The pandemic trigged an “astonishing” surge in the biotech industry, with red-hot stock valuations and a flood of IPOs.
The industry caught the eye of retail investors and a series of lockdown measures leaving many people homebound with spare time and easy access to online trading platform, saw many dive into these ‘on trend’ stocks.
Covid-19 vaccine maker Moderna garnered a valuation of nearly $200bn during the frenzy, effectively making it “the Tesla of the biotech industry”, Marek Poszepczynski, joint lead investment manager of the International Biotechnology Trust told City A.M.
But the industry can be complex to understand, and unreliable in terms of steady returns, which has played a significant role in the dwindling of investments in recent months.
The boom in so-called investor ‘tourism’ has seen retail investors flock to other trendy stocks as the pandemic begins to recede, leaving many biotech firms with more “realistic” valuations, added Poszepczynski.
“During the initial stages of the pandemic, the biotech sector was very much in the limelight… The astonishing success of the vaccine trials then caught the scientific community by surprise, and biotech became front page news,” he said.
“However, in the cool light of day, biotech is not an easy sector to understand or invest in. Clinical successes are highly unpredictable, and it takes both experience and scientific understanding to invest successfully in this area.
“Unfortunately, the reality of the long timeline to profitability – and the possible pitfalls along the way – soon become more apparent to investors, and valuations correct to more realistic levels as disillusioned generalist investors move their money to safer havens.”
Biotech indices have been on the decline since the second half of 2021, with commentators suggesting the bull market is over, healthcare sector analyst at Third Bridge Sebastian Skeet added.
Clinical trials often have very binary outcomes – either a drug works, or it does not – which means a biotech firm’s share price can swing heavily, which can often deter investors who are not in it for the long haul.
“Investing in biotech, and to be specific drug development companies, requires a risk appetite that most generalist or retail investors are not comfortable with,” Skeet explained.
‘This is not unique to Covid-19’
While the sector has suffered accordingly to investor ‘tourism’ in recent months, these cycles of sentiment are not new Poszepczynski added, and more importantly – they do not speak for the “stable underlying fundamentals” of the industry.
“We view the correction [of market activity] as an opportunity, and there are several extremely promising catalysts for a significant rebound this year,” he said, adding “Strong takeover activity is the lifeblood of the biotech sector, and the attractive valuations we’re seeing at the moment are likely to drive a substantial uptick in M&A activity as larger names look to fill their pipeline of innovative drugs.”
Skeet agreed, explaining that in light of current valuations and “certain players flush with Covid-19 driven cash”, it would not be unreasonable to assume that large acquisitions are on the horizon.
“Whilst the world may be slowly moving on from the pandemic, patients who need care will not,” the analyst said. “If anything, as the world opens up the biopharma industry will enjoy a recovery in sales as patients see their doctors and surgical procedure backlogs are worked through.”
Robert “Bob” Rauker, CEO of AIM-listed Belluscura, which specialises in oxygen devises for long Covid-19, also told City A.M. that the trend of investor ‘tourism’ is not uncommon – but it can bruise smaller firms.
“This is not unique to Covid-19…we see this all the time. We saw this with SARS way back when.
“I don’t want to knock [retail investors] but I think sometimes they don’t fully appreciate all the dynamics… And I think that can really hurt smaller stocks significantly.”
He described the impacts of investor ‘tourism’ as “a little bit of market indigestion”, but that just a fraction of biotech and coronavirus-focussed businesses will be relying on such investment.
Whether the investment falls back substantially, the pandemic-era boom has drawn a lot of attention to both biotech and lung health, which could help supercharge the industry for the future.
The International Biotechnology Trust also expects to see a return to “normality” for clinical trials, after years of Covid-19 disruption, which will inevitably keep the ball rolling within the biotech space – whether its stocks are ‘on trend’ or not.