OR WAIT null SECS
But a doubling-down on R&D offers reason for optimism.
Inflation reports continue to worsen. We reached 7.5% year over year in the US in January, the highest level in 40 years. This suggests the Fed will be busy raising rates to a greater extent and for a longer period of time than previously thought.
This scenario adds insult to injury for biotech investors, as higher discount rates wreak their greatest havoc on the early stage biotechs making big bets on innovations with demanding, long development timelines ahead of them. Many of these went public in the stunning bull market for the sector in 2019 and 2020, but will find it harder to fund these programs going forward, at least near term.
This perhaps explains why a rising number of these companies are trading with negative enterprise values as the expectation is that these programs will continue to consume their cash balances. Companies with cash flows will continue for now to be king and preferred by investors.
From peak to trough, the XBI index has fallen over 50%, the steepest decline since its inception in 2006. As if not bad enough, it has also been the longest downturn at over 12 months, surpassing the 50% routing over the 12 months following the “Hillary Tweet.” The IPO market has no pulse, and while follow-ons are getting done, the numbers remain far below last year’s levels.
The current macro environment continues to favor the large-cap pharma companies that continue to report strong revenue gains, but even there, stock price performance has suffered this year. Pfizer has fallen 20% since its peak in late December, albeit the stock is still up an epic 48% vs. one year ago. This despite achieving an incredible milestone, becoming the first pharma company to reach $100 billion in annual revenues.
M&A continues to be the focus of investors hoping for a much-needed source of alpha and remains a key pillar of large-pharma growth strategies. My colleagues at EY recently published their annual review of the industry’s Firepower Report measuring the financing capacity for M&A and found that it now stands at a record $1.4 trillion. Despite the high need to access new breakthrough innovative therapeutics, and looming levels of effort (LOEs), backed by lots of firepower, M&A activity has also been below investor expectations.
The underwhelming start to the year for M&A has disappointed investors and has contributed to poor investor sentiment. With the targets down dramatically, investors are hopeful for a pick-up in M&A later this year and the prospects for a rally in biotech.
Perhaps there will be a lag as buyers and sellers adjust to current valuations. Perhaps the boards and management teams of the biotech targets will need time to accept the realities of the new market conditions.
Meanwhile, the innovation renaissance remains alive and well. According to a report issued by IQVIA on R&D productivity (https://bit.ly/3LS6jSz), there are over 800 next-generation biotherapeutics now in the R&D pipeline, up from 600 at the end of 2019, with increased activity in CAR-T and natural killer (NK) cell therapies.
Further, the study reports that intensified efforts are being taken by all stakeholders to accelerate innovation cycles and bring scientific breakthroughs to patients faster. The median time from first patent filing to launch in the US has fallen to its lowest level and in the past two years included 21 drugs that were launched less than five years into their patent terms. Most new drugs (72%) received some form of expedited review by FDA, including one in four receiving an accelerated approval or an emergency use authorization. The 15 largest pharma companies invested a record $133 billion in R&D in 2021, an increase of 44% since 2016, and a level close to 20% of annual sales. That said, success rates have been in decline, perhaps owing to the breakthrough nature and, hence, higher risk of truly innovative research programs.
All in all, while the markets may not currently be rewarding biopharma, fundamentals remain strong on many fronts, and this, in my view, is ultimately positive for investors, our industry, and the patients we serve.
Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec’s Editorial Advisory Board