After Biotech’s $43B Year, Growth Starts To Taper As Markets Mature
The spigot of venture capital funding and investments pouring into life sciences and biotech, which have supercharged the sector and the development of lab space, hit record levels last year — but experts expect the growth to slow down this year amid the broader dip in the markets.
Venture capital funding for startups hit a record $43.3B last year, according to Newmark’s just-published year-end analysis, topping the record $29.9B haul from 2020. That represents a compound annual growth rate of roughly 21.3% over the last decade, an indication of the industry’s stratospheric growth and a symbol of robust future demand for lab developers.
“If you’re raising money, you want to target something with secular growth possibility,” Newmark Associate Director of Capital Market Research Daniel Littman, author of the report, told Bisnow. “Something that’ll grow beyond economic cycles and regular ups and downs. These have been record fundraising years, with a record amount of dry powder in the system.”
But not all market signals point to continued, unfettered growth. Despite the record fundraising, there are some signals of slowdown and moderation in the stock market and among venture capitalists.
Silicon Valley Bank Managing Director Jonathan Norris predicts the overall dollar amount VCs invest in biotech in 2022 will decline by 20%-30%. While that might sound dramatic, it would merely return the market to previous record-setting years in 2019 and 2020.
“Obviously, the market has cooled off,” Biocom California CEO Joseph Panetta said. “Biotech investment tends to follow suit with the stock market.”
The life sciences boom has always been connected to the IPO boom and stock market, according to Jay Chok, an associate professor at the Riggs School of Applied Life Science, who wrote his thesis on biotech IPOs. When the market and funding trends down, and the financing window closes for firms to go public, companies start being more frugal with their expenses to extend their burn rate. That eventually impacts real estate.
“We don’t really know by how much and when, but at some point, it will trend down,” he said of real estate investment and demand.
Littman said fewer firms may attract funding as investors and the marketplace mature, become more selective, and place more money on fewer companies. There has also been significant merger and acquisition activity, with the average deal size last year in the $600M-$700M range. Data from PitchBook shows similar trends in funding, with seed valuations last year jumping from below $10M to $14.1M on average, and early stage deals spiking from roughly $70M to $109.3M on average.
“You’ve had fewer companies with bigger deals, and more unicorns,” Littman said. “There’s more demand out there and a willingness to buy these companies at higher valuations. The real estate space now versus what it was 10 years ago, it’s completely different. There’s much less risk.”
The slowdown in IPO activity in biotech comes after the sector hit a peak in the last two years, with 149 startups raising $50M in public stock offerings in 2020 and 2021, versus just 83 making that jump the two years prior.
But starting midway through 2021, a downturn began, with increasingly higher valuations proving overly optimistic when compared against the public performance of new public biotech firms; 80% of firms that went public last year were trading below their asking price, according to BioPharma Dive.
The long cycle of testing and approval to get a drug to market means most public biotech firms are pre-revenue. When IPOs aren’t panning out for investors, it leads to fewer IPOs for drug startups, lower valuations, and questions around whether the pipeline of new companies will narrow substantially. A number of venture investors said they planned to save cash and stay private longer, which would mean startups potentially forgoing a step up to larger lab spaces.
“Capital markets have always known and understood biotech less than other types of industries,” Chok said. “When the pandemic hit, there was this euphoria, an idea the sector is going to be hot. The fundamentals of the scientific technologies haven’t changed. You need a lot of patient capital, and there’s always less of it than scientists desire. Today’s downtrend is a result of the uptrend, when crossover investors saw an opportunity in the market.”
There has been a great influx of what Norris calls crossover investors from hedge funds, as well as tourist capital, which he says has jumped on the enthusiasm for the market and leveraged the excitement of the sector. The current downturn has made the tourists “squirrely” and retract. But most investors with longer-term horizons aren’t going anywhere.
“The patient capital have all raised new funds in the last year,” Norris said. “This is when their thesis will be put to work. The investment pace may slow down, but they certainly won’t stop investing altogether.”
There’s a significant connection between life sciences fundraising and real estate needs. Littman said due to the mostly private nature of the biotech funding business, it is difficult to come up with a multiple that measured the relationship between VC funding and square footage, though others have made educated guesses. Healthpeak Chief Investment Officer Scott Brinker estimated last year that every $1M of venture capital and money raised in initial public offerings translates into about 400 SF of needed space.
Any significant drop in venture capital funding would potentially have a downstream impact on development and lab demand.
Newmark’s year-end report found that roughly 34M SF of lab space is under development or renovation nationwide, which wouldn’t be affected by a startup funding slump, Littman said. But the future pipeline, which stands at 104M SF of proposed space, would likely shrink, especially in new and tertiary markets. Established markets, such as Boston — which received $13.7B, or 36% of nationwide VC biotech funding last year, per MassBio — would still be magnets for funding.
The long-term impact of the current slowdown is still hard to read, said Biocom’s Panetta. There is lots of uncertainty right now, due to inflation and the geopolitical situation, and “uncertainty at any level leads to a hesitation in investment.” Panetta said real estate developers he’s spoken with are moving ahead “aggressively” since they haven't seen a slowdown in demand, especially for wet lab space.
But he’s keeping his eye on some potential regulatory shifts, including a revisiting of the America Invents Act, which may shift intellectual property rights in a way that’s less favorable to biotech, and President Joe Biden’s comments about refocusing on drug pricing, that may further cool the investment climate.
The market correction, however long it lasts, will likely not be nearly as impactful as previous downturns. Norris said that some investors see the IPO market beginning to slowly come back as soon as the second quarter. Chok said when valuations start trending lower, that value leads to more merger and acquisition events, which in turn brings back investment in the sector. All the sources for this story agreed the market fundamentals and maturity of the sector suggest long-term fortunes are still bright.
“Can life science keep growing at the rate it’s been growing? Maybe not, maybe the growth rate slows down a little bit,” Littman said. “I think volumes will stay high, but the growth rate will slow. I think there is a limit, but life sciences and healthcare are among the industries with the higher limit, since there are so many conditions and potential treatments out there.”
CORRECTION, FEB. 21, 11:00 A.M. ET: A previous version of this story misquoted Daniel Littman, implying incorrectly that he was making future market predictions. The quote has been adjusted to accurately reflect his sentiments.