The S&P select biotech index has now posted seven quarterly declines out of the last 9 quarters, marking the worst streak since inception.
Investors are rightly concerned about the viability of many of the ~300 life sciences companies with new public listings since the pandemic lockdown in early 2020. During the first quarter alone nearly 50 such companies have announced strategic reviews are ongoing. For sure, there will be more bankruptcies, equity mergers and delisting events.
First quarter IPO activity slowed to only n=4 offerings, a run rate that is 5x less than the ~100 completed in both calendar years 2020 and 2021. Not to mention the ~100 SPAC deals in that timeframe as well. The credit crunch in the banking sector is continuing to deepen.
Since the Fed began to raise rates, total deposit outflows from the banking sector are now almost $1 trillion. Financial sector analysts started 2Q reporting the largest 2-week cutback in bank lending in US history, the largest 2-week cutback in bank lending to corporates in US history and the largest decline in real estate lending on record. There are a couple hundred life sciences companies, many <$250 million market cap, that have <1 year of cash.
Capital planning is a critical component of a life sciences company investment thesis in any market environment, but it can move to the top of the list during extreme periods. Tighter control of the purse strings should place a greater emphasis on quality and will likely improve the risk / reward profile of the sector moving forward. It’s a stock pickers market during periods of sector wide "creative destruction". The last two life sciences bear markets preceded multi-year 300+% trough to peak bull runs.
Reduction of the public life sciences universe is a sign we are closer to the bottom than the top. It is more a question of when, not if, there will be another sighting of a raging life sciences bull.
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