Biotechs Are Returning to Pre-pandemic Market Expectations, but Not Evenly
The flood of venture and government funding, and overwhelming willingness to take on more risk for critically needed COVID-19 vaccines and treatments throughout the pandemic, gave the illusion that drug development timelines can be significantly accelerated. But now, amid higher interest rates and tighter funding conditions, it is difficult for biotechs to get access to the cash needed to fund R&D and maintain those same timelines. It is also challenging to manage the same number of R&D investment projects as they have in the past. Small and medium-sized companies might be feeling this change the most. Larger companies often have deeper relationships with banks and more resources available, allowing them to get the financing they need, while small and medium companies are more immediately affected by market changes.
This disparity is evident in biotech companies’ financial reporting. There was a significant increase in the debt-to-equity ratio for small companies in 2022. This is likely because small companies continued losing money, which depleted their equity, and were unable to raise additional equity to make up for the loss. Additionally, liabilities either stayed the same, increased, or did not decrease at the same rate as these small biotechs were losing money, which would have increased their debt-to-equity ratio. Larger companies did not see this same impact because they have greater stability, which enables them to better manage their margins, equity, and debt.
Meanwhile, large companies are faring better in the market. In 2022, large companies saw a 26% increase in cash and equivalents, which is more than three times higher than the 8% increase they saw in 2021. While larger companies excelled, small and medium companies saw cash and equivalents decline for the first time in the last four years. Investments made during the pandemic put large companies in a better position to ride out market shifts and maintain cash.
Larger biotech companies also generated significant revenue during the pandemic compared to medium and small biotechs, adding to their capital reserves, and making their financial strategies much more resilient than those of small and medium companies. While small biotech companies experienced a decrease in revenue for the first time in the last four years in 2022, large and medium companies saw a mild increase in revenue. Small biotech companies have seen diminishing revenue growth rates since the biotech boom of 2020. Though medium and large companies appear to have maintained growth for longer than their smaller counterparts, they have also seen diminishing revenue growth rates since 2020.