Biotech Out­look 2022: Am­ple Op­por­tu­ni­ty for a Re­bound

The ear­ly suc­cess­es of the COVID-19 vac­ci­na­tion pro­gram, along with a num­ber of in­no­v­a­tive break­throughs, drove record cap­i­tal flow and en­thu­si­asm for the biotech sec­tor in 2020. But the sec­tor has since cooled. Clin­i­cal tri­al fail­ures, reg­u­la­to­ry set­backs, drug pric­ing con­cerns and a lull in M&A all con­tributed to the slow­down, while new­ly pub­lic small firms faced the chal­lenge of mov­ing from blue-sky po­ten­tial to con­crete busi­ness mod­els.

There still re­main some prices, es­pe­cial­ly among smid-caps, that seem in­flat­ed rel­a­tive to their stage and risk lev­el, but on the whole, the sec­tor has slowed too much. There are in­creas­ing­ly com­pelling val­u­a­tions among large-caps and re­ward/risk se­tups among small­er-caps that should pro­pel ap­pre­ci­a­tion through this year.

There are al­so a num­ber of macro tail­winds that make the back­drop more fa­vor­able in 2022, while at an in­di­vid­ual com­pa­ny lev­el, some big names have big tri­al da­ta and drug de­ci­sions due this year that could re­ver­ber­ate and reignite en­thu­si­asm. How­ev­er, the sec­tor is grow­ing and that breadth and di­ver­si­ty means less broad rip­ple ef­fects from pos­i­tive de­vel­op­ments and po­ten­tial­ly dif­fi­cult stock se­lec­tion go­ing for­ward.

In­vestor sen­ti­ment sug­gests in­creas­ing ap­petite

One sign of po­ten­tial re­bound is the strength­en­ing in­vestor ap­petite for the group. Ac­cord­ing to our lat­est in­vestor sur­vey, 66% think that biotech will out­per­form the broad­er mar­ket in 2022 and 58% plan to in­crease their ex­po­sure to the sec­tor. The ma­jor­i­ty of in­vestors (64%) al­so see the sec­tor as un­der­val­ued ver­sus our sur­vey re­sults from the sec­ond half 2021 where on­ly 49% thought biotech was un­der­val­ued.

In­vestors have strength­ened their views on M&A as the biggest tail­wind go­ing in­to 2022, and we agree. M&A ac­tiv­i­ty is due for an uptick in light of stronger bal­ance sheets, loom­ing patent ex­pi­ra­tions, de­pressed smid-cap val­u­a­tions and po­ten­tial vis­i­bil­i­ty on a post-pan­dem­ic world. We ex­pect sin­gle-as­set com­pa­nies in mid-to-late stage clin­i­cal de­vel­op­ment val­ued at $1 bil­lion to $5 bil­lion to be the sweet spot for most ac­tiv­i­ty, though we wouldn’t be sur­prised by a large block­buster deal.

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The sus­tained in­flu­ence of COVID-19

The pan­dem­ic nar­ra­tive has a role to play here, but it’s a mixed pic­ture. If 2022 sees mar­ket volatil­i­ty due to con­tin­ued pan­dem­ic wor­ries, com­pa­nies may con­tin­ue to sit on the side­lines or de­ploy their cash to­wards div­i­dends and buy­backs in­stead of M&A. But the same wor­ries could en­sure that biotech con­tin­ues to ben­e­fit from the R&D spot­light and vac­cine/treat­ment rev­enue.

If we get near­er to a post-pan­dem­ic world, there are still risks and ben­e­fits. Re­open­ing could see drug launch mo­men­tum im­prove with greater com­pa­ny-physi­cian-pa­tient in­ter­ac­tions on the plus side. But re­open­ing may al­so en­cour­age in­vestors to di­vert mon­ey flow to oth­er sec­tors with more po­ten­tial up­flow, such as tourism and hos­pi­tal­i­ty, as the virus tran­si­tions from pan­dem­ic to en­dem­ic.

The land­scape for pol­i­cy and reg­u­la­tion im­proves

Drug pol­i­cy and the reg­u­la­to­ry land­scape both pro­vide more tan­gi­ble up­sides for 2022. The on­go­ing pol­i­cy grid­lock in Wash­ing­ton means re­forms are un­like­ly for now. Even if some re­form mea­sures were to pass, we see them as a clear­ing event that may re­move the over­hang and at­tract gen­er­al­ists to the space but with on­ly lim­it­ed ma­te­r­i­al im­pact on the bot­tom line.

The new­ly con­firmed FDA Com­mis­sion­er Dr. Robert Califf should bring sta­bil­i­ty and a his­to­ry of sup­port for in­no­v­a­tive tech­nolo­gies. Reg­u­la­to­ry bod­ies are al­so pro­ject­ing amenabil­i­ty to the key gene ther­a­py space and per­mis­sive­ness on ac­cel­er­at­ed ap­provals, which will per­pet­u­ate a fa­vor­able en­vi­ron­ment for drug ap­provals and la­bel ex­pan­sions. How­ev­er, com­pa­nies will still need to con­duct high-qual­i­ty clin­i­cal tri­als and Dr. Califf has shown stricter scruti­ny of chem­istry, man­u­fac­tur­ing and con­trols, which could im­pact bi­o­log­ics and nov­el modal­i­ties (gene and cell ther­a­pies).

Bar­ri­ers to growth

Growth for biotechs in 2022 is un­cer­tain, with long-term EPS/sales growth ex­pec­ta­tions near the low­est lev­els in years. A num­ber of fac­tors are com­ing to a head here. If we con­tin­ue to see more vari­ants of con­cern sim­i­lar to Omi­cron, spe­cial­ties that re­quire in-pa­tient vis­its and elec­tive spe­cial­ties will be im­pact­ed and high­er costs in de­vel­op­ing new COVID vac­cines and treat­ments could add pres­sure to mar­gins. At the same time, fran­chis­es are ma­tur­ing and the new en­trants and con­tin­ued pen­e­tra­tion for lega­cy block­buster biosim­i­lars could po­ten­tial­ly dis­count nov­el prod­uct launch­es – al­though they could al­so in­crease M&A sen­ti­ment.

There are high­er comps of 2021 ver­sus 2020, in some cas­es boost­ed by COVID, and in­creased com­pe­ti­tion and up­com­ing patent cliffs will make some in­vestors cau­tious. The fact that key biotech drugs from a num­ber of big play­ers will lose their ex­clu­siv­i­ty be­fore the end of the year con­tin­ues to weigh on sec­tor sen­ti­ment, al­though it could be bal­anced by pipeline en­hance­ments and bet­ter busi­ness de­vel­op­ment ef­forts. Com­pe­ti­tion is al­so an im­por­tant head­wind, as mul­ti­ple biotechs and phar­mas are pur­su­ing the same promis­ing tar­gets or dis­ease ar­eas and sol­id prod­ucts may strug­gle to launch.

Rea­sons for op­ti­mism

In­creased in­vest­ment in ear­ly-stage com­pa­nies in the pri­vate mar­ket in 2021 should re­sult in a ro­bust pipeline of po­ten­tial fu­ture IPOs and, with weak sec­tor per­for­mance in 2021, fa­vor­able val­u­a­tions at base could at­tract more in­vest­ments in the pub­lic mar­ket.

In re­cent years, biotech in­no­va­tion has been a key dri­ver of the sec­tor, and is ex­pect­ed to con­tin­ue at a rapid pace – pos­si­bly ben­e­fit­ing from R&D ad­vances and fund­ing fol­low­ing the pan­dem­ic. We ex­pect in­no­va­tion around new drug tar­gets, de­sign, and man­u­fac­tur­ing, as well as de­liv­ery of ad­vanced cell and gene ther­a­pies and ex­pan­sion in­to new dis­eases par­tic­u­lar­ly in the can­cer, neu­rol­o­gy, and rare dis­ease spaces, all of which will dri­ve en­thu­si­asm for the in­dus­try in 2022.

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