A recent Wall Street Journal article highlights the underperformance of the Nasdaq Biotech Index against other benchmarks. The article implies the weak returns are due to a lack of blockbuster biotech therapies; at the same time, the piece underscores the robust private funding activity within the biotech ecosystem. The ecosystem and the capital markets in which it operates are complex; viewing this sector through the lens of the public markets doesn’t provide a complete picture of its promise to investors.
The ecosystem and the capital markets in which it operates are complex; viewing this sector through the lens of the public markets doesn’t provide a complete picture of its promise to investors.
It is true that biotech and pharma companies are moving toward developing diverse portfolios of therapies and away from relying on blockbuster drugs. However, the WSJ article does not explore that perhaps biotech returns, as measured by the Nasdaq index, are falling because more and more investor activity is occurring in private markets, rather than on public exchanges.
Based on our discussions with clients and investors, many early-stage biotech companies choose to remain private because it is expensive to go public and remain that way. Furthermore, venture capital firms raised a record amount of dry powder in 2018: $55 billion, according to data from research firm Pitchbook.
Investors who want exposure to biotech are increasingly turning to startup, venture and private equity funds for opportunities. Private biotech investment volume grew a staggering 71.8 percent in 2018, according to Pitchbook data. Deal volume, while not quite as robust this year, is on track to exceed that of 2017 by nearly 50 percent.
If we look at transaction counts and volume side by side, the picture becomes clear: Growth in private capital raising has outpaced public deals. And, as more biotech companies remain private, the Nasdaq benchmark becomes less reliable as a gauge of sector performance.
Median post-money valuations in private biotech have increased 86 percent since 2014, according to Pitchbook. The median pre-money valuation has increased even more, more than doubling in the same period.
We can’t overstate the complexity of the ecosystem. The robust private funding market for biotech and pharma may surely have something to do with lagging public returns in the sector.
