Life Sciences Practice

What are the biotech

investment themes that
will shape the industry?
From 2019 to 2021, venture capitalists plowed $35 billion into
biotech companies with advanced platform technologies that
could transform the industry.

by Olivier Leclerc, Michelle Suhendra, and Lydia The

© Who_I_am/Getty Images

June 2022
 The past three years have seen a boom in venture
capital (VC) funding in the biotechnology sector.
Our research shows that VC companies invested in
2,200 biotech start-ups worldwide in 2016; by 2021,
that number had grown to 3,100.1 We also found that
biotech companies raised more than $34 billion
globally in 2021, more than doubling the 2020 total
of $16 billion.
In the biotech sector, VC funding peaked in the
first quarter of 2021 and has declined slightly since
(Exhibit 1). Despite recent dips in the valuations of
newly public companies and a slight decline in VC
funding over the past four quarters, VC companies
continue to plow money into biotech.2 The
exuberance of these seasoned early-stage investors
signals that they see the potential for significant
breakthroughs in how drugs are discovered,
targeted, and delivered. Start-ups with cutting-edge
platform technologies—which constitute a base
or infrastructure on which other therapies can be
developed—have benefited the most.

Web 2022
VCBiotechFunding-V1-Ex1to3
Exhibit
Exhibit 1 of13

Venture capital biotech

biotech funding
funding peaked in the first quarter of 2021 has
2021 and has
slightly declined since.
slightly declined since.
Capital raised by privately funded biotech companies at seed to series C,1 total investment, $ billion

9.1 8.9
8.3 8.5
7.6

4.9 4.8
3.9

2.7
2.1 2.2 1.9
1.5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2019 2020 2021 2022
1
Deals >$10 million in seed to series C in privately held companies during 2019–21; filtered for “biotechnology” industry; excludes contract and research
services, industrial biotechnology, and food/agriculture.
Source: McKinsey analysis based on PitchBook, Inc., data; has not been reviewed by PitchBook analysts

1
Unless otherwise noted, all figures in this paper were derived from our original research.
2
Nikou Asgari, Hannah Kuchler, and Jamie Smyth, “Biotechs face cash crunch after stock market ‘bloodbath,’” Financial Times, February 9, 2022.

2 What are the biotech investment themes that will shape the industry?
 We analyzed VC and private-equity funding from
seed to series C in privately held biotech companies
with deal sizes greater than $10 million from 2019
to 2021. For historical context, we also analyzed
seed and series A deals in 2017 and 2018. We
categorized companies by their differentiating
platform technologies; for biotech companies
working in multiple therapeutic areas on various
platforms, we categorized them first by platform and
then by therapy type. Our analysis excluded medical
products, research tools, and contract research and
services companies.
Investment in next-generation
biotech platforms
From 2019 to 2021, VC companies invested more
than $52 billion in therapeutic-based biotech
companies globally. Two-thirds of that went to start-
ups with platform technologies (Exhibit 2).

Web 2022
VCBiotechFunding-V1-Ex1to3
Exhibit
Exhibit 2 of23

More than two-thirds of venture capital

capital biotech
biotechfunding
funding from
from 2019
2019to
to2021
2021
went to start-ups
went to start-upswith
withplatform
platformtechnologies.
technologies.

Seed to series C1 VC funding in privately held biotech companies, 2019–21, $ billion

Cell therapy 2.0 Next-generation

gene therapies

7.7 7.6
34.6 Precision Machine Validated but New Small
Platform-based medicine learning– “undruggable” delivery molecules 0.8
therapeutics enabled drug targets methods Other
discovery biologics

4.5 4.4 4.0 2.3 3.4

Immuno-oncology Neurological Infectious Immunology Other
disorders diseases
0.9
17.2 Metabolic
Other diseases
0.8
therapeutics 4.6
Cardio-
Other oncology vascular 0.6
Aging
2.4 2.9 2.5 0.5 2.1

Note: Figures may not sum, because of rounding.

1
Deals >$10 million in seed to series C in privately held companies during 2019–21; filtered for “biotechnology” industry; excludes contract and research
services, industrial biotechnology, and food/agriculture.
Source: McKinsey analysis based on PitchBook, Inc., data; has not been reviewed by PitchBook analysts

What are the biotech investment themes that will shape the industry? 3
 VC investors appear focused on emerging
technologies that can tailor treatments to individual
patients and deliver them to the target site with
great accuracy. Six platforms are generating
significant investor excitement:
— Cell therapy 2.0 can more precisely address
diseased tissues or cells or address a wider
range of disease (such as solid tumors).
— Next-generation gene therapies can edit and
modulate DNA and RNA and have the potential
to cure genetic diseases.
— Precision medicine can diagnose conditions
earlier than other diagnostic tools can and tailor
therapies to patients’ specific genetic profiles.
— Drug discovery enabled by machine learning
(ML) can cut through vast swaths of data to
speed the discovery and development of
new drugs.
— Strategies are being developed for
“undruggable” targets, including hard-to-hit
proteins and hard-to-treat diseases.
— New delivery methods can send novel therapies
to the entire affected tissue precisely and safely.
3
“Facts about cellular therapies,” AABB—Association for the Advancement of Blood & Biotherapies, accessed May 23, 2022.
4
“CAR T cells: Timeline of progress,” Memorial Sloan Kettering Cancer Center, accessed May 23, 2022; Shannon L. Maude et al.,
“Tisagenlecleucel in children and young adults with B-cell lymphoblastic leukemia,” New England Journal of Medicine, February 1, 2018,
Volume 378, Number 5, pp. 439–48.
5
“Solid tumor research,” Thermo Fisher Scientific, accessed May 23, 2022.
4 What are the biotech investment themes that will shape the industry?
Six biotech platform technologies
with transformative potential
In each biotech platform that has received
investment interest, emerging tools have the
potential to address challenges and push current
technical boundaries (Exhibit 3).
Cell therapy 2.0
As of 2021, approved cell therapies3 have
generated more than $2 billion in sales, and the
market is expected to reach $20 billion by 2026.
Since the first chimeric antigen receptor (CAR)
T cell therapy was approved in 2017,4 they have
revolutionized the treatment of hematologic
malignancies, achieving unprecedented efficacy.
New cell therapy technologies and techniques offer
the potential to address diseases with significant
unmet needs (such as solid tumors, which represent
more than 90 percent of adult cancers5) and
nononcological conditions.
However, some significant challenges (including
safety) that cell therapies face have hindered
broader use. The inflammatory cytokine release
syndrome sometimes associated with CAR T
cells, for example, can cause side effects ranging
from flu-like symptoms to organ failure and death.
Current autologous cell therapies (that is, therapies
using cells obtained from the patient) require
lengthy treatment that can give a disease time
to progress. Scientists are studying new ways to
harness and modify patients’ cells, and from 2019
to 2021 VC companies stepped up funding of these
second-generation efforts.
Web 2022
VCBiotechFunding-V1-Ex1to3
Exhibit 3 of 3
Exhibit 3
Venture capital
capital funding
fundingininbiotech
biotechcompanies
companieswas
wasdriven
drivenby
byinnovative
innovativeplatform
technologies.
platform technologies.
Seed to series C1 VC funding in privately held biotech companies, by platform technology, 2019–21,
$ billion

7.7 7.6
Cell therapy 2.0 Next-generation gene therapies

Innate immune cells Other T cell therapies RNA-based Other viral-vector

modalities technologies
and editing

1.3
Precision control
of cell therapy
1.7 2.2
Novel Other nucleic acid
1.1 nucleases technologies
In vivo Other
cell therapy 0.4 0.1
0.9
Other
Non-nuclease
stem cell
editing and
therapies
modulation
0.9 4.0 0.7 2.0
Early disease
detection
Target
identification
New small-
molecule
Improved
capsids 0.8
binding sites Small
molecules

3.4
Other
biologics
1.8
1.0
Biomarker
discovery 2.1 Biological
Rational 2.0 vehicles
drug design 0.3
Novel Protein
disease degradation Enhanced nano-
targets particles 0.2
Other
1.5 delivery
Precision population 0.5 0.5 methods
health 0.3
Other precision 1.7 Other undruggable
medicines target methods
Lead
validation 0.5
1.0 Other ML methods 0.2 0.9 0.9

4.5 4.4 4.0 2.3

Precision Machine learning Validated but New
medicine (ML)–enabled ‘undruggable’ delivery
drug discovery targets methods

Note: Figures may not sum, because of rounding.

1
Deals >$10 million in seed to series C in privately held companies during 2019–21; filtered for “biotechnology” industry; excludes contract and research
services, industrial biotechnology, and food/agriculture.
Source: McKinsey analysis based on PitchBook, Inc., data; has not been reviewed by PitchBook analysts

What are the biotech investment themes that will shape the industry? 5
 Three new approaches stood out among cell
therapy platforms:
— Innate immune cells. While CAR T cell therapies
have shown initial success, some start-ups
are shifting their focus from T cells to innate
immune cells (such as natural killer [NK] cells
and macrophages) because they may better
penetrate solid tumors. The growing interest
in innate immunity, primarily in NK cells, was
evident from 2017 to 2018, with investments
expanding to other cells (such as gamma delta
T cells and macrophages) once NK cells achieved
clinical success.
— Precision control of cell therapy. VC investors
are betting that companies harnessing synthetic
biology and complex logic to control cell
therapies precisely may improve their safety
profiles. For example, CAR T cells can kill
cells they contact, including ones that aren’t
cancerous. Engineered networks of genes,
called “synthetic gene circuits,” can inhibit the
killing of healthy cells, producing better safety
outcomes. From 2017 to 2018, we saw seed and
series A funding for five companies, all of which
succeeded in completing series B or C rounds
from 2019 to 2021.
— In vivo cell therapy. The field of in vivo cell
therapy saw almost no dealmaking activity
between 2017 and 2018. But by 2021, several
biotech companies were working on ways for
patients to produce CAR T cells in their bodies
rather than relying on ex vivo manipulation
of extracted cells in distant manufacturing
facilities. Delivering genetic material and
instructions directly to a patient’s T cells
could reduce the logistic and manufacturing
complexities that have constrained the uptake
of CAR T cell treatments.
Next-generation gene therapies
Gene therapies have transformed patient treatment,
offering, in some cases, excellent outcomes
6 What are the biotech investment themes that will shape the industry?
for genetic disorders. According to a McKinsey
analysis of pharmaceutical industry data from
Evaluate, roughly 400 gene therapies are currently
in development; by 2025, they could comprise
around 20 percent of new product launches. The
field continues to evolve, with gene editing enabling
permanent and precise genetic deletions and ex
vivo modifications.
Obstacles to gene therapy remain. For example,
CRISPR-Cas9 gene editing can perform only a
limited range of edits on a limited set of genomic
targets because of its limited specificity, activity,
and deliverability. And safety concerns persist
about its potential to inflict permanent DNA damage,
mutagenic effects, or cell death.
Biotech companies have increasingly focused
on next-generation strategies, including the
following, to overcome the challenges of existing
gene therapies:
— RNA-based modalities and editing. Several
start-ups are developing new RNA-editing tools
(such as adenosine deaminase acting on RNA
[ADAR] and CRISPR-Cas13) to make transient
edits and avoid harmful double-stranded
breaks. Another approach is to modulate protein
expression with new classes of RNAs (such
as transfer and small activating RNAs). Most
investments in novel RNAs began in 2019, but
the success of messenger-RNA-based COVID-
19 vaccines has propelled the entire field.
— Novel nucleases. Enabled by AI and enzyme
discovery, several biotech start-ups are
exploring novel Cas nucleases or enzymes (such
as Cas12 and CasX), which promise improved
efficiency and targeting specificity in CRISPR
gene editing. Investor excitement has grown
exponentially; the average VC funding for
nuclease platform companies grew fivefold, from
an average of $10 million to $50 million, from the
2017–18 to 2019–21 data sets.
Biotech companies have increasingly
focused on next-generation strategies
to overcome the challenges of existing
gene therapies.
— Non-nuclease editing and modulation. The
range of edits possible with conventional
CRISPR-Cas9 gene editing is limited. However,
novel editing technologies (such as base and
prime editors, transposases, and epigenetic
modulators) have the potential to overcome this
challenge with precise epigenetic modulation or
more efficient knockouts and insertions of one
to more than a thousand base-pair sequences.
While deals from 2017 to 2018 primarily focused
on base and epigenetic editing , the wave of
start-ups funded from 2019 to 2021 focused
on search-and-replace prime editing and
transposases, which use an enzyme to catalyze
the movement of certain types of genes.
Precision medicine
Precision medicine—an approach to maximizing
therapeutics’ effectiveness that uses diagnostics
and analytics to consider individual variability in
genes, environment, and lifestyle—has already
produced breakthroughs, including treatments
specific to certain gene mutations. Advances in
the ability to process enormous amounts of data
combined with AI have allowed the field to explode.
However, there are limits to the broader use of
precision medicine to diagnose and treat patients.
First-generation precision diagnostics can only
detect known biomarkers and mutations. While
early precision medicines have affected well-
What are the biotech investment themes that will shape the industry?
validated disease targets, there remain patient
subgroups that don’t respond to treatment,
necessitating further identification of unique
disease subpopulations. Finally, translating complex
genetic data into actionable clinical-care decisions
remains challenging.
To advance precision medicine, numerous emerging
biotech companies are focusing on cutting-edge
technologies, including the following:
— Early disease detection. While existing
diagnostics search for a few known mutations,
advanced multiomic tools can scan millions of
circulating biomarkers (including metabolites
and epigenetic markers) to detect early signs of
disease. Investors continue to double down on
such tools, with significant follow-up funding and
series A investment in companies in this space.
— Biomarker discovery. Platform technologies
that can sort through large integrated multiomic
data sets (including those on genomics,
proteomics, metabolomics, and so forth) could
help companies identify novel biomarkers and
genetic targets for patient subpopulations and
predict patient responses. Most companies
funded in series A from 2017 to 2018 received
follow-up series B or C investment and continue
to develop their biomarker discovery platforms.
7
 — Precision population health. Several biotech
companies are focused on using insights
from complex genomic data to guide disease
prevention and treatment decisions. These
companies simplify and rapidly analyze
sequencing data that focus on genomic
variations, offering interpretative services for
nonspecialized clinicians. Compared with other
precision-medicine subsegments, this field has
the highest proportion of late-stage funding,
with 80 percent of such companies in series C.
Machine learning–enabled drug discovery
Advances in ML promise to accelerate drug
discovery and development through computer-
modeled simulations that predict molecular
behavior. Rapid advances in this field have enabled
more effective drug design and optimization.
For example, a breakthrough in protein structure
prediction by the open-source AI system
AlphaFold regularly achieves accuracy
competitive with experimentation.6
However, the translatability of ML models is limited.
Challenges include an insufficient number of high-
quality data sets, a lack of generalizability, and
uninterpretable algorithms. This situation creates
opportunities for novel ML approaches that use
sophisticated algorithms and integrated data sets
to increase the efficiency and accuracy of the drug
discovery process.
Innovative start-ups have developed novel methods
in three areas:
— Target identification. ML is increasingly used
for phenotypic screening and understanding
disease. Advanced genetic-profiling platforms
can identify new genetic variants or use ML
to scan the entire genome for hot spots and
potential targets. Companies continue to
expand the repertoire of identified disease-
relevant targets, including proteins, RNA-
splicing sites, and biomolecular condensates.
This space received roughly 70 percent of series
B and C funding, signaling its relative maturity
and competitiveness.
6
AlphaFold Protein Structure Database, DeepMind Technologies and EMBL-EBI, accessed May 23, 2022.
8 What are the biotech investment themes that will shape the industry?
— Rational drug design. Start-ups are working to
make their ML models more generalizable so
that they can apply one predictive model across
multiple similar targets. Approaches include
robotic platforms that learn from experiments
and generative algorithms that can design
custom molecules from scratch. Biotech
companies advancing such technology are
just beginning to form, with almost half at the
series A stage.
— Lead validation and optimization. Algorithms
can scan libraries of billions of molecules across
numerous disease targets to choose those most
suited to clinical development. To address the
lack of high-quality training and experimental
data, ML can generate a list of interactions
between proteins and the molecules that bind
with them and cross-reference that list to
select leading candidates. Biotech companies
developing such technology are relatively small,
with the median deal size a little more than
half that of all ML biotech companies (around
$17 million versus $32 million).
Strategies for validated but undruggable targets
Conventional drug modalities (such as small
molecules and monoclonal antibodies) target
proteins to address disease. However, research
suggests that at least 85 percent of disease-
associated proteins in the human body are
undruggable—conventional modalities can’t produce
a therapeutic effect, because they have no binding
site. In recent years, the biopharma industry has
made progress on this front, and successes in the lab
have renewed investors’ interest in delivering drugs
to hard-to-target proteins and hard-to-treat diseases.
However, beyond identifying binding pockets in
the disease-relevant proteins, problems remain.
They include resistance to small-molecule drugs
in proteins with known binding pockets, limited
disease-modifying effects in targets whose protein
functions aren’t easily altered, lack of validated
targets, and limited understanding of disease biology.
Biotech start-ups are developing novel platforms to
address undruggable targets and diseases. Three
promising approaches are as follows:
— New small-molecule binding sites. Many
VC-funded companies are focused on advanced
techniques in interactions between proteins
and small molecules and on computational
methods to identify previously unknown binding
sites on proteins that small molecules can
target. The past three years have seen
increased investment in this approach, which
constitutes more than 50 percent of all funding
in this category.
— Protein degradation. An emerging modality in
disease-causing proteins is protein degradation,
which circumvents the need to identify elusive
small-molecule binding sites. The major class is
proteolysis-targeting chimera (PROTAC), which
promotes selective protein degradation.
— Novel disease targets. Several biotech
companies are advancing the knowledge
of disease biology by developing innovative
platforms to identify new targets in hard-to-
drug illnesses. One approach involves sampling
populations that are naturally resistant to those
diseases, using advanced analytics to identify
protective antibodies, and developing those
antibodies as therapeutics.
New delivery methods
Drug delivery has seen significant advances as
more therapies rely on robust vehicles to target
disease-specific cells. The lipid nanoparticles used
in messenger-RNA-based COVID-19 vaccines are
among the most promising of such vehicles. This
market is growing exponentially—more than 400
RNA-based therapies in the development pipeline
will require targeted delivery mechanisms.
Delivery is one of the biggest challenges for novel
drug modalities, and significant scientific and
technical advances will be necessary to realize
What are the biotech investment themes that will shape the industry?
their full potential. For example, the ability of
adenoassociated viruses to deliver large cargo
(such as CRISPR nucleases) in vivo is limited.
Additionally, currently validated vehicles can access
only a limited set of tissues. Intravenous lipid
nanoparticles, for example, primarily target the liver.
Some delivery methods can also trigger the immune
system, leading to adverse events and blocking the
efficacy of the therapy.
Most drug delivery start-ups are using one of three
main types of cutting-edge bioengineering:
— Improved capsids. Biotech companies are
using rational design and directed evolution
powered by ML to improve knowledge of
existing adenoassociated virus vectors and
discover new vector capsids (or protective
protein shells). While novel-vector companies
won the majority of drug delivery funding from
2017 to 2018, the share of deals in the space has
declined since 2019.
— Biological vehicles. To improve safety, biotech
companies are engineering delivery methods
using the body’s natural signaling system (such
as by using exosomes—extracellular bubbles of
liquid or cytoplasm enclosed by a double layer of
lipids—which have the potential to reach almost
all tissues). This technology is still young, as
shown by the limited number of investing deals
for it from 2017 to 2018. Most deals from 2019 to
2021 were seed and series A rounds.
— Enhanced nanoparticles. Nanoparticle
enhancements (such as lipid composition
optimization) can expand the range of tissues
that a drug can reach. Nanoparticle companies
have had relatively small funding rounds of
around $25 million each, around half of the
$45 million average deal size in the drug
delivery sector.
9

7
“What is...Duchenne muscular dystrophy: A guide for patients and families,” Muscular Dystrophy Association, February 2019.
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10
Achieving long-term benefit from
biotech platform technologies
Our analysis highlights increasing investment in
several platform technologies that could have a
significant long-term impact on drug development.
The convergence of AI and ML technologies with a
greater understanding of biology could make drug
discovery faster and more efficient. However, to
benefit from the innovations that VC companies are
funding, the biotech industry has several existential
risks to address, including:
— Differentiating incremental innovations.
Given continuous innovation, many start-ups
are improving incrementally on competitor
technologies. CasX, for example, is smaller than
Cas9 for easier delivery and is believed to be less
likely to trigger an immune response. To compete
successfully, pioneers will need to generate
evidence that will differentiate them and show
the value of their products. They can also
advocate for a regulatory framework that can
assess new technologies even when head-to-
head comparisons in clinical trials aren’t feasible.
— Addressing more intractable diseases. Because
of the risks inherent in innovation, many biotech
companies validate their technologies in
conditions with well-understood mechanisms
(such as sickle cell disease). However, if many
companies with new platform technologies
pursue this strategy, new therapies may outstrip
need in diseases with limited patient populations.
For example, with more than 30 products in
development to treat the approximately 20,000
children around the world who are diagnosed
with Duchenne muscular dystrophy every year,7
Olivier Leclerc is a senior partner in McKinsey’s Southern California office; Michelle Suhendra is a senior capabilities and
insights analyst in the Waltham, Massachusetts, office; and Lydia The is a partner in the Bay Area office.
The authors wish to thank Emily Capra, Savitri Fouda, Alex Godfrey, Sarah Heath, Serene Hu, Bruce Jia, Brahma Kumar,
Xiruo Li, Leonne Philippen, Ethan Reich, Uday Tripathi, and Tanya Xi for their contributions to this article.
Designed by McKinsey Global Publishing
Copyright © 2022 McKinsey & Company. All rights reserved.
What are the biotech investment themes that will shape the industry?
companies struggle to recruit patients for trials.
Companies can benefit from enhancing their
understanding of disease biology and innovate
to design unique products that can target
underaddressed diseases.
— Demonstrating value for cost-constrained
healthcare systems. The pharma industry has
transitioned toward a model that produces
innovative drugs at premium prices to treat small
subsets of patients. For example, while the top
ten blockbuster drugs in 2010 treated more
than 40 million patients, the top ten in 2020
treated 12 million. The prevailing model will no
longer be sustainable if the top ten drugs in
2030 treat even fewer patients. Companies may
need to pursue a different model, pushing the
boundaries of emerging platforms to address
larger populations. To create products that can
help more patients at lower costs, manufacturing
processes may need to evolve, and R&D may
need to become more efficient.
With substantial VC investment fueling innovative
therapies that address unmet needs, the biotech
industry is poised to make lasting changes that
can overcome the challenges it faces. In the future,
biopharma may be able not only to treat but also to
cure more common diseases and prevent others,
touching much larger patient populations at lower
costs. Technological innovations, coupled with
ecosystem solutions, could enable cheaper, safer,
and more efficacious therapies.