2023: Moving Past the Bubble in Lifescience

It is a unique and special time in healthcare. The intersection of meaningful data, increasingly powerful interpretive and relational software and proven platform technologies portend a cycle of innovation in therapeutics and healthcare delivery that can substantially lengthen our healthspan – the period over which we live a physically and mentally engaged life - while ultimately decreasing the total cost of care.? The rate of progress across disease will vary.? Drug discovery will be fastest where genetic clues point the way (for example cancers) and slowest where genetics and environment are confounded and where anatomy and biology present complexity and constraints (like in mental illness).? The pace of prevention will likewise follow a path of least to most resistance.? The degree of perverse reimbursement incentives, ingrained clinical habits, diagnostic certainty and ability to create low touch patient interactions to keep people on course in preventative care regimens, are all important here. But there should be little doubt that progress as a whole will be rapid and the result will be impressive advances.?

?There are always speedbumps along the way and about every ten years we run into a rough spot in the healthcare investment space, and biotechnology more specifically. In the rearview mirror these periods have looked awfully similar, with outrageous upmoves in public company valuations followed by less surprising compensating downward moves. The upward movement carries with it a range of predictable behaviors including investors of all types chasing performance by moving to earlier and riskier securities only to eventually find themselves in trouble. Everyone then moves back into their lane with promises to stay there this time. Depending on the magnitude of capital flows in each direction, this can entail significant damage to capital intensive companies who have neither intact investor syndicates nor an accepting public market to fuel their burning hot engines.

This most recent bubble has been pronounced in both directions, and it has been a tough three-year digestion period. After performance hungry investors and executives with unrealistic views about the value of their technologies populated the public and private markets with dozens of high burn, long duration, low probability companies, there was a necessity to cut burn, focus on more tangible assets and demonstrate the case for realistic value creation. This is how it should be on a normal day in the market, but every decade or so healthcare investors become less discriminating.? We have been cautious for some time owing to the structurally unsustainable conditions that had developed, but in the second quarter of 2023 we began to find real value in the market once again.

While there was a further several months of choppiness, November and December were a nice change of pace, at least in the public markets, marking the first value-driven upward movement of note since the healthcare market peak in January 2021. Value here is defined as moves precipitated by takeouts, clinical and regulatory successes and earnings quality. Given the retrenchment of businesses and reset valuations, these sorts of performance drivers have now become much easier to achieve and to sustain.? In addition, markets appeared more rational.? After a number of years of everything going up or everything going down, differentiation and stock moves proportionate to perceived changes in value have, in our view, become more normal.? This is a good sign that valuations have rebalanced and that market participants are assessing value in a more rational way.? Still to come will be a fully open market that invites appropriate companies to become public at appropriate valuations.? A rational market for healthcare equities that investors trust is a precondition. How long trust will take is a fickle thing, but the conditions for it have come a very long way.

#healthcare #investing #lifescience

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