1 February 2023
Our international team recently attended the J.P. Morgan Healthcare Conference (JPM) 2023. In its 41st year, the annual conference brings together global industry leaders, emerging fast-growth companies, innovative technology creators and members of the investment community in the healthcare investment sector. Here our team has pooled their market intel to provide an update on the themes of biotech M&A, IPOs, private financings, government policy, hot indications and modalities for the year ahead.
The expected boom in biotech acquisitions by pharma companies continues to stutter. Three mid-market deals were announced going into JPM (AZ/CinCor (up to $1.8 billion); Ipsen/Albireo (up to $952 million); and Chiesi/Amryt (up to $1.4bn)), but no banner deal of the scale of Amgen/Horizon ($27.8bn) which electrified the sector at the back end of last year, or BMS/Celgene ($72bn) which was announced going into JPM 2019. Interestingly, all three deals involved European acquirors, and contingent value rights were used to structure the deal consideration after falling out of use in recent years. The message from pharma business development teams is that we are now in a buyers' market but many biotech C-suite and investors have still not adjusted to the new market reality.
Macro factors are weighing heavily on the market. Recovery is dependent on a reduction in interest rates. High interest rates depress current valuations in biotech and prompt a move to less risky asset classes. The Federal Reserve is forecasting lower inflation and rate cuts towards end of 2023, so there is cautious optimism for a recovery in market conditions for public biotech in 2024. The Bank of England and European Central Bank are similarly forecasting reductions in inflation late in H2, but are not yet discussing reducing interest rates. However, the US is so dominant in biotech investment that where the US markets lead, the UK/EU market is likely to follow.
VCs still have plenty of dry powder which they need to invest and the Silicon Valley Bank healthcare investments and exits report for 2022 released just before JPM started noted that VCs had raised $50bn for life sciences investment across 2021 and 2022. Seed stage and series A financings are largely unaffected. For later stage pre-clinical and clinical stage biotech, both private and public, we are back to a world of the 'haves' and the 'have nots'. As was the case in Q2 2020, companies with recent readouts of strong data which de-risk their programmes are still finding it possible to raise capital. But times are hard for companies who are low on cash and do not have strong data, or where the next significant data readout is some way off. For those companies, it's a question of survival until sentiment improves.
Cost control (headcount reduction, pausing internal programmes) and creative approaches to financings, including royalty financing and revenue financing, are back on the agenda. To give just one example, Ionis announced going into JPM that it had entered into a royalty agreement with Royalty Pharma to enable it to progress its existing clinical programmes. For an upfront sum of $450m and potential milestones of $650m, Royalty Pharma acquired an interest in Ionis' Spinraza™ royalties (an antisense RNA product targeting spinal muscular atrophy; partnered with Biogen).
There was universal exasperation amongst the British contingent at JPM about the UK Government's changes to the R&D tax credit scheme. The announcement from the UK Chancellor of the Exchequer in the week before JPM of a possible change of heart, following a vigorous lobbying effort by the BioIndustry Association, was widely welcomed. No further details about the policy U-turn were available during the conference and many UK companies remain concerned until the revised proposals are published. Interestingly, there were also reports that in investor meetings and M&A discussions, the US Inflation Reduction Act is impacting adversely on biotech valuations, and not just for late-stage assets. It is coming up in discussions about mid-stage and early-stage assets too, with some adverse impact.
Oncology is being given a run for its money this year (in comparison with previous years) by other large patient population disease areas, in particular in CNS/neurodegeneration. Eisei secured its long-anticipated FDA approval for Leqembi™/lecanemab on the day before JPM started. Together with the FDA approval in September 2022 for Amylyx's ALS drug Relyvrio™ and the upcoming FDA reviews of Biogen/Ionis's antisense therapy Tofersen™ also in ALS (PDUFA date in April 2023) and Eli Lilly's donanemab in Alzheimer's disease, there is a sense of momentum building in the CNS/neurodegeneration space.
Having said that, many questions remain about the likely commercial success of the new Alzheimer's disease therapeutics, not least as the US Centers for Medicare and Medicaid Services have declined US coverage for the whole class of amyloid-targeting drugs (other than in randomised clinical trials). Many clinicians remain sceptical whether their undoubted efficacy in reducing amyloid plaques will actually produce a clinically relevant improvement in cognition. Aside from CNS, recent developments in obesity treatment are also garnering interest in that therapeutic area. Novo's Wegovy™/semaglutide (a GLP-1 receptor agonist) is due to become available on the NHS early in 2023 and Eli Lilly's tirzepatide (a dual GIP/GLP-1 receptor co-agonist) is expected to be authorised by the FDA for the treatment of obesity in 2023, following strong Phase III data in 2022. Analysts forecast peak annual sales for tirzepatide in the range $25-48bn, if widely reimbursed. If achieved, this would beat the current record of $21bn (held by Abbvie's Humira™) by some margin. As for early-stage drug discovery efforts, anti-ageing is recognised as a key area attracting significant investment and research effort.
After a spate of approvals in 2022 (including Zynteglo™ (beta-thalassemia), Skysona™ (early cerebral adrenoleukodystrophy) and Hemgenix™ (Haemophilia B) in the US; Upstaza (AADC deficiency) and Roctavian (Haemophilia A) in the EU and UK; and Carvykti in Japan), gene therapy is attracting a lot of attention. Gene therapy patent litigation is booming, as commercial products come to market. 2023 also should bring more data about the likely commercial potential of this modality.
Three of the gene therapies approved in 2022 are the highest priced medicines ever approved. Moreover, gene therapy is expanding beyond its roots in ultra-rare diseases. For example, Haemophilia A is the largest indication approved to date for a gene therapy. Both these factors could increasingly strain the willingness of payers to cover those therapies. Bluebird's shock withdrawal of Zynteglo and Skysona from the EU/UK market in 2022, despite regulatory approvals due to its failure to achieve an acceptable reimbursement price, was an illustration of the potential difficulties ahead.
Gene editing also attracted attention at JPM 2023, following the EMA approval late in December 2022 of Vertex/Crispr Therapeutic's beta-thalassemia/sickle cell disease gene editing product, and the FDA's upcoming review. If approved, this will be the first commercially approved gene editing product. Cancer vaccines in combination with immune checkpoint inhibitors are also in the spotlight, following the announcement in December 2022 by Moderna and Merck of the data readout from their Phase IIb KEYNOTE-942 trial of an investigational personalised mRNA cancer vaccine in combination with Keytruda™ (Merck's anti-PD-1 therapy). This was the first demonstration of efficacy for an investigational mRNA cancer treatment in a randomised clinical trial.
Sidebar discussion amongst AI/drug discovery companies on the fringes of the Biotech Showcase revealed an interesting consensus that some form of open innovation or pre-competitive co-operation in the sector would be desirable, particularly in obtaining access to curated datasets. Currently each company typically has to invest in curating the datasets to which it obtains access. This can be a heavy investment, and there is a concern that this involves significant duplication of effort and cost between companies. There were calls for one of the major tech companies involved in the market to step in and take a lead on solving this problem for the sector.
In summary, we're facing a difficult financing environment, but with some grounds for cautious optimism for the healthcare sector as a whole, particularly as we move into Q3 and Q4. If any of the above themes are of particular interest, please get in touch with Adrian Toutoungi, or your usual Taylor Wessing contact.