Based on the unrelenting demand for more lab space in the Boston area, a boom in the region’s massive biotech cluster continues unabated. But the stock market paints a different picture of an industry that is a linchpin of the Massachusetts economy.
For more than a year, US biotech stocks have been down overall, some by up to 80 or 90 percent. Pressure from investors has been especially intense for small- and medium-size companies that don’t yet have products on the market and are burning through cash in a race to commercialize their discoveries. Some, including local firms, have resorted to layoffs as they run low on funding, and industry leaders say more job cuts are likely, along with mergers and bankruptcies.
At the same time, investments from venture capital firms in Massachusetts biotech startups reached a record high in 2021. And technologies such as mRNA vaccines and CRISPR gene editing have cemented Kendall Square’s status as the industry’s epicenter of innovation.
So what exactly is going on? Call it an adjustment.
“We are clearly living through an innovation renaissance and the fundamentals of the industry are quite strong,” said Barbara Ryan, senior adviser of life sciences at the consulting firm Ernst & Young. “But from a stock market perspective we are living through the deepest and longest correction that we’ve seen in the biotech indexes since their inception.”
One of the most popular biotech indices, called XBI, is down 27 percent since the start of the year and nearly 50 percent off of its peak in early February 2021. By contrast, the S&P 500 is up about 13 percent over that same time.
“It is arguably the worst slump in the space relative to the S&P that we have ever seen,” said Andre Perold, chief investment officer and cofounder of the Boston investment firm HighVista Strategies. Stock prices of many early-stage biotechs are trading for a fraction of their former worth. “Some of these biotech firms will not survive. They won’t be able to raise money, or if they do, it will be very diluted,” Perold added.
Over the past two months, Boston companies announcing plans to shrink their workforces by 30 to 60 percent include Akebia Therapeutics, Bluebird Bio, and Yumanity Therapeutics. Earlier this month, the microbiome firm Kaleido Biosciences shut down altogether.
Established local biotechs aren’t in jeopardy, although some are going through a rough patch on Wall Street. Moderna is down from its August 2021 peak by 67 percent, but remains awash in cash from its COVID vaccine. Biogen has fallen 48 percent since its beleaguered Alzheimer’s drug ― which Medicare will cover only on a highly restricted basis ― was approved last June.
Meantime, it’s been smooth going for Vertex Pharmaceuticals. The Boston company’s stock price is up 30 percent over the past year based on strong earnings and promising data from early-stage studies, including one for a potent but nonaddictive painkiller.
But analysts say firms with less than 12 months of cash on hand may have to pair up with another company to keep going. Others will get picked up by larger pharmaceutical firms at bargain prices.
Part of the reason for this period of instability is the economic hangover from an industrywide exuberance during the first year of the pandemic, according to experts. “Biotech was on a tear as we entered COVID-19,” said Justin Kim, a biotech analyst for the investment bank Oppenheimer.
Between early 2020 and February 2021, the XBI rose about 78 percent, a surge Kim and others attribute to an infusion of investors who grew increasingly interested in drug companies as news about COVID-19 vaccines, along with virus-related therapies, dominated headlines.
But since then, some investors have moved to less risky investments. For the past two months, the XBI has hovered around levels similar to what were seen before the pandemic. Which weren’t exactly bad.
“The biotech indices are not at all-time lows. They have lost significant value, but even at these lower values, they are higher than they’ve been for most of the history of the industry,” said Doug Cole, managing partner of Flagship Pioneering, an investment firm that creates and funds biotech companies, including Moderna.
Michael Gilman, chief executive of the private Waltham-based biotech startup Arrakis Therapeutics, believes the downturn is just cyclical. “I don’t think it signals any larger trend or defect in the industry,” he said. “We are living in a super risky world right now and that makes investments that feel risky to people, like biotech, fall out of favor.”
Those risk factors include things the industry can’t control, such as inflation, high interest rates, the war in Ukraine, and the lingering pandemic.
But there’s more to the downturn than that. Until about a year ago, raising money through the stock market was easy for biotechs. Maybe too easy. Record numbers of biotech startups went public during 2020 and 2021, including early-stage companies that don’t even have a drug ready to test in clinical trials. “That used to be taboo, and now it is the norm,” said Brad Loncar, chief executive of Loncar Investments.
“During the good times, companies were kind of valued as exciting ideas, and today, when things are bad, they are being valued as actual businesses,” Loncar said. “There are a lot of companies that don’t deserve to be public and never did, and those companies will go away. It is part of the painful but healthy process of rejuvenating the industry.”
Despite the rash of layoffs, biotech leaders say they expect rising unemployment to be short lived. “The talent scarcity in our industry is severe, so if you have experience, you will find work,” said Chris Garabedian, chief executive of Boston biotech startup accelerator Xontogeny and a venture fund manager at Perceptive Advisors.
The deflated stock prices of many biotechs could also make them attractive takeover targets for larger firms. Last year was one of the slowest in a decade for biopharma mergers and acquisitions, but according to Ernst & Young’s most recent report, pharma companies are sitting on about $1.2 trillion in cash they could use to buy companies or form partnerships.
”There is a good chance that M&A will come roaring back,” Loncar said. If that happens, he said, it could help turn around around the entire biotech industry.
So far the slump hasn’t affected privately held biotechs as directly as public ones. Garabedian said there is plenty of “dry powder on the sidelines” that venture capital firms can use to invest in private companies, which are not beholden to the pressures of quarterly earning reports and stockholders anxious for a return on their investment.
According to the Massachusetts Biotechnology Council, private biopharma firms in the state raised a record-smashing $13.6 billion in venture capital funds in 2021. “We may not have record-breaking year after record-breaking year, but the ecosystem is still strong,” said Joe Boncore, chief executive of MassBio.
“Overall, I am very optimistic because we still have everything that makes Massachusetts the best place in the world for research and development,” Boncore said. “Massachusetts, maybe unlike other ecosystems in the country, is better positioned to withstand the changes in the biotech financial market, and it will probably come out stronger.”
Investors are also optimistic about the long-term fate of the industry, even though that may not show up in stock prices anytime soon, partly because of the disconnect between time-consuming innovation and the desire for quick profits.
“What ultimately drives the biotech industry is the science, and the science has never been more exciting,” Loncar said. “And the stock market has never been more disjointed from that.”
Ryan Cross can be reached at email@example.com. Follow him on Twitter @RLCscienceboss.