Introduction
Heading into the new year, the recent J.P. Morgan Healthcare Conference in San Francisco infused the biotech industry with a fresh wave of optimism. Remarkably, 2023 emerged as a significant year for M&A, and despite a complex array of macroeconomic factors, including pauses in interest rate increases, the mood at JPM was notably upbeat.
In challenging times, like those experienced in 2023, there was a notable pivot towards certain "hot" areas. These areas were propelled by their immense commercial potential, clinically and commercially proven mechanisms, and successful exits that stimulated further early-stage investments.
As Aimee Raleigh, Principal at Atlas Venture, wrote as part of the “From The Trenches” feature of LifeSciVC,
As investors, our general outlook is “cautious optimism,” and given the great deal flow we’re already seeing at compelling valuations so far this year, we are enthusiastic about the opportunities in these areas, and many others, heading into ‘24.
The Big Picture
Inflation
The annual inflation rate ticked up slightly to 3.4% in December 2023 from 3.1% in November.
Monthly 12-month inflation rate in the United States from November 2020 to December 2023
Federal Funds Rate
Goldman Sachs economists forecast that the Federal Reserve will begin reducing its benchmark interest rate in March, with a total of five cuts anticipated throughout 2024.
The appropriate level [of the federal funds rate will be 4.6% at the end of 2024" if the Fed's economic projections hold up, Fed Chair Jerome Powell said during a conference call to discuss December's decision.
10-Year Treasury
So, all eyes are on the Fed and when they will start to cut rates, which in turn should help fuel increased investment interest in biotech.
Yield Curve
We’ve talked about the yield-curve being a predictor of recessions extensively, so we’ll simply add a recent tweet from Lux Capital’s Josh Wolfe….
Public Market Update
Fear & Greed Index
The Fear & Greed Index is used to gauge the mood of the market. When combined with fundamentals and other analytical tools, the Index can be a helpful way to assess market sentiment.
Biotech Market Update
Over the last three months the SPY and QQQ are up 10.5% and 12.4%, respectively, with the XBI outperforming (finally!) up 28.0%.
Total Returns Last Three Months: SPY vs. QQQ vs. XBI
The sentiment at this year’s recent J.P. Morgan Healthcare conference was the most positive we’ve experienced in recent years with companies and investors cautiously optimistic about the prospects for biotech in ‘24.
So how do we think about linking the macro to the biotech markets….
However, the story is a bit more nuanced. RA Capital produced a great report, citing….
M&A Continues in Biotech
M&A set new records in 2023 with >$80B of transaction value. The below figure from RA Capital’s report “shows that 2023 M&A levels exceeded past years not only in the number of deals but also the total M&A dollars deployed. Considering the depressed valuations, that’s saying something.”
Biotech Venture Ecosystem
According to Altas Ventures Bruce Booth’s recent analysis “While off the peak quarterly funding level by ~50%, by all historic measures this is a robust level of financing [~$5B per quarter], and supports 800+ private biotech companies each year in the US alone.”
However, things are not evenly distributed.
“On the venture creation side of things, using the proxy of “first financings” as a good metric for new startup formation, things have clearly tightened up significantly over the past year or so. With a little over 50 new startups raising capital in 4Q24, we’re back to levels not seen for nearly a decade, at the start of the biotech secular bull market in 2013-2014.
Further, the share of rounds going towards startups raising their first financings, versus follow-on rounds, is the lowest ever recorded, according to Pitchbook data, coming in just below 25% in 4Q24.”
There were clearly a lot of new startups financed during the’20-‘21 timeframe and we’re seeing those companies either mature or fold. It’s taking a while for these startups to work through the system, but we expect new financings to rebound in ‘24.
Bioverge Portfolio News & Updates
Our tagline at Bioverge of “bringing science fiction to life” was inspired by the incredible entrepreneurs and companies we’ve had the privilege of supporting over the years.
Here’s a brief sampling of what a few of them are up to these days:
A Gel Injected Into the Scrotum Could Be the Next Male Contraceptive.
Biotech company Contraline has safely implanted a sperm-blocking hydrogel in 23 men. It’s designed to be a fully reversible vasectomy.
Pragma Bio and DayTwo Join Forces to Illuminate the Path to IBD Disease Management. The partnership is focused on leveraging cutting-edge technology and extensive patients’ datasets and metagenomic data to answer unmet needs in the Inflammatory Bowel Disease (IBD) space through the foundational discovery of biomarkers and therapeutics.
The Bioverge Podcast: Decoding Biotech: A Deep Dive into AI and Platform Technologies
Random Personal Musing
We’re re-reading "The Psychology of Money: Timeless lessons on wealth, greed, and happiness" by Morgan Housel, which offers a unique exploration of the complex relationship between money and human behavior. Housel doesn't focus on the technical aspects of financial management, such as investment strategies or budgeting, but rather on the psychological, subjective, and emotional factors that influence people's financial decisions. In our opinion, it’s a must read for anyone interested in investing and more generally gaining a more complete understand of your own relationship to money.
And of course if you haven’t read Housel’s newest book yet, “Same as Ever: A Guide to What Never Changes” it’s an equally quick read with key insights into investor behavior and how our own psychology drives our financial decisions.
And Finally, A Quote
“Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.”
― Morgan Housel, The Psychology of Money: Timeless lessons on wealth, greed, and happiness
Fin.
This was an unexpected pleasure. As a Bioverge investor I was expecting just a rundown of the latest company doings but this post was so much more and very educational. The economic insights gave me a very good idea of what is going on in the biotech space. Thanks!