Biotech Out of the Ashes

In the fall of 2002, nothing felt safe. In the decade prior, the rise of the internet had precipitated brand new companies and business models predicated on skipping traditional business-to-consumer routes. Mixed with low rates, free-flowing venture capital, and a new technology that was sure to define the future, investors were all-in. By March 2000, the tech-heavy Nasdaq had more than doubled in just one year. Then the “dot-com bubble” burst, dashing the dreams of investors and entrepreneurs alike as companies like Pets.com went under. Valuations plummeted. Stock indices troughed in October 2002, with the S&P 500 losing 49% and the Nasdaq losing 78% from the peak in March 2000.

What investors of the time did not know was that the success stories of the next generation would be built upon companies rising like the phoenix out of the ashes of 2002’s devastation. Amazon, for example, may have looked similar to many others that failed, trading as low as $0.28 per share. The internet was the way of the future, but the world depended on the most brilliant, disciplined, and admittedly lucky visionaries to go from here to there. The dot-com craze was both a bubble and a glimpse of tomorrow. The path was just a bit hazy in the finding.

This could be the same moment in the biotech industry. And in our view, there are many reasons to suppose it is.

In the last few years, biotech has had stark underperformance. The S&P’s biotech index is currently more than 50% off the highs of early 2021 in what has felt like a grinding bear market. Past performance has investors skittish, and rising rates are choking the flow of capital to emerging companies. Uncertainty in the regulatory agencies and government funding isn't helping, either.

But we see the phoenix forming here. First, let’s consider one key driver of biotech success: pressure on pharmaceutical companies. As margins get squeezed, these industry leaders need to source new innovations to maintain topline revenue and often look to fresh biotech solutions. And pharma is being squeezed, especially given the ongoing discussion of drug pricing. Unlike many hot topics in the political arena, pharmaceutical pricing is a bipartisan concern. Case in point: the Inflation Reduction Act was signed into law by President Biden in 2022, equipping Medicare to negotiate steep drug price reductions and keep prices from far outstripping inflation. On the other side of the aisle, Trump is now pushing for the Most Favored Nation policy, which advocates for Medicare drug pricing to be equivalent to other developed nations. This executive order is still in process but showcases broad US interest in the issue.

And it’s not just political pressure that is mounting. A wall of pharmaceutical patents will be ending in the next several years, creating a scramble for new ideas. Pfizer, despite its $100 billion windfall from the Covid vaccine, had lackluster success with reinvesting its capital. The search is on to fill the void.

Demand for innovation is growing from the population side as well. By 2050, one in six people will be over 65, driving need for chronic disease care, assistive technologies, telemedicine, and long-term care solutions.

Enter opportunity: biotech clinical stage companies and early commercial launches are the answer to both developments. Pharmaceutical companies are bound to search for additional income streams to combat revenue headwinds and boost their portfolios as the population ages—and scrappy biotech companies are waiting.

Most importantly, biotech companies are also ready. In medtech and diagnostics, we see enhanced remote monitoring, advancing diagnostic capabilities, and AI-enabled imaging. New technologies are allowing for earlier disease detection, reduced misdiagnoses, and advanced therapeutic monitoring, which has a significant impact on patient well-being and required care. Healthcare efficiency is another form of essential modernization. Digital health platforms and clinical AI solutions are being implemented to reduce variability in care, even where healthcare providers are limited.

At Eventide, we believe these dynamics are setting up biotech and broader life sciences to perform well after four years of stagnation. Our team, equipped with MD and PhD degrees alongside industry experience, brings an informed perspective as we pore over clinical data and the competitive landscape. We strive to position ourselves in burgeoning companies with powerfully transformative advancements, and believe that structural demand and incredible technological gains will kick off a new wave across healthcare that will advance human flourishing. And that’s something we’re both willing and excited to bank on.