Today’s Biotech Market In Context

The past five years have been the greatest bull run in the history of the biotech industry. Stock market outperformance, significant fundraising levels both private and public, more IPOs in this window than every before, and huge volumes of M&A. As we head into the annual JPM Healthcare Conference next week, it’s worth reflecting on the state of the industry:

• Valuations remain very strong. The NASDAQ Biotech Index has never been at 3500 heading into a new year (or 3300-ish into a JPM conference) before; despite the volatility, the index was up nearly 11% in 2015 – as compared to the S&P500 being down nearly 1%. Lots of star-performing small-cap biotech names are off their all-time-highs, but many still maintain attractive multi-billion dollar valuations today. Dozens of pre-data preclinical and Phase 1 stage companies are being valued north of $300M.
• The IPO window is still open. Over 140 biotech companies had closed successful, significant IPOs since the spring of 2013, marking the most prolific IPO window in history. The sector had at least sixteen biotech IPOs since mid-September, and the queue for new issuances later in January and February of 2016 has ballooned.  At least eight S-1’s on file went public Tuesday and Wednesday of this week – including CRISPR play Editas, epigenetics/combo story Syndax, and gene therapy play Audentes, among others (here, here). There will undoubtedly be a substantial number of biotech IPOs in 2016.
• Deal-making continues at a feverish pace. We’ve witnessed tens-of-billions in R&D-stage M&A annually over the past few years. Further, Pharma is engaging in earlier stage partnering more actively; yesterday, we announced two R&D collaborations with structured M&A components – so called “Build-to-Buy” acquisition option deals – with Quartet-Merck and Rodin-Biogen (here).

The big question, though, is whether this cycle, in place since the bottom in 2009, is truly unique or special relative to past investment cycles, and how that might affect its sustainability.

As I outline in a new paper in the January 2016 issue of Nature Biotechnology, titled “This Time May Be Different,” there’s a strong case to be made that indeed this time is different. I know those are the four most dangerous investing words, and ignoring history is folly.  So I’ll hedge and say that it may be different. A summary of the article is below, but I encourage readers with interest to click the title above for the PDF, which contains figures and data supporting each of the points below.

The Commentary first sets some of the context for the current cycle relative to past environments. Since the industry’s inception in the early 1980s, we’ve experienced at least eight cycles, with the current one exceptionally sustained and dynamic.

This Time Is Different

Against this historic backdrop, there are at least four things about the current cycle that make it different than past periods:

• Advancing Products Over Promise. We are in the midst of a biomedical renaissance that is delivering transformative medicines, like Solvaldi, Ibrutinib, Zydelig, anti-PCSK9s, anti-IL17s, CAR-Ts, gene therapy, and many many others. The industry’s pipeline is incredibly rich today, with over 3400 active clinical stage projects, 70% of which are being advanced by small companies. After nearly four decades of promises, the biotech industry is truly delivering in earnest on its potential for high impact therapeutics; this is indeed a significant new feature of today’s environment versus past cycles.
• Maturing Industry Players. Biotech is no longer an emerging sector as it was in its first few decades. There are 2500 US biotech companies, including over 400 traded on major public market exchanges. Further, many have real financial metrics: examining the companies in the NASDAQ Biotech Index in aggregate, the industry’s revenues and earnings have more than doubled over the past five years. In addition, the number of biotech companies with more than $1 billion in market capitalization has gone up 3x during that time. We have a robustly capitalized biotech sector today.
• Deepening Capital Markets. Past bull markets in biotech had very shallow institutional investor pools; when these investors got anxious, sentiment rapidly went negative, provoking a feast-or-famine, open-or-closed market environment. Today, the breadth and depth of the equity capital markets have never been more extensive, across both specialist and generalist firms. Hundreds of institutional IPO buyers have participated frequently over the past three years, not dozens like in past cycles. Positive fund flows in biotech have been a critical driver of demand for biotech over the past five years; watching fund flows in 2016 will be important. Given the lack of other compelling equity sector options, and low interest rates, biotech may resume neutral to positive flows in 2016. So while it remains to be seen how this will play out in 2016, the depth of the biotech capital markets today is very different and reflective of a much deeper and more resilient investor pool – and has supported the longest IPO window ever in biotech (nearly 32 months and counting). The volume of IPO activity in the first quarter of 2016 will be a test of this part of the thesis.
• Improving R&D Productivity. The last point of difference is that after years of declining R&D productivity, the sector may be at a turning point: the ROI on R&D may be improving, according both BCG and McKinsey. In addition, as a lagging indicator, the number of FDA approvals reached a nearly two-decade high with 44 new therapeutics approved in 2016. These positive R&D productivity trends likely reflect better decision-making and a shift towards more “External R&D” strategies (here).

The above four elements strongly support the idea that this investment cycle may offer some structural differences versus past periods.

What’s Not Different.

To be balanced, it’s worth calling out a few things about the current environment that aren’t different from past expansionary cycles; here are highlights of three:

• Valuation Inflation. Every bull market sees an uptick in valuations, and this one is no different. P/E ratios have expanded, and pre-money valuations for both IPOs and private rounds have moved upwards (here). Historically, when valuations overshoot, two possible outcomes occur: either companies quickly grow into their valuations (newsflow around compelling data, perhaps), or they see their share prices drop back to earth. We’ve seen some of both in recent months.
• Event-driven Hyper-volatility. Biotech is an event-driven sector, and blockbuster clinical data can move stocks, even large ones. Since the launch of the NASDAQ Biotech Index in 1993, one out of every five months has a 10% move up or down in the index. That’s enormous volatility. Furthermore, it’s been there for twenty years and it’s not going away.
• Payor and Reimbursement Challenges. Pricing is the perennial issue that plagues our sector; public debate about it (and tweets on the topic) always spooks investors, with fears of price controls cutting back the premium for innovation. That would certainly have dire consequences. We need to get out in front of this issue and focus on value-based pricing, but its an issue we’ve been wrestling with for decades and this cycle is no different.

Conclusion

I’ll leave specific stock predictions to other pundits, but do believe there’s strong support for the premise that structural changes in the industry have enabled a “new normal” today that is intrinsically a more robust biotech investing climate.

While we certainly face common cyclic issues like expansionary valuations, volatility, and pricing concerns, there’s multiple reasons to believe we’ve matured as a sector, and along with that comes deeper, more sustained capital market access that can fuel the continued advancement of new medicines.

This time may indeed be different.

Bruce Booth

Image source: Ridge Carpenter

2014 was a great year for private biotech. Venture capital (VC) investment into the biotech sector as a whole—from recent startups all the way to enterprises in late-stage financings—jumped to a record $9 billion. The number of series A financing rounds also remained strong. These trends held true for the subset of private companies that Nature Biotechnology considers in its annual survey. Data from Dow Jones show that money from combined exits (initial public offerings [IPOs] and buyouts) for private investors reached mythic levels last year—a 78% increase over an already strong 2013. Although the number of overall VC rounds into innovative biotech did not expand from 2013’s totals, the total amount invested did, and the global count of private biotech companies jumped from 1,133 in early 2013 to 1,361 as 2014 began.

VC investing across all industries in 2014 reached the highest level in more than a decade—$48.3 billion went to more than 4,300 deals, according to The MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, powered by data from Thomson Reuters. But biotech has been one of the top performing sectors. Much of this fervor is attributed to the hot biotech IPO market—a receptivity so robust it’s less a window and more a hole blasted through the wall—as a strong IPO market tends to draw in VC funding. When its IPO market whirred to life 2.5 years ago, a needful industry warily wondered how long it would last. Now the question is, when the eventual correction comes, how will it affect private investment in biotech?

Excerpted from our annual feature gauging the health of the private biotech sector, included in the May issue (out 5/12/2015). Click image to enlarge.

Source: Ridge Carpenter

We published in the December 2013 issue a news feature looking at this year’s biotech IPO rush. We’ve removed the article from behind our paywall, and it can be freely read here. The PDF is here: Burning Bright.

By our count, by the end of the third quarter there had been 36 biotech IPOs across global exchanges this year, raising on average $73.8 million apiece. The companies going public on either NASDAQ or NYSE have done better, raising on average $86 million each. Another 10 biotech companies or so have gone public since September ended; you’d need to go back to the year 2000 to see a similar combination of new IPOs and high amounts raised.

The post-IPO market has been robust, too, with the stock of many companies soaring in the weeks following their debut. Our calculations found that overall, the 29 companies that went public this year on either NYSE or NASDAQ had returned ~62% over their IPO price at the end of the third quarter.

There has not been nearly as much enthusiasm for non-US-based companies or beyond the US exchanges, though Oncolys BioPharma raised ~$48 million on the Tokyo Exchange, and TWI Pharmaceuticals, which works in generics and immune modulation, raised more than $100 million in Taiwan (link is to BioCentury — subscription required). The Netherlands-based Prosensa grossed nearly $90 million in the US, though it shortly after reported a drug failure that cut the stock down. And from the UK? GW Pharmaceuticals raised about $31 million on NASDAQ, but that firm didn’t make Nature Biotechnology‘s rather stringent definition of biotech. Egalet, of Westminster, UK, is in the queue, but we’ll need to see what type of reception it gets if and when it does price.

Comments on the article can be posted below, or tweet them to us at @naturebiotech.

Tackling big issues, like cancer, requires striking out in new directions.

Over the past week, we have seen extended press coverage of the principles of a potential cancer ‘megafund,’ building on ideas from the October 2012 Nature Biotechnology article by Fernandez, Stein & Lo on “Commercialization biomedical research through securitization techniques.”  The Economist covered it here and the Financial Times added its commentary here.

The article proposes an innovative financial structure in which a large number of biomedical programs at various stages of development are funded by a single entity to reduce portfolio risk. The hope is that a cancer megafund in the magnitude of $5 billion to $30 billion could effectively produce the next generation of cancer therapeutics. The article has gained a following since its publication and has united thought leadership from scientific and financial communities to brainstorm together on this audacious goal. Through the support of MIT Sloan School of Management (where the co-authors are based), Alfred P. Sloan Foundation, American Cancer Society and National Cancer Institute, a CanceRX conference was held June 16-18, 2013.

The conference steering committee convened a diverse set of stakeholders who normally would not have the opportunity to discuss, debate or structure such ideas. Nobel Prize winners shared panel discussions with credit rating agencies, investment bankers and university technology transfer directors. Medical research centres debated with business school professors on not only funding innovation, but also new business models to make R&D dollars sustainable and predictable.

Financing the cure(s) for cancer is a complex problem. However, the conference was smartly structured into different streams so that participants could analyze and understand the core mechanisms separately before thinking about potential implementation of the whole. The key issues included:

1. Scientific and engineering challenges
2. New business models
3. Financing structure, marketing and investor concerns
4. Technology licensing and intellectual property issues
5. Credit models and debt rating
6. Government, healthcare reform and non-profits

One may think that $5 billion – $30 billion for a disease area sounds almost too big. Can it really be done? It strikes me that perhaps we can learn lessons from history and what we can accomplish if we are united to achieve a goal. At the same time as the MIT CanceRX conference, G8 leaders were gathering in Northern Ireland to discuss the global challenges of today. Thirteen years ago at the G8 Summit in Okinawa, Japan, political leaders planted the idea of a fund to provide resources for infectious epidemics afflicting the world: HIV/AIDS, Tuberculosis and Malaria. A year later, African leaders in Abuja endorsed the idea and in two years, the Global Fund to Fight AIDS, Tuberculosis and Malaria was born.

To date, the Global Fund has raised $25 billion in commitments and deployed $20 billion in grants to fight these infectious diseases and to strengthen health systems in more than 150 countries. The Global Alliance for Vaccines and Immunizations, formed to fund vaccines for the poorest 72 countries of the world, has had its funding supplemented by the International Financing Facility for Immunizations and the use of capital markets to issue bonds on government pledges. These billions have been raised on a model of donor commitments and grants. Imagine what powers can be unlocked from the trillions in the bond markets if capital to fund disease R&D can be recycled back to investors and through the innovation value chain?

Ideas have always started with people. The co-authors of the original paper have further developed their model and brought in the smartest minds in intersecting fields this week to meet each other. These working groups need a chance, time and space to work together – can innovative finance for cancer find an early adopter?

Julia Fan Li