
The word “cycle” suggests that we’re doomed to repeat the long waves of feast and famine that governed biotech for decades. And yet, we reap what we sow, for better and worse. These cycles seem inevitable because we can’t realistically turn away the generalist interest when it’s there (people are free to bid up public stocks and the positive “can do” attitudes those valuations engender are infectious), planting the seeds of the downturn to follow when that exuberance wanes.
Once we accept that biotech, like all innovation sectors, is subject to fluctuating investor interest and confidence in its capacity to change the world and create value, let’s consider how to deal with it. Specifically, let’s consider how to preserve the productive development of all that’s good and worthy in our sector so it isn’t beached when the tide goes out indiscriminately.
By “we” I’m referring to you and me. The “we” that works and lives in this sector and who sticks around through thick and thin, cycle after cycle. We know what biotech can accomplish. Our jobs, whether as investors, board members, or operators (those lines have been blurring), require us to persevere through the short-term fluctuations. We port the lessons and know-how from the past into the next program, the next company, the next financing, the next cycle, resolving to do better. We measure our success based on a career’s worth of drugs and other products brought to market and sustainable financial returns, which tend to go hand in hand in the long run.
“We” are also the ones whose decisions, in the aggregate, determine which preclinical programs are funded and therefore transmit the message of policies like the Inflation Reduction Act into what kind of medicines will see the light of day a decade from now.
And so we’ve suffered a protracted downturn in general interest in biotech. That downturn has been compounded by rising interest rates undercutting equities in general. Now we must determine 1) how much worse this downturn might be and 2) how we’ll do things differently once we reboot.
Part 1: The crash is done, we’re standing on firm ground
I think biotech has seen the worst it's going to see of this downturn, and I think that’s been the case now for a while. We’ve been bouncing along an extended nadir for about six months, each bounce leaving less weakness and air to squeeze out of the public biotech sector. That doesn’t mean that companies won’t fail and drop in value for their own idiosyncratic reasons (most trials fail). I just mean that the sector is not laboring under the challenges that overly general statistical exercises looking at the numbers of struggling companies might suggest.
To do the right analysis, we have to first consider our perspective.
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The data visualizations in this piece are best viewed in PDF form. To keep reading, please download the PDF here.
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