The Great Biotech Disconnect

Based on commercial real estate in San Diego – or in any biotech hub, for that matter – you would never know that stocks in the sector have gone bust... It's like boomtown here in San Diego, where I live. It seems that every time I go out, which is often, I see another new […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Great Biotech Disconnect By Herb Greenberg Based on commercial real estate in San Diego – or in any biotech hub, for that matter – you would never know that stocks in the sector have gone bust... It's like boomtown here in San Diego, where I live. It seems that every time I go out, which is often, I see another new sign for a biotech company I've never heard of. It also seems like hardly a week goes by without a story in the local press about a biotech-related commercial real estate transaction, such as [this one]( from the San Diego Union-Tribune, involving "near record prices" being paid... in this case by a biotech real estate unit of asset-management giant Blackstone (BX). Perhaps nothing sums it up more than [this story]( in the Times of San Diego, headlined "Biotech Firms in Hot Race for Space – Demand Outstripping Supply in San Diego, Other Top Markets," about how the high demand is causing rents to spike. A lot of that involves a steep rise in demand for lab space. The reason: a boom in biotech research and development hiring – according to a mid-2021 report from commercial real estate firm CBRE Group (CBRE), this is up 79% from 2014 to 2021 compared to the prior seven years. As a result, it's hard to find space, with vacancies in San Diego running around 2%. But one thing I haven't seen is anybody asking the most obvious question... Is this a bubble in biotech real estate? And if not, why isn't it reflected in biotech stocks? Consider the SPDR S&P Biotech Fund (XBI) – an exchange-traded fund ("ETF") with 188 holdings across the sector. As you can see in the chart below, after moving higher throughout 2020, the biotech sector has been pummeled over the past year... Driving all of this, in part, is the relative ease to develop new drugs... or at least attempt to develop them. As a June report from RBC Capital Markets explained... The Human Genome Project took 13 years to sequence the first human genome in 2003, at a cost of around $3 billion. The cost dropped dramatically to around $70,000 by 2010, and then to just $689 in August 2020. Certain companies can now complete a sequencing run in around 25 hours, excluding prep time. That dynamic helped push a surge in the creation of hundreds of biotech startups in recent years, fetching astronomical valuations while still private, as investors couldn't open their wallets fast enough – like they're playing for the Mega Millions lotto jackpot. Toss in cash raised by dozens and dozens of biotech initial public offerings ("IPOs") and special purpose acquisition companies ("SPACs"), and the need for labs and additional office space has exploded. --------------------------------------------------------------- Recommended Links: [A company with 400 million 'patents']( One company has quietly compiled more than 400 million official trade secrets. The company is using these trade secrets to build the world's largest "codebase," which could lead to it becoming "America's Next Big Monopoly." Not surprisingly, Wall Street is starting to take notice. And the smart money is already pouring in. Tech investor Cathie Wood has invested over $80 million already, and Microsoft founder Bill Gates has invested as well. [Get the details here before this story goes viral](. --------------------------------------------------------------- [Your FINAL CHANCE to See Whitney Tilson's Most Important Event Yet]( It goes OFFLINE at midnight tonight. Until then, you can watch four of the top financial minds predict what 2022 has in store for regular investors. And learn how four stocks could hand you 100%... 200%... even 500% gains in the coming months and years. While it's still online, [click here to watch for free](. --------------------------------------------------------------- And while there may not be chatter of a bubble, biotech real estate is showing signs that things may be getting a bit stretched... Exhibit No. 1: In an industry that can't seem to build enough lab space, it's getting harder to find lab workers – or so says [this story]( from STAT, regarding the biggest biotech market of all, Boston... The surplus of startups reflects investors' desire to pour more money into the world's leading biotech hub. But with every new company that comes out of stealth mode or a mega-funding round that comes with mega-hiring goals, the people problem has gotten worse. Exhibit No. 2, which is potentially even more worrisome: Some of these drugs are having trouble making it to first base to even get their drugs into clinical trials. As biotech news site Evaluate [reports]( there has been a rise in so-called "clinical holds" by the U.S. Food and Drug Administration ("FDA")... It might be going too far to suggest that the recent spate of clinical holds is evidence of the FDA suddenly getting tough, but the fact that all of these concern very early-stage projects should give pause. Longtime biotech analyst Jason Napodano, who runs research firm Bio5c, thinks that's worth paying attention to... As he told me... Clinical holds are like interceptions in football. Why have there been so many? Because there are so many more QBs that stink starting for teams that shouldn't exist. As regular Empire Financial Daily readers will recall, the [last time]( I talked to Jason he was pointing out that there are almost too many new public biotech companies to research... and many (if not most) have a single product that's barely in the early stages of development. This gets us back to the question of whether biotech real estate is in a bubble... The analysts don't come right out and ask that question on earnings conference calls with the real estate investment trusts that are heaviest into biotech. But back in July, one came close on the Alexandria Real Estate Equities (ARE) call when he said... I'm just wondering what you think happens to space demand, if there's any sort of pullback in that capital formation this time? In other words, what happens when money stops pouring into the space at the rate it has been? In response, Alexandria Executive Chairman Joel Marcus, whose firm is also an active venture investor in emerging biotech, explained it this way... I think the companies that would be most at risk would be newly public companies now that are outside of the private venture or private equity financing. They're public now. And if the markets shut down, they have capital. They'll have to adjust their burn rate and be careful because they won't be able to go back to the capital market. So, I think that we saw that in '08 and '09. It was the newly public companies, companies that were preclinical particularly or in the clinic and needed a number of years of runway. So that would be a downside scenario. But as I said, I think for at least for the coming couple of quarters, we see a pretty steady flow of capital. Well, that was in July, and there doesn't appear to be a lack of appetite to fund private biotech... yet. However, biotech stocks continue to struggle. And nobody I talked to seemed to be able to explain the disconnect... let alone why they're doing so poorly. There's certainly no shortage of opinions, as is evidenced by the interviews with more than a few venture and hedge fund investors and industry insiders who were quoted in [this STAT story]( from last week. STAT covers nothing but biotech and pharma. So if STAT's writers can't figure it out – including my friend and longtime biotech writer Adam Feuerstein, who co-authored the article – we can only guess. Maybe it gets back to what Jason was saying... There are simply too many biotech stocks, and most are nowhere near ready for prime time – at least as public companies. If biotech by its nature is risky, those with little more than a stock and a dream are the riskiest. As one serial biotech entrepreneur told STAT... Make no mistake: Winter is coming. With the public markets for biotech down 45% in one year, I predict that small startups will start to feel the supply of readily available [venture capital] cash tighten. One thing is for sure – if winter is coming for biotech funding, it's also coming for biotech real estate... even here in sunny San Diego. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg February 1, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. 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