Early stage Investing in Biotech Innovation

Biotech public markets in recent years have faced many significant challenges. The S&P Biotechnology Select Industry Index dropped more than 50% from its February 2021 peak and only 30 IPOs in the first three quarters of 2023 compared to the 114 in 2021. This not only led to layoffs and streamlined project pipelines among many biotech companies. On the contrary, the venture capital (VC) funding, although reduced from its 2021 peak, remained robust, particularly for innovative platform technologies like machine learning (ML)- enabled drug discovery, cell therapies, and gene therapies. These areas continued to gain substantial investment due to their potential to address a wide range of problems.

The decline in the public-market valuations and IPO funding has not only forced biotechs to adapt by laying off employees but also made them start to focus on projects to conserve cash. The variation can be seen in VC funding when it has provided a lifeline, remaining above pre pandemic levels despite having fewer deals and a consistent median deal size. There can only be an emphasis placed on the innovative platforms reflecting a shift in investment strategies, with notable interest in ML-enabled drug discovery and other cutting edge technologies. The ongoing interest in the area underscores the long- term potential investors who see an interest in biotech despite the current market.

VC funding for Biotechnology did not decline in 2022 but amounted to over $22 billion; 2023 saw over $12 billion VC Biotechnology funding up to the third quarter. Next-generation platform technologies like drug discovery with the help of ML and cell treatments, saw large amounts of funding, where only the start-ups focusing on ML received more than $9 billion between 2019-2022. Thus, despite the dynamics in VC funding, the fields of gene and oligonucleotide therapies, cell therapies, and computational chemistry remain attractive to investors and indicate their perspectives for the development of biotechnology. It is also significant to note that while the public market may be tempering its expectations of the sector, VC investments have remained stable, thus underlining commitment on the sector’s potential for expansion.

Author: Dylan Blackburn

Reference Article: https://www.mckinsey.com/industries/life-sciences/our-insights/what-early-stage-investing-reveals-about-biotech-innovation

McKinsey & Company. What early-stage investing reveals about biotech innovation. https://www.mckinsey.com/industries/life-sciences/our-insights/what-early-stage-investing-reveals-about-biotech-innovation . Published 2024. Accessed July 31, 2024.