Life Sciences PracticeWhat early-stage investing reveals about biotech innovationPublic funding for biotech remains tenuous, but in 2022 and 2023 venture capitalists have continued to pour money into innovative platforms that could revolutionize the sector. December 2023This article is a collaborative effort by Emily Capra, Christian Fougner, Olivier Leclerc, Ahti Mäkitie, Anthony Suberski, and Michelle Suhendra, representing views from McKinsey’s Life Sciences Practice.In recent years, biotech public markets have struggled to stage a meaningful comeback. The S&P Biotechnology Select Industry Index entered fourth quarter 2023 more than 50 percent lower than its peak in February 2021, and only 30 biotechs have undergone an IPO in the first three quarters of 2023 versus 114 IPOs in 2021 (Exhibit 1).1 Total biotech IPO funding has dropped dramatically, with only $3.4 billion raised in the first three quarters of 2023 versus $16.0 billion in the first three quarters of 2021.2 In response to this difficult environment, 1 S&P Capital IQ, accessed October 2023.2 Ibid.3 Annalee Armstrong, Max Bayer, and Gabrielle Masson, “Fierce Biotech Layoff Tracker 2023: Novavax to cut more staff in new $300M savings plan; Regenxbio, Gilead and more,” Fierce Biotech, November 9, 2023.4 Gabrielle Masson, “After pandemic sugar rush, a market ‘hangover’ opens biotech to funding approaches steeped in stigma,” Fierce Biotech, October 9, 2023. more than 250 biotechs have initiated layoffs in 2022 and 2023. Many of these companies have also streamlined their project pipelines to safeguard their available cash runway.3Amid a challenging public-market environment, venture capital (VC) funding has provided a much-needed lifeline to fuel biotech innovation. Despite also registering a decline after peaking in 2021, with several investments occurring in down or flat rounds,4 VC funding has consistently remained Exhibit 1Performance of the S&P Biotech index 2019–H1 2023,1 total gross return, index (Jan 2019 = 100)2019050100150200250S&P 5002020202120222023Biotech IPO funding 2019–Q3 2023, total investment, $ billionNote: Chart includes IPOs > $10 million during 2019–Q3 2023, fltered for biotechnology industry; excludes nontherapeutic biotechs such as contract and research services, industrial biotechnology, and food and agriculture.1Tickers include SPX (S&P 500), XPH (SPDR S&P Pharmaceuticals ETF) and XBI (SPDR S&P Biotech ETF)Source: McKinsey analysis based on PitchBook, Inc. and S&P Capital IQ data, accessed Oct 2023; has not been reviewed by Pitchbook or Capital IQ analystsBiotech stock valuations and IPO funding have declined signifcantly since peaking in 2021.McKinsey & CompanyS&P BiotechS&P Pharma20195.6IPO funding4776114233012.316.12.13.4# of IPOs202020212022Q1–Q3 20232What early-stage investing reveals about biotech innovationrobust and elevated above prepandemic levels (Exhibit 2). In 2...
