Reviving value in listed biotech companies: Yes, we can!

Here is the data that supports a comeback to most biotech companies

Sunstone Life Science Ventures has been actively investing in, building, and divesting biotech assets since 2007, and we have a portfolio of listed biotech assets of significance to us. We have analyzed available financial and share price data and want to share some facts, which help prepare substantiated guidance for listed biotech companies and our fellow co-investors.

Investors have seen share prices of listed biotech companies plummet over the past year, particularly for pre-commercial biotech companies. This decline is not necessarily due to negative clinical data or operational failures, but rather several global unmanageable factors that have led investors to sell out.

So, what are chances of regaining value, and how long will it take?

According to various indexes, including The Thomson Reuters Venture Capital Index, the negative share price development throughout 2022 has been consistent. The index dropped from approximately 23,000 in November 2020 to below 10,000 in January 2023, indicating a general drop of more than 50% of the index value in that period.

Here, Sunstone’s Biotech index compiles 275 pre-commercial (def.: EBIT<0) biotech companies listed on NASDAQ/OMX, NYSE (New York Stock Exchange), and LSE (London Stock Exchange) since 2020. We have normalized the share price curves to have an index of 1.00 (one) on the first day of trading. In the figure below, the orange line is the median share price development since January 2021.

Clearly, a downward trend started in 2021 and accelerated from there on towards the current floor at approx. 0.25. Consequently, by early 2023, 50% of the companies had lost 75% of their value compared to their IPO share price. Even the 25% 'best' performers (75% quartile) have lost 40% of their IPO value, whereas the 25% most exposed companies lost close to 90% of their IPO value in this period(!). We had a look at the companies that lost the most value, but rarely did we find negative news on biological effects or clinical progression. It has just been the hardest times for the companies that are furthest away from having commercial assets!

History shows a way forward!

We now extracted data back to 2000 and identified 806 biotech companies on the same stock exchanges as above that had seen a drop in share price, to compute what the likelihood of recovery is and how long it takes. We have represented the findings in the chart below.

Considering the bar representing the 5.0x multiple, a biotech company would have 25% likelihood of multiplying its lowest-ever share price by a factor of 5. At the same time, the gray line shows that on the median, it takes 360 days to recover these 5 times from the lowest share price. Considering the upper left part of the graph, it can be derived that 24% of all companies could never recover above 50% (1.5x) from their lowest, while at the other end, it is clear that 14% of all companies lifted back to a level >10x higher than their lowest.

Combining the median losses from the upper graph of, say, 75% which means that current median level is at 25% value, a 4x lift is needed to get back to the IPO price. From the graphs above, one can now estimate that if the market forces of older times prevail, a 4x could be done with 29% likelihood for any biotech company, and it would take the median company 258 days.

It may be helpful to recall that the reported recovery data from 2000 and onwards encompass the bursting bubbles of 2008 and 2015, and that it also includes that companies did have financing events to fund their development activities.

Now, we look forward to the next 12-18 months and expect that the majority of the biotech companies will recover from the current low.

What do you think ?

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