Biotech

Last year was a difficult year for the biotech industry, with the cost of capital rising with interest rates, small cap biotech companies found it difficult to raise capital at attractive rates.

Investing in biotech is for the patient investor, and we think that 2023 provides an opportunity to enter biotech investments at attractive valuations… and then wait.

We like investing in biotech companies because of the high-risk high-return potential if a technology is successfully developed through clinical trials.

We also like that drugs developed in a clinical setting have meaningful impacts on people’s lives and the generous R&D tax incentives from governments provide a much needed cash buffer for small cap biotech companies.

Last year, the Biden administration announced the “Cancer Moonshot'' project, to provide funding for drug development in the area - and recent policy changes have supported drug development in both the renal space and for Alzheimer's disease.

Drugs that we think are set for a strong decade are:

• Cell therapies for cancer treatment
• Renal drugs for kidney disease
• Treatments for rare diseases that can secure orphan drug status
• Alzheimer's treatments
• Weight loss / diet drugs

We think that VC biotech funds sat on the sidelines in 2022 and there is a surplus of cash to be deployed in the market.

At the JP Morgan biotech conference the outlook for the biotech industry was optimistic for 2023, with a likely return to M&A activities for big pharma.

Whether this trickles down to small cap biotechs, only time will tell, but we think this is going to be a slow year for small cap biotechs (at least in the first half of 2022) - and an opportunity for patient investors to go bargain hunting in the sector.

Click here to see our Biotech investments.

What do the analysts say?

According to McKinsey & Co. the outlook for biotechs in 2023 is a return to focus on fewer, high priority programs.

McKinsey believes that successful biotechs will ensure a clear connection between capital allocation and value creation in R&D and in broader company operations.

In simple terms, biotechs will be more focused on few drugs and preserving capital.

This might see a return to M&A activity in the space and a good acquisition opportunity for cashed up biotechs.

Read the full McKinsey report.

PWC has also flagged M&A activity as a big outcome for biotechs in 2023, as the overall economic outlook stabilises, the need to invest in pipeline opportunities and technology grows.

Oncology and immunology leads the conversation in the world of Big Pharma, but other areas such as the central nervous system and cardiovascular diseases are expected to gain interest.

Read the full PWC report

Talu Ventures life sciences managing director Andy Jane said:

“There was about $US40bn worth of new US biotech VC fund money raised in the last 18 months so there is plenty of dry powder for new companies, and follow-on funding for those companies which VCs have a conviction about.

Public equity markets are still essentially closed although there were occasional green shoots at the back end of last year. People are taking bets on whether 2023 is going to be a bull or bear year. I would say the consensus is 60/40 a bear year.

Source

What is the bear case?

The key risks for any early stage biotech is funding.

The outlook for 2023 is that small cap stocks are going to find it difficult to raise capital at attractive valuations.

This means that investors will want to see cashed-up biotech companies focus research and development on one or two key assets, so as to preserve capital for when the appetite for high-risk investments returns.

Some biotech companies are trading at cash backing, and with valuations crunched, it could be an opportunity for investors to pick up some ‘bottom of the market’ deals in the sector.