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Back in Person, Sparks Could Fly at Upcoming J.P. Morgan Conference

Pharmaceutical ExecutivePharmaceutical Executive-12-01-2022
Volume 42
Issue 12

Will biopharma investment heat up and signal better fortunes for 2023?

In January 2020, healthcare industry movers and shakers descended on San Francisco for the 38th Annual J.P. Morgan Healthcare Conference, the definitive Woodstock of healthcare. Who could have imagined that we would not return until January 2023. What will we be talking about?

Implications of Inflation Reduction Act

The Inflation Reduction Act (IRA) became law in August and gives Medicare the power to cut prices and cap out-of-pocket spending for seniors on some drugs. The legislation will also require drug companies to pay Medicare a rebate if they raise prices faster than the rate of inflation. This will be tough to implement, which is why Congress allocated $3 billion for it.

That said, companies and investors are concerned about the likelihood of lower sales, reduced profitability, and fundamental shifts in R&D strategies. Some industry CEOs have said they have already initiated portfolio reviews through the lens of the IRA. While there is still significant uncertainty among industry leaders around how the law may be implemented and how it will affect their businesses, many have cited that it will shape their decisions to cut back or reshape their research. The IRA reduces the attractiveness of small-molecule innovation vs. biologics, which is unfortunate given that these are the lowest-cost therapeutic options. Biologics, or large molecules, tend to be far more complex and costly. The specific disincentive in the IRA for the development of small-molecule drugs is that they would be exempted from price negotiations for only nine years post-approval, compared to 13 for biologics. It is also likely to discourage investments in additional indications over the course of a drug’s lifespan, as the time for a return would be limited. Oncology is expected to be hit especially hard.

I’m sure there will be lots of questions and debate about the IRA at JPM; but given the standstill in Washington between Democrats and Republicans, the law itself is unlikely to change anytime soon.

M&A and business development

These two areas have, and always will be, core to the growth strategies of the largest biopharma companies. But it is expected that the pace of dealmaking will accelerate (despite a potential recession) for a multitude of reasons. Those include an innovation renaissance across the smaller “target” biotechs and record levels of firepower (> $1.2 trillion, according to the annual Firepower EY report) across the acquiror universe, which also find these parties needing to address a looming growth gap with upcoming losses of exclusivity for revenues of about $225 billion beginning in 2025. This is complemented by a high level of distress among the target biotech companies. Many public and private organizations are currently valued below cash, and many have limited access to the capital markets. It is estimated that about 40% of the sector will have less than 12 months of cash by year end. The IPO market has been shut down for all of 2022 and follow-ons confined primarily to those companies generating positive clinical data, and even then, at highly dilutive valuations. Since its peak in February 2021, the biotech sector has gone through its longest and steepest bear market. Some very early-stage companies launched into the public markets during 2020 and 2021 funded through limited or no meaningful clinical milestones have seen share price declines of ~90%.

Will sparks fly during the week of the 41st Annual JPM Healthcare Conference this January 9-12? Could we see rotation out of value back into growth and biotech?

The reopening of the economy ushered in by vaccines and therapeutics fueled a rotation out of growth and into value stocks in anticipation of a V-shaped recovery, which we got. That ultimately led to the steepest Fed-led spike in interest rates in more than 40 years to tame the inevitable inflation, which, in turn, decimated valuations of long-dated assets.

Development-stage biotechs are the longest-dated asset class, and their stock prices fell precipitously in lockstep with the rise in rates and inflation. There is talk that a peak in rates and inflation could be in our line of sight as is a potential recession. If so, investors may rotate back into growth and biotech, specifically. If that pivot gets an additional nudge from an active M&A calendar, we could be setting up for some good news at JPM and a better year for biopharma in 2023.

Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec’s Editorial Advisory Board.