A Wind­ing Road Ahead for Biotech?

The biotech sec­tor has evolved sig­nif­i­cant­ly over the last five years, but in­no­va­tion con­tin­ues to dri­ve in­vestor op­ti­mism. How­ev­er, with patent cliffs loom­ing, biosim­i­lar com­pe­ti­tion heat­ing up, eas­ing con­cerns around the FTC, and IRA un­cer­tain­ty on the hori­zon, the path to sec­tor out­per­for­mance has a wind­ing road ahead. RBC Cap­i­tal Mar­kets’ Biotech Half­time Re­port ex­plores the head­winds and tail­winds shap­ing biotech’s fu­ture mov­ing in­to 2024.

Key Points:

• Strong in­no­va­tion in­to new modal­i­ties such as emerg­ing an­ti­body con­structs and ge­net­ic med­i­cine are gen­er­at­ing wide­spread en­thu­si­asm across the sec­tor
• Loom­ing patent cliffs and drug de­vel­op­ment re­forms are caus­ing bio­phar­ma com­pa­nies to shift strate­gies
• While biotech is un­der pres­sure, the S&P Biotech in­dex (XBI) is show­ing ear­ly signs of sta­bi­liza­tion

Strong in­no­va­tion in bio­phar­ma

In­no­va­tion con­tin­ues to be a hall­mark of the biotech sec­tor. New modal­i­ties, from emerg­ing an­ti­body con­structs to ge­net­ic med­i­cines, have flour­ished and en­abled in­creased tar­get in­ter­ro­ga­tion. Fur­ther ex­plo­ration and uti­liza­tion of these modal­i­ties is like­ly to be a key fac­tor for bio­phar­ma growth in the com­ing years.

Once-dor­mant spaces of med­i­cine are al­so ex­pe­ri­enc­ing en­thu­si­as­tic at­ten­tion from bio­phar­ma. Meta­bol­ic dis­eases, for in­stance, have un­der­gone a treat­ment rev­o­lu­tion, as both small and large play­ers look to take on and po­ten­tial­ly re­form di­a­betes and obe­si­ty ther­a­peu­tics. There has been a shift from con­tem­po­rary sin­gle-re­cep­tor ag­o­nism to bis­pecifics, which in­di­cates that the in­dus­try is look­ing to tar­get weight loss as well as glycemic con­trol. Clin­i­cal man­age­ment re­mains top of mind as re­al-world tol­er­a­bil­i­ty is brought in­to ques­tion; ad­verse events are im­pact­ing qual­i­ty of life and serve as a clear gat­ing fac­tor to sub­stan­tial mar­ket op­por­tu­ni­ty.

Alzheimer’s, im­munol­o­gy and in­flam­ma­to­ry dis­eases have sim­i­lar­ly seen a wealth of de­vel­op­ment fo­cus, which is putting a pos­i­tive light on the in­dus­try as a whole.

With U.S. drug ap­provals and ac­cel­er­at­ed ap­provals on the rise, the FDA is demon­strat­ing an in­creas­ing flex­i­bil­i­ty for ear­li­er ap­provals in un­met need dis­eases.

Biotech in­no­va­tion not with­out set­backs

As new modal­i­ties and dis­eases take cen­ter stage, cor­re­spond­ing con­sid­er­a­tions have arisen, large­ly around man­u­fac­tur­ing, safe­ty, and treat­ment pro­to­cols.

In the man­u­fac­tur­ing are­na, chal­lenges with the scal­a­bil­i­ty of some prod­ucts, par­tic­u­lar­ly for CAR-T, gene ther­a­py, and ra­dio­phar­ma­ceu­ti­cals re­main. Biotech pro­duc­tion is in­her­ent­ly com­plex, and fur­ther ex­ac­er­bat­ed due to lim­it­ed ca­pac­i­ty and band­width.

De­vel­op­men­tal ther­a­pies are be­ing ex­plored with nov­el modal­i­ties and tar­gets; this is yet an­oth­er risk to con­sid­er, es­pe­cial­ly with the FDA ex­pe­dit­ing ap­provals.

Treat­ment pro­to­cols are al­so be­ing more close­ly ex­am­ined. Many nov­el drugs en­ter­ing the mar­ket are short course or one-time ther­a­pies; this presents a com­pli­cat­ed com­mer­cial chal­lenge that will need to be ad­dressed giv­en its sig­nif­i­cant im­pli­ca­tions for rev­enue op­por­tu­ni­ties.

The un­in­tend­ed con­se­quences of the In­fla­tion Re­duc­tion Act (IRA)

The long-term ef­fect of the drug pric­ing pro­vi­sions in the IRA could have a detri­men­tal ef­fect on the in­dus­try at large. Be­yond the ob­vi­ous fi­nan­cial bur­den, the IRA will al­so im­pact drug de­vel­op­ment and the ini­ti­a­tion of new prod­ucts. The short­ened ex­clu­siv­i­ty lifes­pan of small mol­e­cule drugs and bi­o­log­ics has com­pa­nies ques­tion­ing whether drug de­vel­op­ment in cer­tain spaces may be as worth­while.

How­ev­er, key le­gal and reg­u­la­to­ry de­vel­op­ments may be­gin to ease con­cerns around IRA over­hangs in 2024. Larg­er play­ers and in­dus­try groups have tak­en le­gal ac­tion against CMS drug price ne­go­ti­a­tions, not­ing specif­i­cal­ly the im­pact this leg­is­la­tion could have on in­no­va­tion in drug de­vel­op­ment and long-term val­ue. Chal­leng­ing the IRA is like­ly an up­hill bat­tle that could prompt Con­gres­sion­al re­tal­i­a­tion, but pre­lim­i­nary in­junc­tions could de­lay IRA im­ple­men­ta­tion enough to have a pos­i­tive ef­fect on per­ceived rev­enue tails and stocks.

Fac­ing a patent cliff

Sev­er­al block­buster drugs are los­ing ex­clu­siv­i­ty soon, which will re­sult in rev­enue hits to their cor­re­spond­ing phar­ma com­pa­nies. His­to­log­i­cal trends in­di­cate that around 70% of mar­ket ero­sion is like­ly with­in the first 4-5 years of biosim­i­lar en­try. New and up­dat­ed poli­cies un­der­score the lat­est reg­u­la­to­ry and leg­isla­tive push to fa­cil­i­tate biosim­i­lar prod­uct de­vel­op­ment and sub­se­quent adop­tion. This sup­port may fa­cil­i­tate a quick­er and larg­er mar­ket up­take for fu­ture gener­ic prod­ucts.

Com­pe­ti­tion in bio­phar­ma

Mul­ti­ple com­pa­nies are op­er­at­ing in over­lap­ping ther­a­peu­tic ar­eas and of­ten pur­su­ing sim­i­lar modal­i­ties. Biotechs will have to ex­am­ine their cap­i­tal al­lo­ca­tion and nar­row in on in­no­v­a­tive and dif­fer­en­ti­at­ed ap­proach­es. Out-year es­ti­mates of­ten fail to take in­to ac­count fu­ture com­pe­ti­tion, pric­ing in too much growth giv­en the cir­cum­stances.

While com­pe­ti­tion in the biotech space re­mains prob­lem­at­ic, there are some ben­e­fits. Da­ta from com­peti­tors could serve as a pos­i­tive cat­a­lyst in un­der­stud­ied ar­eas where mech­a­nisms are less val­i­dat­ed, and high­ly com­pet­i­tive en­vi­ron­ments may en­cour­age M&A as com­pa­nies con­sol­i­date. Hav­ing mul­ti­ple ef­fec­tive drugs for a giv­en in­di­ca­tion could be use­ful down the line for nov­el com­bi­na­tions, or de­ter­min­ing lines of ther­a­py.

M&A: In the shad­ow of the FTC law­suit 

The FTC’s un­ex­pect­ed law­suit to block Am­gen’s ac­qui­si­tion of Hori­zon Ther­a­peu­tics has had a no­tice­able chill­ing ef­fect on the M&A space. Fur­ther­more, the lack of vis­i­bil­i­ty in­to broad­er macro trends around mar­ket volatil­i­ty and cost of cap­i­tal is serv­ing as a de­ter­rent to M&A ac­tiv­i­ty. The per­ceived “safer” op­tion is en­gag­ing in col­lab­o­ra­tive deals — it mit­i­gates risk while si­mul­ta­ne­ous­ly sup­port­ing growth and in­no­va­tion.

Biotech un­der pres­sure 

Re­ces­sion­ary fears are fu­el­ing a risk-off en­vi­ron­ment, which is fur­ther ex­ac­er­bat­ed by head­winds, in­clud­ing the ex­pect­ed loss of COVID treat­ment rev­enue, patent cliffs, FTC deal scruti­ny, and the IRA. All of these place pres­sure on biotech as a whole.

How­ev­er, his­tor­i­cal da­ta sug­gests that biotech is able to with­stand both re­ces­sion­ary and in­fla­tion­ary pres­sures; giv­en their growth pro­file, they tend to re­cov­er faster than the S&P500. With in­fla­tion abat­ing and a soft land­ing look­ing more prob­a­ble than a full re­ces­sion, biotech is ex­pect­ed to grow in­to any eco­nom­ic turn­around.

Biotech mar­kets are in­di­cat­ing ear­ly signs of sta­bi­liza­tion, with the XBI hov­er­ing around ear­ly-year lev­els. In 2023, the IPO mar­ket has re­mained un­moved, but there is po­ten­tial for com­pa­nies with clin­i­cal as­sets to go pub­lic as pri­vate fund­ing has cooled off.

In­vestor sen­ti­ment in the sec­ond half of 2023 is pos­i­tive, with in­vestors sur­veyed by RBC Cap­i­tal Mar­kets’ ex­pect­ing biotech to out­per­form the broad­er mar­ket.

“With U.S. drug ap­provals and ac­cel­er­at­ed ap­provals on the rise, the FDA is demon­strat­ing an in­creas­ing flex­i­bil­i­ty for ear­li­er ap­provals in un­met need dis­eases.” – Bri­an Abra­hams, M.D., Head of Biotech­nol­o­gy Re­search, RBC Cap­i­tal Mar­kets

Gain per­spec­tives from the cut­ting edge of biotech to help you lead to­day and de­fine to­mor­row. Ex­plore RBC’s Pathfind­ers in Bio­phar­ma se­ries.