Biotech Market Forecast: 3 Top Trends That Will Affect Biotech in 2023

1. Big biotech names look resilient to recession

Raj Lala, president and CEO of Evolve Funds, told INN that he expects healthcare stocks to remain resilient to current market challenges in 2023. However, he still advised a cautious approach.

“Scale is important in the healthcare industry, and for that reason we favor owning the largest names in the category,” he said. “In addition, we expect continued market volatility next year, which favors a covered call strategy.”

Whether the US will enter a recession is up for debate, but the fund executive said that even if it does, biotech companies will “continue to perform well” since investors tend to prefer “defensive sectors."

“Healthcare stocks are perceived to be stable companies that offer products people need even during a recession," Lala explained.

Despite the industry's reputation for withstanding tough blows, last year proved tricky for the biggest biotech indexes out there. For example, the iShares Biotechnology ETF (NASDAQ:IBB) fell 6.59 percent in 2022.

Merck & Co (NYSE:MRK), Eli Lilly and Company (NYSE:LLY) and Abbvie (NYSE:ABBV) were 2022's top gainers in biotech, according to a list prepared by biopharma researcher Evaluate Vantage, highlighting the dominance of the market's largest players.

2. Biotech IPOs could make a comeback

The biotech sector is at times dictated by the amount of initial public offerings (IPOs) in the open market.

In 2020 and 2021, the industry saw an unprecedented flurry of listings, receiving support from the capital markets at a time when the eyes of the world were turned to solutions for COVID-19.

However, in 2022, the result of this trend was a bloodbath for new companies as they scrounged for more capital.

Jeff Jonas, leader of a biotech incubator and a former executive at Sage Therapeutics (NASDAQ:SAGE), told BioPharma Dive that companies need to be designed to be more “fiscally prudent” so they don’t end up strapped for cash.

“The market’s going to turn. It’s going to change,” he told the publication. “The key is always having clear catalysts, operational excellence, and things that create real value.”

Investors will have to keep watching the progress of IPOs in 2023, as well as the health of newcomers. But at least one expert expects to see a recovery in IPOs after 2022's depressed numbers.

According to BioPharma Dive, analysts at BMO Capital Markets expect to see more biotech debuts if the market performs at a better pace and the appetite for risk from investors seems favorable.

“We’re starting to see secondaries, and expect IPOs to eventually follow,” the analysts wrote in a note from December 2022.

3. US political division could create biotech risk

Despite its reputation for stability, early stage plays in the biotech sector carry an element of risk.

In a report looking forward to 2023, Evaluate Vantage indicates that rising global interest rates will continue to significantly affect the industry this year, “providing a poor backdrop for the high-risk drug development sector.”

There's also a political aspect in that US Congress is now divided after 2022's midterm elections. This division could impact discussions surrounding the Biden administration’s Inflation Reduction Act, which was enacted in August 2022 and affects various aspects of the biopharma sector — for example, pricing.

Any hits to the health of the biotech market will be seen and felt most directly by smaller companies. “This means portfolio prioritization, job cuts and deals struck out of desperation — and a rise in investor activism,” states Evaluate Vantage.

On the upside, the firm found that while some think there's more pain ahead, most industry insiders believe the US biotech space has already seen its worst days.

Investor takeaway

The biotech space is at a crossroads as experts debate whether the future will bring the same struggles seen in 2022, or the highs seen in earlier years. As the year progresses, investors will need to exercise due diligence to make the best decisions.