2021 in Retrospect and 2022 Outlook

2021 in Retrospect and 2022 Outlook


A month into 2022 and all virtual “JPM meetings” completed, we took a moment to reflect on the past year and our outlook for what lies ahead in the coming 11 months.

2021 In Retrospect


Another eventful year for healthcare with COVID-19 remaining a dominant theme throughout. The emergence of more infectious strains Delta and Omicron -as we predicted at the outset of the pandemic-, mass deployment across developed nations of vaccines against the virus, as well as the emergency use approval of numerous therapeutics all added to the continuously evolving environment impacting corporate strategies as well as acquisition and financing markets:

Healthcare public equity

Solid performance in general, with S&P Healthcare sector index rising ~25% during 2021. More volatile performance in the biotech sector, gaining 15% by end of summer only to collapse through autumn and winter to end 2021 essentially as where it started – a correction that would continue steeply in January 2022 taking the index down a further ~15%.

The overall good sector performance breaks down into different trajectories across sub-sectors:

  • Biotech: volatile H1 2021 and pronounced decline in H2 that continued in the new year; with value declines occurring across all capitalization levels but particularly for small-mid caps
    • Negative trend consistent across most therapeutic areas, particularly for players active in advanced therapeutic modalities as investors start to look for tangible evidence of clinical benefits over “promises”
    • Significant mismatch between prior investor expectations and companies’ abilities to deliver, in particular following the large number of early-stage IPOs over the past years
    • Gene therapy players particularly affected by high profile failures (e.g. Biogen) and safety doubts raised in a variety of programs – some now trade at a discount to their cash balance
    • Despite this, the biotech sector in general enjoys a healthy cash runaway compared to pre-pandemic, offering a partial cushion against sustained valuation depressions
  • Large cap healthcare: fair performance
  • Heath-tech: best performing category 2021
    • Exceptional growth of general tech industry
    • Significant investor expectation (and company strategies) in the area of sector convergence, with (the expectation of) technology-augmented or -delivered healthcare activities becoming more and more a reality

IPO issuance was strong with 399 new companies listing in the US raising $142.5 billion (Renaissance Capital 2021 annual review). Healthcare represented 36% thereof, including e.g. Sana Biotechnology who raised $588 million at the preclinical development stage. Post-IPO performance was more disappointing compared to 2019 and 2020, down -12% for the class of 2021.

Biopharma’s declining market values did not prevent an all-time record in biopharma subsector IPO volume 2021.

The picture changes when looking at SPACs. While in 2020, capital allocation to SPACs as vehicle to IPO saw a significant increase, SPAC creation slowed down in 2021 with focus now shifting towards finding great acquisition targets and completing the de-SPAC. The surge in SPAC number and volume of capital accumulated waiting to be put to work, may possibly even render some vehicles finding it hard to identify and pursue the desired transaction within the previously-envisaged timeframe. Newly issued SEC guidance for SPAC warrants accounting and other legal scrutiny around the process is expected to amplify possible delays. As a result, probably in 2022 we may see companies being less enthusiastic about SPACs as a route and rely more firmly on classical IPO or private financings.

Overall and despite the recent slowdown, it is still early days to determine the success of the SPAC market in venture healthcare.

Healthcare M&A

Strong Healthcare M&A market, closing >3,100 deals (Pitchbook) at a combined $593 billion value setting a new volume record and a new second place in deal value (2015 remains the largest on record at $647 billion). Healthcare IT ranked as a leading area as telehealth and electronic health record assets were being snapped up by service providers, suggesting that industry has reached a novel degree of maturity. Biopharma deal activity, in contrast, was at a low since 2017, presumably reflecting the substantial value appreciation that had occurred during 2020.

In the biopharma subsector, global M&A volume 2021 has been in line with 2020 following a 2019 peak (the most active period last 5 years) which was partly that pronounced given several mega-deals running into the calculations (e.g BMS / Celgene, Takeda / Shire).

Healthcare Financing

Healthcare venture capital was very strong, continuing the trend of increasing investments across healthcare and biotech at a larger scale exceeding 2020 in deal size by ~40%.

In the biopharma subsector, 2021 set an all-time record for venture capital financing, similar to IPO volume. Rapid pace of investments coupled with increasingly quick turnaround from first investment to exit shows trend towards fast and substantial capital deployment, mainly stemming from continued asset allocation into healthcare in search for returns, and identifying most promising areas therein. More private capital flowed into early-stage biotech companies and in larger size. Average size of the leading private rounds grew almost 8x over the last five years, illustrating significant private capital appetite for large exposure at early stages where public markets would not yet be appropriate, and with that an overall shift in the financing ecosystem.

All this momentum has turned 2021 into the largest healthcare fundraising year ever, surpassing 2020’s record of $16.8B US VC-raised capital (healthcare) and nearly tripling the capital available just two years ago, according to Silicon Valley Bank. A large number or prominent investors closed their healthcare funds to outside investors in 2021. As a result, we expect fundraising activity to slow down in 2022 as VC will have a large pool of focused capital to support new investment in the healthcare space in the near future.

2022 Outlook

Several trends that we expect may shape 2022 and beyond are already observable.

Capital market dynamics

The declines in public market valuations since September 2021, accelerated through January, may impact the market in a number of ways:

  • While the valuation run-up in biopharma 2020 was undoubtedly one of the factors behind the subsector M&A slow-down of last year, the recent sell-off in biopharma equities together with strong cash balances held by larger pharmaceutical players may change the dynamics this year
  • Despite robust biotech cash balances going into the year, valuation declines will require management prudency to avoid raising cash at unfavourable valuations and delivery towards value-creative milestones that change the trajectory. It may also lead to acceleration of deal making in H2 2022
  • That IPO window may now have narrowed. Biopharma IPOs 2022 have had lukewarm starts so far and a number have already been postponed. Companies who successfully made it to market 2021 taking advantage of buoyant conditions but raising only modest amounts, may find themselves in difficult situations when looking to finance future development

In summary, we expect 2022 M&A biopharma appetite to rebound especially in H2. More generally, healthcare M&A appetite is expected to continue unmuted as companies look to enhance their product offerings, expand their market reach, and fill their innovation pipelines.

Artificial Intelligence in the Fundamentals of Drug Development

The industry is undergoing -or at least expected to undergo- a paradigm shift and it is moving from a drug discovery system based on serendipity to a fully quantitative computerized approach which leverages AI and machine learning in unprecedented ways. Large industrial players as well as technology pioneers alike have long advocated the need for a far reaching system update; we expect that some tip of the iceberg of all this becoming reality will get into sight this year.

Digital therapeutics

What may have sounded like a geek’s joke to some a few years ago, digital therapeutics may now even already be considered mainstream (or close thereto), attracting significant industry attention from almost all stakeholder groups. We expect this new degree of seriousness will bear fruits near-term with initial players becoming largely commercially successful this year.

Health tech

Traditionally a niche sector when compared to the large landscape of pharmaceuticals, the various subsectors within healthcare technology have almost all been amplified as a result of the pandemic where the search is out for holistic delivery of care to which pharmaceuticals are a key component but probably the rest is technology (and people). Health-tech companies raised more capital in 2021 than in any other year. We expect continued investment in the space, followed by increasing sector consolidation as companies look to scale up.

Continued China growth

While China has in the past at least by some been considered as being on the sideway of healthcare innovation, US and European players must remain alert of proprietary technology and innovative drugs being developed successfully out of China. Collaborations with global pharmaceutical companies (e.g. Beigene / Novartis) may become more common, but also we should expect some Chinese leading players to “go all the way” alone and compete at par in the market.

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