The rise and rise of biotech

Without health, we have nothing. 2020 saw the biotech industry experience phenomenal growth, with capital deployment levels far greater than ever before and dealmaking occurring in both public and private markets.

There was a lot of excitement around diagnostics, vaccines and therapeutics for COVID, but, much more than that—the importance of health innovation became top of mind more generally. Together with the promise of AI to effect more efficient drug discovery and less failures and reduced time to market, investors were out in full force. A remarkable 84 initial public offerings for biotech companies in North America took place in 2020, raising a total of US$15 billion. We anticipate the upward trajectory to continue. In addition, $16.8 billion was raised by biotech focused venture capital funds and $6.3-billion by biotech focused SPACs. Here, we share drivers and trends we expect will contribute to the ongoing rise of the biotech sector.

Continued generalist participation

Last year, generalist investors shifted their attention to biotech as the XBI outperformed the S&P. These investors funded both private and public companies through venture capital funds and stock indexes, respectively. While generalists are less likely to invest directly in pre-clinical companies, we expect them to continue to engage in opportunities as companies move through clinical developments. Here, they will see de-risk occur from a clinical standpoint which will give them greater confidence to invest. Family offices also recognized the growing opportunity in the sector, in many cases pooling resources together to co-invest with venture capital funds. The increase in demand across investor types both expedited roadshow timelines and resulted in larger-than-usual IPOs and strong post-IPO performance.

Increased activity in diagnostics and personalized healthcare

The effects of COVID-19 increased investment in diagnostics and the personalization of healthcare, allowing for the build-out of product portfolios and foundational platform work. The impact on M&A was the accelerated development of very attractive companies which have enjoyed ongoing premiums in pricing. Although the pandemic was a catalyst for growth in this area, persistent unmet clinical needs and an aging population will continue to be significant drivers for investment—and we will likely see continued activity around AI and digital health, particularly in their application to drug development, patient identification and customized care.

SPACs and more SPACs

SPACs (special purpose acquisition companies) were very popular in 2020, making up the majority of IPOs and providing an alternative to the traditional IPO route. A key driver for biotech SPACs was the rush to take advantage of the capital markets and the enthusiasm the market held. Going forward, we expect to see SPACs remain a common part of biotech companies’ toolkits on the road to becoming public. However, due to a greater, and perhaps over-supply of, dedicated biotech SPACs, we are seeing dynamics shift, with companies being able to negotiate better terms around valuations, promo fees and warrant coverage. 

More U.S. investor eyes on Canada

In 2020, Canadian biotech companies experienced increased attention from U.S. VC and other institutional investors. As the competition and pricing for deals in Silicon Valley and Boston in this sector skyrocketed, investors looked to Canada’s deep scientific bench for investment. And since success begets success, with the IPOs of AbCellera, Repare Therapeutics and Fusion Pharmaceuticals this past year, early-stage U.S. investors are no longer wondering whether one can build a world-class life science company in Canada. While cash-rich Canadian pension funds traditionally invested in this sector indirectly through venture capital funds in large part because they lacked the in-house expertise, this is also changing. COVID’s experiment with working virtually has paved the way for these institutions to access on a world-wide basis employees with the sector expertise to invest directly.