Is the golden age of biotech stocks over?

Much of the last decade felt like the golden age of biotechnology investing. Money — lots of money — was poured into new gene therapies that replaced defective genes with healthy ones, immunotherapies that were game changers for people with cancer, innovative medicines for rare diseases and HIV, and more. The returns on biotech stocks were phenomenal.

The Food and Drug Administration approved 378 new drugs between 2010 and 2019, a big chunk of which were cancer medicines. Biotechnology companies played a big role in developing many of these new treatments, and their successes could partly be seen in the stock market, where biotech stocks soared. In fact, the iShares Biotechnology ETF returned 351% in the decade ending December 31, 2019, beating the high-tech-laden Nasdaq Composite, which returned 343% during the same period, and trounced the S&P 500’s 257% return.

One of the incredible biotech breakthroughs of that era — two rival cancer drugs, Imbruvica and Calquence, which revolutionized the treatment of chronic lymphocytic leukemia, the most common form of adult leukemia — are the centerpiece of my new book, “For Blood and Money: Billionaires, Biotech and the Quest for a Blockbuster Drug.” The companies behind these drugs minted massive returns for their investors: Pharmacyclics, which developed Imbruvica, was bought by AbbVie for $21 billion, and Acerta Pharma, which developed Calquence, was bought by AstraZeneca for $6.6 billion. These were two of the greatest biotech trades of all time and arguably represent the peak of the biotech boom.

With the research and writing behind me, I increasingly think that the golden age of biotechnology investing might be coming to an end. It’s not just the drubbing of biotech stocks that has already taken place in the stock market over the last 16 months. That largely occurred because capital is a coward, and the Federal Reserve’s monetary tightening has sucked out speculative capital from the biggest risk-taking segments of the market, including biotech.

There are new political, regulatory, and structural obstacles the biotech sector must now overcome.

Congress is making it harder and more expensive for drugs to be approved through the FDA’s accelerated approval program. Imbruvica and Calquence were both first approved through this program, which greenlights new medicines for the treatment of patients with serious diseases and unmet medical needs based on study results of smaller groups of patients that can reasonably predict clinical benefit.

There is increasing scrutiny from federal lawmakers and regulators of the accelerated approval of drugs. As a result, the FDA granted just 10 accelerated approvals in 2022 through December 7, far less than in previous years. In its December omnibus legislation, Congress also made explicit the FDA’s authority to require larger and expensive post-approval trials related to accelerated approval. The new reality around accelerated approval adds cost and risk to the biotech equation.

The Inflation Reduction Act of 2022, meanwhile, will soon allow the government to negotiate prices on the most expensive medicines covered by Medicare if the drugs don’t have generic competition. That will likely cause drug companies to release generic versions of their treatments or allow others to make them earlier than they would have. Either way, the value of patent-protected branded drugs will diminish. This act also complicates efforts by biotech companies to get their drugs on the market quickly, making their clinical trial and regulatory plans more complex. This is because the clock on a new drug’s peak market years will start ticking after the first approval. Again, let’s look at Imbruvica and Calquence. Both raced forward and were approved in the U.S. market for relapsed and refractory mantle cell lymphoma, a very rare cancer. Approvals for their big market, chronic lymphocytic leukemia, came later.

Then there is Project Optimus, the FDA’s reform of dose optimization for cancer drug clinical trials. Regulators want cancer drug developers to move away from seeking the maximum tolerated dose in early-stage trials and instead focus on lower doses that provide efficacy. This is a complicated transition for biotechnology companies to undertake and could make drug development more difficult and expensive. Biotech companies will probably have to run more studies with more patients to figure out appropriate dosing levels. Amgen and Kura Oncology have already had to run new dose-optimization trials as a result, and Project Optimus also put a wrench in Merck’s $2.7 billion deal to buy ArQule, a biotech company, resulting in an accounting write-down.

Regulators also seem quicker to issue clinical holds on certain drug candidates. An analysis conducted by investment bank Jefferies showed the number of clinical holds in 2021 was double the historical average, driven by holds on cell and gene therapy trials, though the number normalized in 2022.

There are also structural headwinds. The inflationary pressures broadly hitting the economy are also affecting biotech stocks. The cost of running trials has increased, as has the cost of hiring and retaining employees.

During the go-go pandemic days of IPOs, SPACs, and generous venture funding rounds, biotechnology companies raised too much money before they were ready to justify it. The stocks of some of these companies traded as little as 200 times a day. Moderna’s average daily trading volume, by contrast, is 5.6 million. Today, many recently funded companies are burning through cash, trying to show progress and keep investors on board. When they empty their coffers, they are finding the funding markets closed or extremely expensive, given higher interest rates.

Biotech investors waiting for big pharma to come to the rescue may be disappointed. In the 2010s, large pharmaceutical companies tended to focus on big mergers, tax arbitrages, mitigating risk, and putting their massive marketing and sales forces to work. Smaller and more nimble biotechnology companies took the lead in innovation and could count on being bought by larger pharmaceutical firms if they showed meaningful drug development.

But after watching biotech companies win big for a decade, big pharma companies have now pivoted toward innovation themselves and are investing in their own pipelines. Pfizer, for example, shed its big consumer products, generics, and veterinary divisions, and is now focused on creating innovative medicines and vaccines. As a result, big pharma companies have become more discriminating when it comes to buying biotechs. Big pharma business development people now know to carefully check their internal pipelines before holding any serious discussions with biotechs.

Amid the current carnage of biotech stocks, it’s tempting to imagine there is another Pharmacyclics out there. As I write in “For Blood and Money,” Pharmacyclics’ stock was trading for as little as 57 cents in 2008 before it went on an historic run-up to $261.25 in 2015. The company ended up owning only half of Imbruvica, whose development could have gone sideways so many times. The drug benefited from a more accommodating FDA regulatory posture at the time — it was the first medicine to receive three breakthrough therapy designations — and luck played a significant role in its development.

Good medicines will still be funded. But biotech investing seems like it will be much harder this decade — and the overall impact on innovation for patients isn’t clear.

Nathan Vardi is the managing editor for enterprise at MarketWatch and the author of “For Blood and Money: Billionaires, Biotech and the Quest for a Blockbuster Drug” (W.W. Norton, January 2023).

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