The once-thriving biotech industry, known for breakthroughs in cell therapy, gene editing, and messenger RNA, is now showing signs of a downturn. During the early days of the pandemic, mRNA vaccine trailblazers like Moderna (Nasdaq:MRNA), Pfizer (NYSE:PFE), and BioNTech (Nasdaq:BNTX) enjoyed skyrocketing revenues, but the recent biotech industry downturn has cast a shadow over this previous success.

Layoffs and shrinking stock offerings: Biotech downturn takes its toll

But in recent months, biotechs have laid off thousands of employees, stock offerings have decreased and notable biotech stocks have plunged, although the Nasdaq Biotechnology Index (Index) is up about 2% so far in 2023. Conversely, the iShares Biotechnology exchange-traded fund (an equal-weighted index of biotech stocks) has fallen about 4.5%.

As biotech companies struggle to raise capital and stay in business, industry analysts like Michael Yee from Jefferies, as mentioned in a February WSJ article, predict a growing divide between the “haves” and “have-nots.”

Biotech companies experienced significant layoffs in 2022, with more than 7,000 people losing their jobs. In January 2023 alone, the sector reported 1,449 layoffs, according to WSJ. By contrast, there were 174 in the same month a year earlier. So far this year, 19 biotech firms have announced workforce reductions. Many pharma companies have done the same. This trend of layoffs and company closures marks a substantial shift for the biotech industry, which previously has proven resilient at fundraising.

Factors contributing to the biotech industry downturn

1. Rising interest rates: As investors seek safer ways to make money amid rising interest rates, the biotech industry’s ability to attract funding has diminished. Some analysts, however, note that the impact of rising interest rates has been relatively modest.
2. Difficulty in developing profitable products: Some initially promising technologies, such as cell and gene therapies, have proven challenging to develop into profitable products.
3. Political tensions between the U.S. and China: Uncertainty resulting from political tensions has affected the industry’s outsourcing of manufacturing and drug development, leading to increased concerns over supply chain disruptions and potential delays in drug production. Meanwhile, Chinese biotech companies are thriving, as Reuters noted.
4. The Inflation Reduction Act, a new federal law allowing Medicare to negotiate drug prices: The uncertainty surrounding the extent of potential discounts has added to the industry’s concerns.

Not all doom and gloom? Some biotechs still thriving

Despite the biotech industry downturn, some biotech companies continue to fare well, with investors upbeat about promising drugs for obesity, psoriasis and liver disease. The new Alzheimer’s drug Leqembi (lecanemab) from Eisai (OTCMKTS:ESALY) and Biogen (Nasdaq:BIIB) has also raised hopes that the industry is making progress in tackling the disease. Several biotechs have accumulated significant cash reserves, enabling them to make acquisitions, and some pharmaceutical companies are actively seeking deals, as WSJ has noted,

Fundraising challenges

Biotechs raised $1.57 billion through IPOs in 2022, a significant decrease from the $16.5 billion raised in 2021, according to WSJ The traditional path of raising money through venture capital and institutional investors, followed by going public, has become more challenging. Venture capitalists are now more cautious about investing in mid- or later-stage privately-held biotechs.

Examples of struggling companies include the following:

1. Finch Therapeutics Group Inc. halted the development of its most advanced drug, sold its other assets, and laid off 95% of its staff.
2. Goldfinch Bio Inc. shut down after failing to raise money.
3. Vyant Bio Inc. is seeking strategic alternatives.
4. Cyteir Therapeutics Inc. laid off 70% of its workforce and halted the development of all drugs except for its lead product for ovarian cancer treatment.
5. Magenta Therapeutics Inc. halted its drug pipeline development and is considering options, including a sale or merger.
6. Rubius Therapeutics Inc. reduced its workforce by 82%.

The biotech industry downturn has accelerated recently, with thousands of employees getting the boot, funding drying up and companies struggling to keep their heads above water. It’s a perfect storm of rising interest rates, product development hiccups, political tensions and onerous new laws that have thrown the industry for a loop. But there are still some biotech high-flyers grabbing investor attention and pushing the envelope in biotech drug development. The industry will need to buckle up, think outside the box and tap into new funding wellsprings and strategies to ride out these challenges and steer a course towards growth and sustainability.