Editor's Note: This article is part of our series marking the second anniversary of the pandemic. Other installments include:
Biotech startups are facing leaner times, as the end of COVID-19 restrictions causes investor appetite to waver.

VC firms flocked to the biotech industry with the onset of the pandemic, investing record amounts of capital worldwide in both 2020 and 2021—$12.6 billion and $16.1 billion, respectively, according to PitchBook data. Generalist investors and corporate venture arms increased their allocations, as COVID-19 underscored the future importance of biotech and its potential for attractive returns.

Two years on, many countries have lifted all restrictions—and the appetite for biotech companies is cooling off.

"There is a reset happening in the biotech industry," Sofinnova Partners managing partner Antoine Papiernik said. "When the wind blows, even turkeys can fly, but we're now in a different environment. People will be more careful with their investments than before, and valuations will slow down."

Compared with 2019, median pre-money valuations for late-stage biotech startups increased by 58% in 2021, while at the early stage, they rose by over 51%. However, startups can no longer justify the sky-high valuations they had two years ago when investors first sought to profit on pandemic-induced growth, Papiernik noted.

Although he thinks there will still be funding for promising companies, the current environment could force many startups to reset their expectations on valuations, with the potential for down rounds in the coming year.

Novo Seeds managing partner Søren Møller also believes that the biotech industry won't see the same levels of growth in 2022. This is likely to impact startups that had plans to go public.

"Listings are definitely going to go down [this year]," he said. "The public markets are at the moment a bit frozen. The long-term impact will depend on the length of the turmoil, but valuations will be affected."

VC-backed biotech companies raised a record amount of capital—$29.3 billion—last year via public listings, PitchBook data shows. The number of flotations also reached its second-highest count in the past decade with 37. However, more than three-fourths of the VC-backed companies that went public last year now trade below their listing price.

Public biotech companies have taken a beating in recent months, as so-called tourist investors pull out of the sector. The prospect of rising interest rates has also made holding riskier and slow-moving stocks less attractive. Since the beginning of the year, the Nasdaq Biotechnology Index, which measures the performance of biotech companies listed on the exchange, has lost more than 17% of its value.

Lower valuations could however open up more opportunities for M&A activity, according to Papiernik. Unlike listings, acquisitions have been on a downward trajectory since 2019. Last year, 24 such deals were completed, compared with a high of 45 in 2018. Depressed prices could entice larger pharmaceutical companies to buy up newer startups, giving them innovative technology and a more attractive exit route for investors.

But with the public markets no longer as attractive, biotech startups may have to tighten their belts and prepare themselves to stay private longer. While VC money isn't abandoning the sector, investors are likely to take a harder look at the companies they're willing to back, particularly those that are years away from producing market-ready treatments.

"We're still in a golden era of biotech innovation, and there are tremendous unmet needs out there," Møller said. "Good companies with good management teams and enough capital to reach milestones will still get funding, but valuations will be less frothy."

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