By The Sick Economist
“Smooth Seas Never Made a Strong Sailor”
2022 has been one stormy year for biotech. XBI, an exchange traded fund that broadly represents the more speculative end of the biotech world, has fallen by more than 40%. This is in addition to a precipitous decline in 2021. Panicky investors have been abandoning ship left and right, leaving only the most dedicated biotech investors at the helm.
Why has the world of speculative biotech taken such a beating lately? With the Fed rapidly raising interest rates to fight inflation, the entire universe of speculative stocks has been crushed. After many years where “risk on” plays were in vogue, investor sentiment has suddenly begun to favor established companies with reliable cash flows. Most names in the XBI do not fit that description. Most biotech companies in this corner of the market are start ups striving to pioneer new science. They are the farthest thing from steady and stable.
Does that mean that the entire biotech enterprise is heading for the rocks? No. Not at all. If anything the experienced pilot realizes that there are huge rewards just over the horizon. Every day 10,000 Baby Boomers get Medicare cards, which means that demand for new medical treatments will only continue to grow exponentially. Additionally, the long term return of the XBI index has been incomparable; In 2012, the index was valued at just $7.73. Today, even after the intense pressure on the sector, the same index is worth around $80. In a decade, the biotech investor with the steady hand and nerves of steel has earned more than a 1,000% return. There is no reason to think that the next several decades couldn’t produce the same kind of returns.
A sailor can’t control the weather. But he can maximize his results by understanding the prevailing winds, and adapting his sailing techniques to suit those winds. How does he trim the sails? What course does he set? Does he provide a steady hand at the helm? A sailor who understands what is going on in his environment has a much better chance of reaching calm waters than a novice who panics.
Below, we discuss three big trends in the biotech world for 2023. As the saying goes, “prayer is not a strategy.” Understanding these trends, and how they fit the larger investment picture, will help you plot a steady course for your financial ship.
1. Cash is King
For many years after 2008, money was cheap or downright free. Almost anyone could borrow money cheaply at great terms. This was because the Federal Reserve lowered interest rates to combat the Great Financial Crisis and never really raised them again. This trend became even more pronounced during the Covid crisis. It became so easy for biotech companies to raise large amounts of money, that it seemed like all you needed was a test tube and a powerpoint to raise $100 million. According to Biopharmadive.com, in 2021, at the height of Covid craziness, 100 biotech companies went public, raising more than $15 billion in total.
That didn’t end well. Many of those newly public companies saw their stock prices collapse within months of their debut on the market. Legions of investors were wiped out. It wasn’t uncommon for speculative grade biotechs to lose 70% or more of their market value.
This boom and bust has led to a situation that is the dead opposite of 2020 and 2021. The funding spigots have suddenly been turned off. While it used to be easy for even the most questionable ventures to raise funds, now the opposite is occurring; many of the most worthy endeavors are starving for capital.
Amongst many of the young companies that went public between 2018 and 2021, most were unprofitable, and many were so young that they didn’t even have any revenue yet. They were still running tests in phase 2, or even phase 1 of new technologies, which meant that they were at least several years away from real revenue, let alone profit. Some companies went public without even having any molecules in human testing!
At the time, the assumption seemed to be that investment capital would just be available forever. Unfortunately, that turned out to be a bad assumption. “Forever” has come and gone, and now investors have become very reluctant to fund money burning biotech start ups (a stock crash will tend to have that effect).
This doesn’t mean that no biotech will ever be able to raise funds ever again. This just means that today’s young companies need to be able to stay alive long enough to show real, measurable results in the clinic. Mouse Models and theories will not be enough to raise money moving forward; real results in people will be required.
In order to keep moving clinical development forward, companies need cash. Basically, the companies that did a good job of raising cash when times were good still have outstanding prospects; companies that never bothered to build up a proper war chest are realistically looking at bankruptcy. These days, the wise investors focuses on companies with a “long runway,” i.e. enough cash in the bank to keep the whole enterprise functioning until clinical results “take off.” What is considered a strong cash runway? How does an investor measure?
A good cash runway is not a number, it’s a situation. If your company has $100 million in cash, and your clinical operations burn about $25 million per year, it could be said that you have a runway of 4 years. This would be considered to be a comfortable situation. This means that your team has 4 years to produce real, tangible results. At the end of four years, hopefully your company will have produced enough real results to more confidently raise investor capital, or, most optimally, actually produce revenue by selling something.
On the other hand, if your company has $100 million in the bank, but typically spends $100 million per year on clinical operations, that means that your runway is only one year. That is a bad situation. It means that a very real risk exists that your enterprise will run out of money before it can produce enough clinical results to merit further funding.
In a new world where investment capital is scarce, you can save yourself a lot of stress by choosing to invest in companies with strong runways. Three companies that currently have a runway into 2025 are: Zentalis ($ZNTL), Sage Therapeutics ($SAGE) and Regenex Bio ($RGNX). All three have clinical programs with agents in at least stage II testing, meaning that they could well have viable products by 2025, before they run out of cash.
How can you determine if your target companies have a strong cash runway? These days, cash is all that analysts talk about. This means that most companies in this sector will present this information plainly in their press releases when they release their quarterly financial reports. Every public company must release quarterly financial reports, and most will produce easy to read, easy to understand press releases to update the investing public on the company’s progress. These press releases typically feature a discussion of the company’s cash position. Make sure you do your homework to help you pick some biotech winners that will stay afloat during these tempestuous times.
2. More for mRNA
One of the reasons why biotech remains one of the most attractive investment sectors is that this industry’s impact on our day to day lives is so enormous and tangible. If you have any doubts about this statement, consider the current Covid scenario in the Western World vrs. China.
Towards the end of 2022, the Western world has mostly returned to normal. Although certain socioeconomic consequences of Covid will be felt for decades, most Americans and Europeans today feel comfortable not wearing masks, and almost total freedom of movement has been regained. Group events like the World Cup in Qatar and Art Basel in Miami have had bigger attendance than ever.
Compare that to the authoritarian hellscape that is China. Covid never ended in China. Harsh lockdowns have been constant, and there is nothing at all about Chinese life that resembles their pre-covid world. It’s almost surreal to watch reporters in China face the camera wearing masks and full Covid garb when the threat has been neutralized on this side of the globe for at least a year.
Why is there such a yawning gap between East and West? There are a number of complex socioeconomic factors that could be discussed, but for this post, the most important fact is: the Chinese made vaccine doesn’t work. It never really worked. According to The Economist:
In much of the world, hard lockdowns to curb transmission of SARS-CoV-2 seem a thing of the past. Not in China. On April 19th, Shanghai entered its third week of a strict lockdown, having registered 19,442 new transmissions the day before (ten deaths have been recorded in the current wave). The disruptions clearly have a huge human and economic cost, but the government appears to have no clear plan B. The main problem is that the elderly in China are insufficiently vaccinated. But it does not help that at one or two doses, at least one of its vaccines is less effective than an mRNA shot widely available elsewhere.
(April 19, 2022).
As 2022 wore on, the situation in China didn’t get better; in fact, it got worse. As the West has returned to a more typical existence, China’s lack of mRNA vaccine has only cost it more and more (literally; the economic damage to China, due to extensive lock downs, has been incalculable).
The gulf between the West and East is more socioeconomic than clinical; The Chinese Communist Party has steadfastly refused to admit that their non mRNA vaccines don’t work well. But politics should not be the main lesson drawn from this situation; the main lesson should be: mRNA technology is a new and powerful tool in the never ending war against human disease.
Covid isn’t the end for mRNA, in fact, it’s just the beginning. The fact that the technology could be adapted so rapidly to fight Covid was just a happy coincidence; prior to Covid, the technology was being tested for a wide range of other applications.
“We now return to our regularly scheduled program,” as the saying goes. With Covid largely in the rear view mirror (at least for the West) scientists are now re-focusing on their original mRNA targets.
The most well known players in the mRNA field are Moderna ($MRNA) and BionTech ($BNTX). These two companies are now applying their messenger RNA technology to a vast array of clinical investigations; other respiratory diseases, a variety of cancers, and even HIV are all in the companies’ crosshairs.
Not to be left behind, other major pharmaceutical players are rapidly acquiring smaller biotech firms so that they can develop their own mRNA platforms. Sanofi Aventis has lately gone on a biotech buying spree and Pfizer has hungrily been on the prowl to increase its mRNA capabilities.
In short, Covid was just the beginning for messenger RNA technology. The astute investor will be following this space, and looking for long term investment opportunities.
3. All In on Allogeneic
Another world changing technology is called Car-T therapy. Car-T therapy was not invented in 2022; but 2022 was the breakthrough year where it really became clear that the therapy has legs.
Car-T is a way of treating cancer (and, soon, other diseases) by which immune cells are removed from the patient’s own body, genetically modified in a lab to fight a particular cancer, and then reintroduced into the patient’s body. The new, “souped up” cells then do a much better of fighting a particular cancer than they would have naturally.
These treatments have been available for a while, but they are just now gaining widespread acceptance in the oncology community. In 2022, Gilead sciences saw two of its Car-T treatments grow by 72% (Tecartus) and 81% (Yescarty). Analysts now expect these treatments to grow into blockbusters.
So the “Car-T” concept (modifying immune cells to fight cancer) is now proven, both clinically and commercially. But these new medicines still represent just a fraction of what they could be. Right now, the process is extremely labor intensive. Each particular patient has her cells extracted, flown to a special lab, custom modified in that special lab, and then flown all the way back to her to be reinjected. The process is expensive and time consuming.
Enter: Allogeneic cells. These treatments are also referred to as “off the shelf” cell immune cell treatments. These are special immune modified cells that can be mass produced, inventoried and dispensed just like any other modern pharmaceutical product. Instead of the laborious process of custom making each treatment for millions of cancer patients, the idea is to create cell infusions that can benefit from modern mass production techniques.
So far, this concept is just that, a concept. But allogeneic cell therapies are getting closer and closer to reality. In 2022, several companies released data that suggests that mass production of cancer killing cells is not just a dream. Additionally, these allogeneic treatment are being targeted against both blood cancers and solid cancer tumors. Up until now, Car-T has only been effective against blood cancers.
Three companies that present solid data regarding allogeneic cell therapies are: Caribou Biosciences ($CRBU), Allogene therapeutics ($ALLO) and Crispr Therapeutics ($CRSP). All three are well funded, feature partnerships with major Big Pharma players, and have presented data that seems to be pointing towards real world, commercially viable products. 2023 should bring some exciting clinical advances in this niche.
Ask any long time sailor, and he’ll tell you that short term fluctuations in the weather can be unpredictable. All that really matters is keeping a firm hand on the wheel and a steady eye on the horizon.
Despite the recent extreme turbulence that has buffeted the biotech sector, demand for cures is higher than ever. The ability of science and industry to meet that demand is also unprecedented. The investor who stays her course, no matter how violent the tempest may become, may very well earn outsized rewards.
Disclosure: The Sick Economist owns shares in $CRBU, $SAGE, $MRNA and $ZNTL