The Rebirth of Biotech

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The last three years in biotechnology have been the most painful that I’ve experienced in the last three decades.

That’s not just because it has been a bear market in biotech. Those always come and go.

It has been painful because there’s never been a more exciting time for the biotech industry than right now – a period where biotech’s potential has been ignited by advancements in computing systems and artificial intelligence. And none of it is being realized by the markets.

What Crippled the Biotech Industry?

The last biotech bull market was incredible, running from 2013 through 2021.

It was fueled by newfound computing power, low interest rates, healthy markets for IPOs, and institutional appetite for the risk and reward that comes from innovating in biotech. It was an exciting time, and the industry investment resulted in a leap forward in the industry.

Then a virus – created through U.S. taxpayer-funded gain-of-function research by the National Institutes of Health – was unleashed on the world. We know what followed. There’s no other word for it: Insanity.

The pandemic policies sucked the air out of the room for the biotech industry.

Nearly all clinical trials of promising new biotech therapies stopped on a dime and practically remained on pause for 18–24 months. At the same time, expenses didn’t go away for the biotech companies, and they started hemorrhaging cash. Not a particularly attractive setup for institutional investors.

Even when the trials began to move after peak hysteria subsided, it was still difficult to get patients to come back with the necessary consistency for treatment and observation required for high-quality clinical trials. Many were unnecessarily fearful of contracting COVID-19, yet again, than they were of their own diseases for which they needed treatment.

The focus was entirely on COVID-19. And it was driven by money. Lots of it, too – $4.64 trillion of the budget was allocated by the U.S. government toward COVID-related projects. And $4.46 trillion has already been spent.

Source: USAspending.gov

$3.29 trillion went to “grants, subsidies, and contributions.” $420 billion alone went to just the Department of Health and Human Services.

And perhaps the most perverse incentive, $710 million in royalties from pharmaceutical companies who developed COVID-19 drugs were paid to scientists at the National Institutes of Health (NIH). And of that $710 million, $690 million went to scientists in the National Institute of Allergy and Infectious Diseases led by Anthony Fauci.

Their salaries and work were all taxpayer-funded, and yet they got filthy rich for supporting “vaccines” that didn’t stop infection, didn’t stop replication, and didn’t stop transmission of the virus. And to add insult to injury, we now know they have horrible side effects.

I just read a peer-reviewed study this morning that showed that there is a 1,236% increase in excess cardiac arrest deaths amongst 2 million COVID-19-vaccinated individuals. COVID-19 “vaccine”-induced myocarditis and pericarditis are now proven to be widespread.

Widespread Industry Distortion

The spending and insanity completely distorted the biotech industry. Investment in the sector completely changed, basically coming to a standstill except for anything related to COVID-19. Despite the media’s 24-hour doom cycle stoking the fires of peoples’ fears – and the demands for innovation in the industry – funding dried up and progress stalled.

Then the trillions of dollars printed to support all of the COVID-related spending resulted in horrible inflation.

This resulted in institutional capital flooding out of small-cap growth stocks like biotech and into safer asset classes. It was a double whammy for the sector.

Institutional capital largely focused only on the safer plays in biotech, which tend to focus on the development of existing therapeutic assets that have already demonstrated promise.

This is the least risky area in biotech and is precisely what institutional capital focuses on in a “risk-off” environment. This was unsurprising and precisely what happens during all biotech bear markets. Unfortunately, it held back the real innovation happening in the industry, which has been in much need of investment capital.

Fortunately, this three-year period is about to come to an end. And what follows will make the 2013–2021 bull market look meek.

Major changes in economic policy and dramatic reductions in fiscal deficits and government spending will result in lower interest rates and a major shift in institutional capital towards higher-growth risk assets.

And RFK Jr.’s approach to the Department of Health and Human Services will put the COVID lunacy to an end and transform the CDC, the FDA, and the NIH in ways that will open the door to innovation again in the biotech sector.

He is a stickler for evidence-based research, the facts, and deeply familiar with the widespread corruption in both the government and pharmaceutical industry. And one of the key pillars of his platform has been to review all vaccines for both safety and efficacy.

The change is going to happen quickly, which is why I’m so excited. The industry will quickly return to investing in and building new platforms and new novel therapies – the kind that drives innovation in a way that the sector is so well known for.

And a newly announced deal this week is actually a sign of things to come.

Where AI Meets Biotechnology

Schrödinger (SDGR), a famous computational biotech company, signed a landmark deal with pharmaceutical giant Novartis (NVS). Novartis is paying Schrödinger $150 million up front in a multi-year deal to work with Schrödinger to develop several therapeutic candidates developed by Schrödinger.

Source: Schrödinger

Schrödinger is a remarkable company that has been around since 1990. For years it was an oddity developing a computational platform to accelerate the drug discovery process. It was certainly early to the market in its mission. But given the developments over the last several years in semiconductor technology and artificial intelligence, the technology has finally caught up with Schrödinger’s mission.

What it is doing is the future of the biotech industry. The upfront payment wasn’t what made the deal with Novartis interesting. It was just the down payment. The deal provides that Schrödinger will be eligible for an additional $892 million in research, development, and regulatory milestone payments.

And it will also be eligible for an additional $1.38 billion in commercial milestone payments, and “tiered mid-single digit to low double-digit royalties on net sales of each product commercialized by Novartis.” That’s more than $2.4 billion, not counting the potential royalties.

Here’s the thing, Schrödinger is valued at just $1.3 billion versus Novartis at almost a quarter of a trillion dollars.

These AI-powered drug development platforms are the future. And as we can see from the Schrödinger deal, they are worth billions.

Naturally, it’s not just Schrödinger.

Roivant Sciences (ROIV) and Bridgebio (BBIO) are two others that are doing exciting AI-powered drug development work. Certara (CERT) is another company doing exciting work.

Ironically, the market just hasn’t caught on yet. These companies are still small. Institutional investors are happy to invest heavily in semiconductors, servers, power systems, and software powering AI. However, they still struggle to make the leap to the cross-section of biotechnology and artificial intelligence.

That will change soon. It is changing already…

Entering the Golden Age

Private capital has been investing heavily in this cross-section. This is normal to see this kind of capital investment in the private markets before the public markets see the potential.

It’s been happening across all stages as well. From companies like Formation Bio – almost a decade into its journey, it’s already valued at $1.7 billion, even more than Schrödinger – to more recent entrants leveraging the most advanced forms of generative AI, like Syntensor.

While we hit the inflection point of AI-powered drug discovery a few years ago, the industry has been artificially held back for the reasons I explained above.

I’ve referred to it before as a coiled spring. The general apathy from institutional capital to invest in biotech hasn’t stopped industry investment in these computational platforms designed to accelerate drug discovery.

We’re on the cusp of a swing in investment in this space that will accelerate the drug discovery and development process and also dramatically reduce the time and expense involved in bringing drugs to market.

We’re on the cusp of the golden age of biotech.

Regards,

Jeff