The 2020 hangover is still weighing down biotech: Chris Bardon

The BioCentury Show: Public markets aren’t yet out of the woods, but M&A will remain robust for years, fueled by obesity drug revenues

Specialist public investors are doing their best to hold up the sector, but biotech still has to wash out many of the lower quality companies that were funded during the boom and ended up driving the generalists away, said Chris Bardon on The BioCentury Show.

Bardon, who is co-managing partner of MPM Bioimpact and leads the firm’s public market investing as the portfolio manager for BioImpact Equities and the Oncology Impact Funds, said the market hasn’t yet found the footing that will see an opening of the IPO window and a swing of positive sentiment.

“We’re still on our 2020 hangover,” said Bardon. “A lot of things happened that weren’t necessarily good for our industry.” She said companies are still facing down rounds and need to grow into their valuations, and it will take a few more failed clinical trials and development programs before those companies are cleared out and “there’s blue skies and clear sailing.”

The bar has been raised both for private and public investors, who have moved to a more parsimonious funding environment, said Bardon. 

“As we went into ‘21 and ‘22, those incremental investors left biotech, and then all we were left with is the biotech specialists like me and all of my colleagues who do biotech 24/7.” And now there are many companies in the late-stage private environment, who may be in the mezzanine stage of financing, waiting in the wings. “They’re afraid to go public until they see that the markets are coming back.” 

The rough rule of thumb, said Bardon, is that a company is worth 4x the peak revenue of its ultimate drug launch prior to patent expiry. In 2020, companies were getting full credit for that valuation when they started clinical trials or even while preclinical. 

“So the question is this: What’s the right valuation? Companies should actually not seek to get a higher valuation than they deserve,” said Bardon. It makes it harder for investors to invest. “You want your investors to be successful and to make money along the way. That creates the proper dynamic for you.” The good CEOs know this, she said.

Bardon believes that M&A will be an ongoing driver for the industry, fueled largely by the success of the obesity drugs. “The cash flow that’s about to come over the course of the next decade from obesity and obesity-related illnesses — we’re looking at annual revenues of north of $25-$50 billion,” said Bardon. That money will be redeployed into R&D, but also into licensing, partnering and M&A. 

And it won’t only be the current leaders, Eli Lilly and Co. (NYSE:LLY) and Novo Nordisk A/S (CSE:NOVO B; NYSE:NVO), she said. “We’ll see multiple companies playing in this field, generating cash flow, and redeploying that.”