Biotech is way above its weight category, and that has never been more apparent than in this pandemic and the race for a COVID vaccine.
For those of us in biopharma, it appears to be a large and dynamic sector populated by countless companies large and small, scientists, business types, experts, lawyers, accountants, and more. Sometimes it seems very big. And the dozens of daily news stories make it seem even more: quarterly earnings updates, clinical data releases, FDA decisions, people on ramps and stairs, etc.
But in reality, the biopharmaceutical sector is quite small relative to the rest of the market..
Context is everything, and getting away from the trees to see the forest is always healthy.
Here is a statistic that summarizes the relative scale of the biopharma: The top 3 tech companies have a combined higher market capitalization than the entire biotech and pharmaceutical universe combined (> $ 3.5 trillion), including nearly 1,000 publicly traded companies.
That’s right, only three companies – Microsoft, Apple, and Amazon – are collectively larger in market capitalization than the combined valuations of J&J, Pfizer, and all other biopharmaceutical companies up to the most recent initial public offering and micro-cap stocks. And there are dozens of other big tech players, from Alphabet to Facebook, Intel and others, behind these three. Our sector is simply dwarfed by its size.
Another scale comparison for the outlook is around their balance sheets – we think the cash positions in Big BioPharma are huge when we talk about $ 20B + from Gilead or $ 30B + from AbbVie, but previous Google, Apple, and Microsoft have positions of combined cash that could fund the entire R&D throughout the biopharmaceutical industry for almost two full years, north of ~ $ 350B. That is a staggering amount of cash.
Why is something in this context important? Why is it relevant to understand the scale of the biopharma?
It is important to appreciate that even minor changes in the attractiveness of the sector relative to other sectors of the economy can dramatically impact the strength of biopharma equity markets, especially for emerging players. Furthermore, the 600-plus players in the small- and mid-cap pre-commercial biopharmaceutical universe, the space we often call “biotech,” depend almost exclusively on cash flows from the broader equity markets for their survival.
Here are some observations on how biopharma, and the life sciences (LS) industry in general, fits into the broader financial world, courtesy of data from Cowen & Company.
Biopharma is a relatively small share of the US equity markets overall. America’s stock exchanges represent about $ 49 trillion in collective market capitalization. The entire biopharma represents 7% of the market, which includes the main players in our industry. Biotechnology, as a subset and includes the “big biotech” firms, reflects only 2.7%.
Biopharma is well above its weight class in the new equity issuance market. Because life sciences is largely a loss-making, profit-making, and stock-burning industry, it makes up a much larger percentage of the new equity issuance market. For all follow-up IPOs and public offerings on US stock exchanges, Life Sciences accounts for 13% of the aggregate market valuations of these issuing companies, 20% of all proceeds from these offerings and 40% of the number of offers.
Biotechnology, and life sciences in general, have increased their participation in equity issuance markets. In recent years, biotechnology has been on the rise. As described earlier this year, we have witnessed a tsunami of financing flows in the sector. While other sectors have also experienced exuberant market appreciation, the dynamism of biotechnology has outpaced most others. the The IPO markets, in particular, have evolved in a much more favorable way. for biopharmaceuticals in recent years, especially since the JOBS Act of 2012.
Therefore, financing flows to biopharmaceutical companies from life sciences venture capital, IPOs and FOPOs have increased in terms of “market share” relative to other sectors in each category. Larger rounds than in the past, and more of them, have driven this increase in participation. As the graph below shows, overall, the LS sector has gone from 10% to almost 20% of all these aggregate financing flows.
The growing role of biopharma in the new emissions market has increased the number of LS companies that are publicly traded.. As I wrote in a 2011 blog post, “Our shrinking biopharmaceutical ecosystem”, The number of publicly traded biotechnologies in the US decreased by more than 25% from 2005 to 2011. This changed dramatically as IPO markets opened from 2012 to 2016, increasing by 50% , as described here in “The Incredible Expanding Universe of Biotech Stocks”. And it’s only gotten bigger in recent years.
As proof of this, the biopharma has been increasing both in its share of companies and in its value weighting in the Russell 2000 index. The Russell 2000 is the best-known index for small and mid-cap companies on the stock market of Since 2014, both the number and the valuation of the biopharmaceutical sector in the index have increased by more than 60%. Biopharma is now the largest subsector in Russell 2000.
While all of these data points are intuitive, and probably not surprising to those familiar with capital markets, there are some implications.
Small numbers, huge impacts. Biotechnology is very sensitive to small changes in macro sector allocations. Whether risk sentiment on or off prevails, or if there are broader sector rotations by asset managers (including growth versus value investing), the reality is that there are very small aggregate changes in the form in which investors allocate the nearly $ 50 trillion in stock value. in US markets it can have a major impact on biotechnology. For example, if asset managers moved just 0.1% into life sciences, that would be worth $ 50 billion, more than all new public equity issuance in biopharma in 2020, a boom year for companies. offers. Changes in the way we reward R&D and innovation in society can easily affect sentiment and these macro-allocations.
Bigger foods attract bigger fish. As biotech has grown larger within the new emissions market, it has become meaningful to larger stock managers. These big fish cannot waste time eating small baits. In the past, it was difficult for the largest asset managers to actively participate in biotech IPOs or FOPOs if they were only getting a small portion of a $ 50-60 million offering. Nowadays, the average offers are much bigger (4 times more), which has created a “space” for the biggest players to participate. This is a feedback phenomenon that has provided positive tailwinds in demand from the sector’s new source markets, and its evolution was described here.
Getting into indices is important. As more biotech companies enter Russell 2000, that means more ETFs on the market will include them, and more managers will need to assign them, driving higher demand for biotech stocks. With more asset managers comparing and getting paid for performance compared to these indices, this brings incremental and general buyers to these stocks. It also increases awareness of the young biotechnologies that are included in the index. This also creates a more underlying demand for biotech capital in the markets.