Investor Perspectives in Biotech

Session Focus

Coburn introduced the session by noting that two days of clinical opportunity and technology aspiration make the question of how to invest and act on them an ever greater priority in a tumultuous period.

The panel assembled investors spanning company formation through the public life cycle: an early-stage company creator, an academic translation fund, a large private and public manager, and a multi-stage healthcare fund.

Where the Sector Stands

Silverstein set the framing with performance figures. Biotech is up 65 percent over the last 12 months and 30 percent this year alone, against geopolitical headwinds and a rising rate environment that is conceptually not a tailwind.

Laura Stoppel put that in context. From 2021 until roughly this time last year the sector was in a downturn, with many public companies trading below cash post-COVID. Momentum began returning around the fall of last year, driven by exciting positive data, which then set the scene for an unprecedented 12 months of M&A. Conversations with advisors suggest that rate of M&A continues.

Nilesh Kumar described four years of doldrums with recovery only in the last twelve months. His explanation goes beyond M&A: good companies had not been able to go public, so data matured in the meantime and the quality of what now reaches market is higher.

His assessment: regardless of what the market does on rates or policy, the sector is fundamentally seeing smarter, better and later-stage companies come to market. The innovation quotient is high. Roughly 80 percent of the IPO class has traded well and follow-ons have been strong. Five years ago these were very early stage and somewhat speculative companies; today they carry accessible and demonstrable value.

Silverstein supplied the comparison. Twenty-one companies have gone public this year with the average IPO up 60 percent, against 11 IPOs across all of last year with more trading down than up.

What Actually Changed Since the Crash

Michael Gladstone argued the fundamentals of biotech investing were strong four or five years ago and remain so, reducible to supply and demand. The supply of great science from academic institutions and industry has been maintained or accelerated. On the demand side, everybody wants to live longer, healthier lives.

What differs is capital flows. Biotech is cyclical, things overheated in 2020 and 2021, and a crash and hangover predictably followed. The science was good, but many companies were earlier than investors realized at the time.

His diagnosis of what went wrong is behavioral. Companies were overcapitalized, and then did what is in human nature: they spent the money rather than recognizing they were overcapitalized and being cautious. Considerable wreckage followed.

He believes that lesson has been seared into people’s minds, and that this cycle is genuinely better. A dollar goes farther in his companies. Investors now focus not only on whether the science is great but on understanding how a company converts dollars into product development progress.

Early-Stage Funding Followed the Public Markets

Roger Kitterman described how public market conditions reach all the way back into academic translation.

In 2019 and 2020, syndicating a novel idea was relatively easy, including platforms known to require substantial capital over a long horizon. Over the following years that became much, much harder.

The effect on his work was concrete and somewhat absurd. Early-stage investors would approach Mass General Brigham Ventures asking what he had in phase two. His answer was that this is academic science, before conceding he had one thing in phase two.

Over the last six to twelve months he has seen appetite shift back toward earlier-stage assets.

The Reverse Merger Reversal

Stoppel described a complete inversion in how reverse mergers are perceived. A few years ago going public that way was almost a scarlet letter, carrying the impression that a company could not attract public market investors.

That has entirely shifted, to the point where going public by reverse merger is now probably more competitive than an IPO. Many companies parallel track both.

The advantages she named: certainty around size, timing and price of the raise, plus tax and filing advantages. The difficulty is finding shells genuinely free of liabilities, and she made the key point that cash is not the asset of the shell.

Kumar observed the pendulum swinging far enough that companies not strong enough to raise conventionally now pursue reverse mergers, because the structure offers investors liquidity.

How These Investors Actually Select

Kumar described Wellington’s approach as research-led and bottoms up across any and every therapeutic area, which he called almost unfashionable.

His characterization of the sector was memorable: biotech is a collection of micro momentums, where things are hot and six months later they are not. Biases exist toward immunology given total addressable markets, and sometimes obesity and oncology, but selection is not thesis-driven by area.

Asked what keeps him up at night on macro risk, Gladstone said he tries not to think about it too much. The risks cannot be ignored, but there is a limit to what a fund like his can contemplate, predict or hedge.

His reasoning is a matter of time horizons. He makes biotech investments on a three to ten year horizon, over which capital markets, interest rates and political policies are likely to evolve ten different times. Reverse engineering a company decision from today’s macro conditions does not hold up across that period.

Key Takeaways

1. Biotech is up 65 percent over 12 months after four years of doldrums, with 21 IPOs this year against 11 last year.

2. The quality of companies reaching market has risen because data matured while the window was closed.

3. Overcapitalization caused the last crash more than bad science, and companies spent rather than conserving.

4. Investors now underwrite execution, not only science. The question is how dollars convert into development progress.

5. Public market conditions reach back into academic translation, with seed-stage investors having asked academic funds for phase two assets.

6. Reverse mergers went from scarlet letter to more competitive than IPOs, with liability-free shells the scarce resource.

7. A three to ten year horizon argues against macro-driven decisions, since conditions will change many times within it.