Private biotech: Innovation amid disruption

The private biotech market continues to grow on the back of scientific breakthroughs fueled by steadfast innovation. This is in spite of sharp public market volatility as the sector’s COVID-driven exuberance fades. Critically, private market valuations are starting to reflect this public market volatility.

In this piece, we explore the state of the private biotech market and highlight three key themes we expect to continue.

State of the biotech market: M&A activity, legislation, and macro considerations

Biotech M&A activity was unremarkable last year, but we believe it should accelerate in 2023 as pharma companies adapt to upcoming patent cliffs, leverage approximately US$500 billion of buying power,¹ and lean into attractive valuations. While the US Inflation Reduction Act legislation was a headwind to the biotech industry in 2022, it has also provided greater clarity and limited the sector’s drug-pricing-related downside risks going forward. 

Though existing macroeconomic uncertainties and ongoing regulatory considerations continue to challenge the overall sector in 2023, we believe winners should be disproportionately rewarded on substantial progress and strong data. 

Biotech’s key themes 

Amid today’s environment of innovation, legislation, volatility, and macro risks, there are three major themes we expect to persist throughout 2023 and beyond.  

Investor sentiment and risk appetite are shifting 
Market volatility and uncertain liquidity has shifted investor focus away from preclinical platform stories toward tangible, derisked assets at more forgiving valuations (Figure 1). Several companies are cued up to test the market in 2023 and given the underperformance of recent IPO classes, we believe investors are likely to remain hesitant and increasingly selective. In our view, they are likely to support a limited set of high-quality and preferably clinical-stage stories with strong insider support and constructive valuations. 

Figure 1

New biotech venture creation should continue to fund innovation 
There has been an abundance of venture creation activity despite broader volatility in the sector (Figure 2). In our view, today’s persistent innovation in early biotech companies should continue. Notably, we believe there is an acute focus on capital efficiency. This emphasis is evidenced in venture firms focusing more on products than platforms to conserve cash runway. We believe oncology, immunology and inflammation, rare diseases, and novel modality platforms will likely continue to see investor interest going forward.

Figure 2

Biotech valuation reset 
Historically, we expect a six-to-nine-month lag in the valuation reset from public to private biotech. However, given the amount of capital raised in the frothy markets of 2020 and 2021, this valuation reset has taken longer than anticipated (Figure 3). Crucially, we believe 2023 has been — and will continue to be — a year of delivering value inflection on the back of valuations more reflective of historical expectations.

Figure 3

Bottom line on the private biotech market

In our view, the current biotech market landscape reflects lower valuations, a focused innovation pipeline, and a renewed emphasis on capital efficiency. We believe private biotech firms with differentiated assets with scientific merit and a focus on valuation discipline can thrive in this environment.

¹Source: Centerview Partners estimates

Please refer to the investment risks page for information about each of the following risks:

• Capital risk
• Manager risk
• Liquidity risk