How Biotech was broken & how to fix it!

Over the past five years, biotech investors have endured a challenging period, and industry’s struggles are evident. The 2020–2021 bubble, fueled by speculative enthusiasm, is a well-known chapter we need not revisit in detail. Instead, the focus should be on a more pressing issue: after half a decade of underperformance, the biotech sector has yet to address its internal shortcomings. While some attribute the industry’s woes to external factors—such as political figures like Trump, Biden, or RFK Jr.—these explanations deflect from the root cause: the sector is plagued by systemic flaws.

Biotech hardly resembles a traditional industry. Of approximately 5,000 compounds entering preclinical testing, only about five ultimately gain approval—a success rate of just 0.1%. This stark reality underscores why the wave of preclinical companies going public in recent years was ill-conceived. The odds are heavily stacked against success, yet industry cheerleaders persist in touting artificial intelligence (AI) as a game-changer for drug development. So far, however, AI has failed to meaningfully improve outcomes. Even if it did, the economics remain untenable: ten compounds targeting the same indication still face a saturated market and diminishing returns even if all are approved

Two alarming trends emerged in 2024 that further exposed these vulnerabilities. After a prolonged slump from mid-2021 through Q3 2023, biotech showed signs of life in Q4 2023, with the XBI ETF surging 26%. Q1 2024 continued this momentum with a strong start. Historically, positive clinical data has been a catalyst for biotechs to raise capital and expand their shareholder base. However, in 2024, a troubling shift occurred: investment banks increasingly turned to Private Investments in Public Equity (PIPEs) to finance companies. Once viewed skeptically, PIPEs became the financing tool du jour. The process typically involved banks taking institutional funds “over the wall” (prohibiting them from trading the stock prior to news release), presenting them with binary clinical data, and offering shares at a slight premium to the prior close. On paper, this benefited all parties: companies secured funding, and funds enjoyed quick paper gains.

Yet this short-sighted strategy backfired. PIPEs diluted existing shareholders, who saw no reward for holding through high-risk binary events. Meanwhile, generalist investors—crucial for broadening the sector’s appeal—balked at participating in PIPEs, where shares were often locked up, reducing liquidity. The result was a self-inflicted wound: by alienating both retail and institutional investors, biotech undermined confidence in an already fragile market. The industry simply isn’t large enough to sustain such exclusionary tactics. By late 2024 and into early 2025, this misstep likely contributed to one of the sector’s most severe downturns on record, compounding years of structural inefficiencies.

In 2024, another troubling development emerged in the biotech sector: the rise of Chinese biotech companies. Historically, mergers and acquisitions (M&A) have been a vital lifeline for the industry, with large pharmaceutical firms acquiring smaller biotech’s to refresh their pipelines. This activity sustains liquidity and incentivizes investors to hold biotech stocks through critical inflection points. While M&A rates increased in 2024, a more pressing issue overshadowed this progress: the shift toward Chinese biotech’s. These companies, benefiting from lax preclinical testing standards in China, can advance compounds into human trials far more quickly than their Western counterparts. Often operating with questionable intellectual property (IP) and selling at one-tenth the cost of U.S.-based peers, they’ve become attractive targets for big pharma and reverse-merger entities eager to sustain their operations. In the short term, this trend benefits acquirers and executives chasing the allure of new technology. However, early data from these Chinese biotech’s has largely failed to replicate in Western trials, raising doubts about their long-term viability and the sustainability of this cost-cutting strategy.

An equally critical issue is the proliferation of "biotech zombies." By 2024, approximately 32% of all biotech firms—over 200 companies—collectively hold more than $30 billion in locked-up capital. These are companies that have failed to advance their original lead compounds yet persist as shells, primarily to maintain C-suite salaries. They peddle unattainable dreams, pursuing strategies such as merging with lackluster private firms, in-licensing derivative Chinese assets, or combining with weak public companies. All three paths erode value and reflect a glaring lack of fiduciary duty to shareholders. These "zombies" invert the principal-agent relationship, prioritizing executive survival over investor interests. Consider a parallel: if investors fund a real estate developer to build homes in New York City and the project fails, losing 80% of their capital, should the developer be entitled to redirect the remaining 20% to buy commercial property in Florida? Most would argue the funds should be returned to investors. The same logic applies to biotech: if a company’s lead program fails, returning cash to shareholders would foster transparency and rebuild trust among patients, investors, and the industry. Yet, entrenched governance mechanisms—poison pills, staggered boards, and lax bylaws—enable these firms to linger, perpetuating a broken system.

I'm deeply passionate about the last issue, as I believe it represents the most significant challenge our industry faces. Boards of Directors (BOD) are failing to act in the best interests of shareholders, and this must be addressed urgently, or we risk losing the industry altogether.

· In 2024, oncology cell therapies were stagnating, with little progress to show. Rather than shutting down and returning cash to shareholders, many of these companies pivoted to rebrand as inflammation and immunology (I&I) players, riding the wave of Georg Schett’s landmark paper, "CD19 CAR T-Cell Therapy in Autoimmune Disease — A Case Series with Follow-up," published in The New England Journal of Medicine on February 22, 2024. The study’s results—showing CD19 CAR T-cell therapy’s potential in treating severe autoimmune diseases across a small cohort of patients—were undeniably striking and captured attention. However, the responses weren’t yet proven durable enough to justify the frenzy that followed. Despite this, at least 10 companies seized the moment, rebranding and raising capital based on data from just a handful of patients from a competitor . Unfortunately, longer-term results have since cast doubt on the initial excitement, revealing a less promising outlook

· AADI had an approved cancer drug, FYARRO, for a rare cancer subtype (PeComa). The company attempted to expand its label to other indications but failed. Despite this setback, management made an impressive move by selling FYARRO for $100 million, positioning the company for what seemed like a strong liquidation value of approximately $5 per share. However, instead of distributing this value to shareholders, management inexplicably diluted the stock at $2.40 per share—more than half below its cash value—to license new oncology assets from China. What authority did they have to gamble with shareholders' money like that? It’s baffling and unacceptable.

· SLRN was a hyped-up IPO with an IL-17 drug that ultimately failed, with the company pointing fingers at their CRO. They also had a drug for thyroid eye disease (TED) that failed to stand out against Tepezza. Sitting on $430 million in cash, SLRN had a chance to do right by shareholders when Tang Capital offered to liquidate the company at $3 per share. Instead, the BOD rejected this, opting to merge with ALMS. To shield themselves from Tang Capital’s pressure—who wanted to buy more shares and return cash to investors—they resorted to a desperate "poison pill" tactic to block Tang from gaining influence. This is a company that failed twice, yet clung to power rather than prioritizing shareholders. These examples highlight a reckless disregard for shareholder interests. This behavior must stop, or the industry’s foundation will crumble.

· STRO I will just quote from Ohad Hammer because I couldn’t have said it better “s a good example of how broken the public biotech investing model is. At first glance it’s a screaming buy with a market cap of $67M and $317M cash as of Dec 2024 but like many other Smid biotech’s, the key issue is an out-of-control cash burn. After a reorg and work force reduction the company is focusing on 2 preclinical ADC programs, which are expected to enter the clinic in 2H 2025 and 2H 2026, respectively. According to their forecast they will burn ~150M per year in the next two years and employ ~150 employees (based on their 10K)- not very capital efficient to for a couple of preclinical/early P1 programs. And to make things worse, Sutro will have very little to show by the time it needs to raise again (probably early 2026), maybe a handful of patient data which will include mostly safety results from the TF ADC program so not a lot of value can be generated by then. If we look at what the company could achieve with its current cash balance they will probably have ~20 patients enrolled in the TF study (assuming FPI Sep 2025 and 3-4 patients per quarter) and maybe ~5 patients in the ITGB6 study. In other words, the company will spend 12M per patient data readout (of course that’s not the direct cost but for investors what matters is how much value can be generated with a given amount of money). In summary, a preclinical company that burns more than 2x its market cap every year, employs 150 employees to support two early stage programs + a discovery pipeline and spends 12M per patient worth of data doesn’t sound like a sustainable business model.”

In conclusion, the biotech industry faces a reckoning. Unless it embraces self-regulation and accountability, its outlook remains grim. Industry leaders must call out these detrimental practices, allow failing companies to wind down, and prioritize the interests of patients and shareholders. Only then can the sector restore public trust and chart a path toward sustainable recovery.

PS none of this is investment advice just an investors thoughts of 5 years of frustration to quote the great Einstein “insanity is doing the same thing again & again and expecting a different result”