Why did biotech valuations boom in 2021, and what does it mean for 2022?

By Samantha Black, PhD, ScienceBoard editor in chief

January 31, 2022 -- Dennis Purcell, founder Aisling Capital and one of the founders of the J.P. Morgan Healthcare Conference, shared his expert opinions on the state of the biotech sector and the investment outlook with ScienceBoard as part of Biotech Finance Month 2022.

Purcell moderated a panel discussion at Biotech Showcase 2022 featuring investors in the biotech sector. The plenary session focused on how the sector has changed over the last couple of years and how the investment space looks for this year.

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During the session, panelists discussed valuations, which are what companies use to raise capital. Higher valuations lead to less dilution to shareholders, Purcell said. In the past couple of years, both public and private investors have wanted to invest in biotech companies, which led to many going public prematurely.

Companies in 2021 were priced pretty high, according to Purcell, as if they were going to be "perfection." These high valuations, however, didn't match where companies were in terms of business (sufficient phase II/III clinical trial data). Rather, companies were going public on the basis of preclinical data alone. It's a long way from preclinical data to a product that is on the market, Purcell said.

However, the sector would need a correction to adjust for these high prices, Purcell continued. This came in the first weeks of 2022 as the industry took a nosedive, with the XBI dropping 19% in just a matter of days.

There is still a tremendous amount of excitement in the biotechnology space, despite high valuations and market volatility.

"I think one of the things that's happening is that underneath all of the industry and forgetting about the numbers and valuation and things like that, the science is just incredible," Purcell said. "So, as a scientific endeavor, the industry has been terrific."

With the wisdom of a seasoned investor, Purcell offered that while valuations sometimes get ahead of where they should be and are sometimes lower than expected, in the end, it all works out. He said that you can't get too excited during boom times and discouraged during down periods. This is where correction comes in, and the industry continues to move forward.

Another topic of conversation with Purcell centered around talent in the biotech space.

"If you talk to the investment community, like my peers, they'll tell you it's not capital we don't have and it's not good ideas that we don't have," Purcell noted. "We don't have the people."

In hypercompetitive biotech markets like Boston, there is a dramatic increase in salaries and companies trying to "steal people" from other companies. It's a kind of musical chairs going on right now. Consequently, talent is a huge issue right now.

The challenge with talent can be considered a volume problem. Whereas 20 years ago, there were around 3,000 biotech companies, now, there are upward of 8,000 companies. In the past six or seven years, there have been over 500 initial public offerings, Purcell explained. That leaves an enormous amount of C-suite level positions to fill. And many of these vacancies are therefore being filled by young entrepreneurs and first-time CEOs.

Purcell offered parting advice to entrepreneurs and leaders in the biotech space that they should strive to surround themselves with people who have experience and can offer their perspectives.

Do you have a unique perspective on your research related to biotech finance? Contact the editor today to learn more.

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