What’s ahead for biotech: Another wave or low tide?

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Unlike most industries in these extraordinarily challenging times, biotech is experiencing a high. Executives in many other sectors are becoming more pessimistic about the outlook for their businesses as the global pandemic continues to spread.1 But the search to understand and find treatment or preventive solutions to COVID-19 has focused intense government, media, and public attention on science and medicine, reinforcing the perception that biotech acquisitions and partnerships represent a good investment.

In an effort to understand worldwide biotech financing in the context of the COVID-19 crisis, McKinsey analyzed the sector’s financial performance and interviewed 20 C-level executives from small and midsize biotechs and venture-capital (VC) firms.

The pandemic has had an enormous financial impact on many sectors, but biotech has weathered the storm: after a brief downturn early in the crisis, it recovered quickly (Exhibit 1). Between January 2020 and January 2021, the average share price for European and US biotechs increased at more than twice the rate of the S&P 500, and Chinese biotechs performed more than six times better, with their average share price more than doubling in a year. Overall, biotech is outperforming its sister industry, pharmaceuticals, as well as many household-name consumer-goods and technology companies.

After a brief downturn in the spring of 2020, biotech quickly recovered.

With acquisitions, partnerships, IPOs, and fundraising still increasing, biotech’s star has, if anything, risen higher than it was before the pandemic. The industry’s response to the crisis, its record of innovation, and its reputation as a safe haven for investment have all served it well. But whether biotech can sustain this performance is open to question. This article looks at the industry’s record of growth, its resilience during the global pandemic, and the factors that could determine whether the biotech wave continues.

The great biotech acceleration

Between 2019 and 2020, biotech saw double-digit annual growth in fundraising from VCs and deals such as partnerships, codevelopments, and joint ventures. It also saw triple-digit growth in IPOs (Exhibit 2).

Venture-capital funding, deals, and IPOs reached record levels in 2020.

Venture capital

VC activity in biotechs grew by 45 percent in a year, taking the 2020 global total to $36.6 billion. US biotechs still led on investments, although Europe and China were not far behind. In Europe, mean funding size grew at more than twice the rate than in the United States. In China, the number of funding rounds grew four times faster than in Europe and the United States.

Some VC investors believe that biotech has matured as a business and that it carries lower risk than it did in the early days. Others think it has suffered from underinvestment in the past. Still others note that investment in the sector is partly driven by the need to diversify VC portfolios. In any case, the fact that more conservative markets such as Europe’s are having larger funding rounds indicates that the local life-science offer is more advanced in its development cycle, or that investors are able to place larger bets.


The value of codevelopments, partnerships, joint ventures, licensing agreements, and other deals almost doubled between 2019 and 2020 to reach $170.6 billion. However, this total represents only those deals with disclosed value—which accounts for 26 percent of all deals—so the true magnitude will be much higher.2 Biotechs partnered with a broad range of other organizations, from big pharma to investment funds and other biotechs. Pharma companies have long used acquisitions to sustain their portfolio strategy while also pursuing pipeline and top-line growth.

Deal growth was mostly driven by the United States, where the average deal size doubled and the number of deals increased by 25 percent.3 China and Europe also saw strong growth as they started to catch up from a smaller base.


IPO activity has grown faster than any other category of fundraising, with companies raising $34.3 billion in 2020, an increase of 186 percent on the previous year. Although US biotechs represented the lion’s share of IPOs, companies based elsewhere, particularly in China, have also seen significant growth in the past few years. Biotechs tend to source opening capital from their local stock market, with the United States (mainly NASDAQ) being the preferred nonlocal option.

As part of our research, McKinsey asked biotech executives whether they were likely to seek an IPO in the next few years and, if they did, whether they would look for capital at home or abroad. The answers were mixed. Some biotechs want to make the most of their local network and feel more comfortable listing at a market they know; others prefer to follow investors, crossing oceans if need be. But they all agreed on choosing a market where biotech and science are not seen as a risky investment, which often means a foreign stock exchange, and specifically a US one.

Unexpected resilience

As the pandemic spread across the globe in early 2020, biotech leaders were initially pessimistic, reassessing their cash position and financing constraints. When McKinsey and BioCentury interviewed representatives from 106 biotech companies in May 2020,4 half of those interviewed were expecting delays in financing, and about 80 percent were tight on cash for the next two years and considering trade-offs such as deferring IPOs and acquisitions. Executives feared that valuations would decline because of lower revenue projections and concerns about clinical-trial delays, salesforce-effectiveness gaps, and other operational issues.

Belying this downbeat mood, biotech has in fact had one of its best years so far. By January 2021, venture capitalists had invested some 60 percent more than they had in January 2020, with more than $3 billion invested worldwide in January 2021 alone.5 IPO activity grew strongly: there were 19 more closures than in the same period in 2020, with an average of $150 million per raise, 17 percent more than in 2020. Other deals have also had a bumper start to 2021, with the average deal size reaching more than $500 million, up by more than 66 percent on the 2020 average (Exhibit 3).6

Biotechs had a promising start to 2021.

What about SPACs?

The analysis above does not include special-purpose acquisition companies (SPACs), which have recently become significant in IPOs in several industries. Some biotech investors we interviewed believe that SPACs represent a route to an IPO. How SPACs will evolve remains to be seen, but biotechs may be part of their story.

Fundamentals continue strong

When we asked executives and investors why the biotech sector had stayed so resilient during the worst economic crisis in decades, they cited innovation as the main reason. The number of assets transitioning to clinical phases is still rising, and further waves of innovation are on the horizon, driven by the convergence of biological and technological advances.

In the present day, many biotechs, along with the wider pharmaceutical industry, are taking steps to address the COVID-19 pandemic. Together, biotechs and pharma companies have more than 250 vaccine candidates in their pipelines, along with a similar number of therapeutics. What’s more, the crisis has shone a spotlight on pharma as the public seeks to understand the roadblocks involved in delivering a vaccine at speed and the measures needed to maintain safety and efficacy standards. To that extent, the world has been living through a time of mass education in science research and development.

Biotech has also benefited from its innate financial resilience. Healthcare as a whole is less dependent on economic cycles than most other industries. Biotech is an innovator, actively identifying and addressing patients’ unmet needs. In addition, biotechs’ top-line revenues have been less affected by lockdowns than is the case in most other industries.

Another factor acting in the sector’s favor is that larger pharmaceutical companies still rely on biotechs as a source of innovation. With the top dozen pharma companies having more than $170 billion in excess reserves that could be available for spending on M&A, the prospects for further financing and deal making look promising.

For these and other reasons, many investors regard biotech as a safe haven. One interviewee felt it had benefited from a halo effect during the pandemic.

More innovation on the horizon

The investors and executives we interviewed agreed that biotech innovation continues to increase in quality and quantity despite the macroeconomic environment. Evidence can be seen in the accelerating pace of assets transitioning across the development lifecycle. When we tracked the number of assets transitioning to Phase I, Phase II, and Phase III clinical trials, we found that Phase I and Phase II assets have transitioned 50 percent faster since 2018 than between 2013 and 2018, whereas Phase III assets have maintained much the same pace. There could be many reasons for this, but it is worth noting that biotechs with Phase I and Phase II assets as their lead assets have accounted for more than half of biotech IPOs. Having an early IPO gives a biotech earlier access to capital and leaves it with more scope to concentrate on science.

Looking forward, the combination of advances in biological science and accelerating developments in technology and artificial intelligence has the potential to take innovation to a new level. A recent report from the McKinsey Global Institute analyzed the profound economic and social impact of biological innovation and found that biomolecules, biosystems, biomachines, and biocomputing could collectively produce up to 60 percent of the physical inputs to the global economy. The applications of this “Bio Revolution” range from agriculture (such as the production of nonanimal meat) to energy and materials, and from consumer goods (such as multi-omics tailored diets) to a multitude of health applications.

What will it take to create value in the future?

Our interviews with biotech executives and investors suggest that if the industry is to maintain its recent strong growth, it will need to address three key areas: building talent, handling complexity, and improving commercial and development execution.

If the industry is to maintain its recent strong growth, it will need to address three key areas: building talent, handling complexity, and improving commercial and development execution.

Building talent

As one biotech investor put it, “There is much more capital available than talent.” Many companies struggle to attract and retain executives with experience in biotech, business development, and commercialization. In addition, a third of the executives and investors we interviewed think that European biotechs lack a sufficiently entrepreneurial mindset. Clinical-development expertise is also in short supply.

The talent pool has been growing in recent years, particularly in the United States, with Europe, China, and other regions still a ways behind. Some companies are establishing a global footprint early on to target the widest possible talent pool, such as the European biotechs that have set up US affiliates and distributed their business-development, access, marketing, and strategy teams across continents. Other biotechs are experimenting with outsourcing models, keeping select talent in-house but looking outside the organization for multiple specialist capabilities. Whichever approach companies choose to pursue, their ability to build, attract, and retain biotech talent will be fundamental to their success.

Handling complexity

As well as staying on top of accelerating technological and biological advances, biotechs must navigate an increasingly complex ecosystem of competitors, service providers, investors, and customers. We see three challenges for the future. One is for biotech companies to rethink supply chains in order to facilitate the scale-up of new biologic innovations and technologies, such as personalized therapies and cell and gene therapies. A second challenge is to maintain focus on the business while dealing with a new financing and investing ecosystem that includes novel investment vehicles such as SPACs, an increasing number of noninstitutional investors, and a broadening of the geographic footprint of investors. The third challenge, for smaller biotechs in particular, is simply to keep up with the speed of technological evolution.

Improving commercial and development execution

A recent McKinsey analysis of launch performance shows that first-time launchers have a lower share of successful launches than their more experienced peers. Many struggle to realize the expected value from their launches: the median first-time launcher reaches just 63 percent of analysts’ expectations, compared with 93 percent for experienced launchers.

Clearly, scientific promise does not necessarily translate into business performance. A stronger focus on execution could help biotechs create more value from their assets and technologies. For instance, investing early to develop a deep understanding of the market in relevant disease areas could help biotechs make better decisions about how to position their product in relation to competitors’ offerings, both during clinical development and in the marketplace. Biotechs could also benefit from tailoring their go-to-market approaches to the needs and potential of their products rather than the resources available to them. Having defined an appropriate go-to-market approach, they could then work to secure sufficient funding or set up partnerships to support it.

Biotechs also have scope to improve the pace and quality of their clinical development, which is critical in meeting investors’ expectations and securing funding. As innovation increases, so does competition for clinical-trial sites and investigator capacity. Getting to market quickly requires biotechs to intensify their focus on clinical operations, plan early, and find ways to derisk clinical development.

Biotech is unlike any other sector. Buoyed up by advances in science and technology, it bucked the downward trend seen in many industries and attracted record levels of investment through 2020 and into early 2021. More broadly, the pandemic has brought biological science to the attention of patients, families, healthcare workers, healthcare suppliers, governments, and agencies worldwide. What remains to be seen is whether biotechs and their ecosystems can continue to scale up rapidly and keep riding the wave for some time to come.

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