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Armistice Capital, Chicago Trust Company Among Funds Leaning Into Biotech


Armistice Capital, Chicago Trust Company, and Montgomery Investment Management are among several funds that have continued to funnel capital into biotechnology, even as markets have been less than kind to those investments over the past three years. But they won’t stay quiet forever.

The biotechnology industry has been a strong performer, at least recently. The onset of the COVID-19 pandemic in March 2020 drove intense investment in the vertical, as many companies, such as CureVac and Novavax, worked on vaccines and treatments. That same time period coincided with low interest rates that made the investments a bit less risky.

More biotech companies started going public via initial public offerings during the pandemic, hoping to capitalize on the moment. According to The Wall Street Journal, in 2020, 90 biotech companies raised $14.8 billion, blowing past the previous investment record, adjusted for inflation, of $9 billion in 2000.

In 2021, 112 biotech companies raised $16.5 billion in IPO funds. Times were good.

But that investment created an environment that was ripe for a crash. The massive increase in the number of companies looking for investment diluted the capital flow, with more companies vying for a pool of money that wasn’t growing as quickly.

It also led to several companies pursuing the same business model, or looking to solve the same problems, which created an either/or scenario for investors. In a zero-sum game, someone wins and someone loses.

The biotechnology industry is, as a whole, a risky bet. Billions of dollars invested for a drug or treatment can end up with no tangible way forward. And as interest rates rose starting in 2022 and the majority of the world had “moved past” COVID-19, investors became more apprehensive about those risky investments.

“It is a shift in capital allocation from risky, very future-leaning things to less risky things,” Eli Casdin, founder and chief investment officer of life-sciences hedge fund Casdin Capital, which had stock holdings of $3.5 billion at the end of 2021, told The Wall Street Journal in 2022. “In a public market, investors shoot first and ask questions later.”

The SPDR S&P Biotech ETF, an equal-weighted index of biotech stocks, fell 19.7% in the first quarter of 2022, compared with a 5% decline in the S&P 500.

From its peak in February 2021, the biotech index has lost nearly half its value, compared with a 15.7% rise in the S&P 500.

Opportunity in Confusion

The above doesn’t paint a pretty picture of recent investment in biotechnology. The current administration has been hawkish on regulation, which of course complicates development and could add additional costs to get to market.

But, there’s opportunity in confusion. For its recent ills, the biotechnology sector offers a puncher’s chance that many other verticals do not.

Much of that is due to the fact that very few small, single-product companies can garner the sort of interest, based on potential returns, that a biotech enterprise can. People will always get sick and people will always want to find a way not to. Which is to say, there’s always a market.

And, depending on what’s being treated, it could push the valuation of a small company into hundreds of millions of dollars in a very short time span.

Take Novavax, for example. Novavax, a biotech company that manufactures vaccines, saw massive growth early in 2020 as the race to create a vaccine for COVID-19 ramped up. In addition to private funding, the company received close to $1.6 billion from the U.S. government as a part of Operation Warp Speed.

Those investment efforts, along with the potential to create a vaccine that would be reproduced billions of times, pushed the company’s stock price from $4 in January of 2020, to over $300 in June of 2021. The stock dipped to $62 a share in May 2022. It’s now valued at $6.71, down 10 cents from its 2020 point.

The company’s stock dipped back down even though it did in fact create a Food and Drug Administration-approved COVID-19 vaccine. But it was the fifth such biotech company to do so, after Pfizer-BioNTech, Moderna, Janssen, and AstraZeneca.

It boils down to an investor’s (or an investment firm’s) level of comfort with volatility. Biotech investments can be lucrative, or they can be a complete bust. The catch is when to get in and when to get out.

While more established biotech companies are safer investments due to their more extensive and diversified portfolios, for the most part, there’s a premium to pay for that security.

The highest-valued biotechnology company is Novo Nordisk, headquartered in Bagsvaerd, Denmark. With a market capitalization of over $430 billion, this Danish company is the largest drugmaker in Europe, and its market cap exceeds the output of the total Danish economy.

Due to its size, Novo Nordisk has a diversified portfolio of drugs but leans mostly into diabetes medications. Two of those medications, Wegovy and Ozempic, were found to affect weight loss so profoundly that their original intent, helping people with diabetes with weight-related onset, has taken a back seat to a general population eager to lose weight. The popularity of the drugs saw Novo Nordisk’s profits increase 45% year over year from 2022 through the first half of 2023.

Even a biotech company as well established and stable as Novo Nordisk is subject to fluctuations that, to a greater degree, affect smaller entities. The company’s 52-week range price has seen a high of $104 per share and a low of $52.97, according to Yahoo Finance.

It currently sits at about $96 a share.

At the end of the day, investment in biotechs is a risk, but it’s juice that can be worth the squeeze if the timing is right. Whether Armistice Capital and other funds are able to make the gains big and the losses in their investments in this volatile industry, time will tell.

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