Can Biotech In­no­va­tion With­stand Dis­rup­tion?

From the FDA over­haul­ing the ac­cel­er­at­ed ap­proval process to the wide­spread im­ple­men­ta­tion of ar­ti­fi­cial in­tel­li­gence across the in­dus­try, biotech is ex­pe­ri­enc­ing dis­rup­tive forces across nu­mer­ous fronts. Here are some of the key dis­rupters to watch lead­ing in­to 2024.

Key Points:

  • Sev­er­al man­u­fac­tur­ing-re­lat­ed dis­rup­tions for high-pro­file drugs have left the bio­phar­ma in­dus­try scram­bling.
  • The long-term im­pact of the In­fla­tion Re­duc­tion Act (IRA) re­mains to be seen and there is the po­ten­tial for even more puni­tive pro­vi­sions on the hori­zon.
  • Con­gress moves to in­crease the FDA’s en­force­ment pow­ers for the ac­cel­er­at­ed ap­proval process which has po­ten­tial to af­fect the in­dus­try in nu­mer­ous ways.
  • Cli­mate change pos­es both chal­lenges and op­por­tu­ni­ties for the biotech in­dus­try at large.

  1. Man­u­fac­tur­ing qual­i­ty and ca­pac­i­ty

In an era of stag­ger­ing biotech in­no­va­tion and in­creas­ing­ly so­phis­ti­cat­ed ther­a­pies, com­pa­nies are run­ning in­to man­u­fac­tur­ing is­sues. There have been sev­er­al man­u­fac­tur­ing-re­lat­ed dis­rup­tions for high-pro­file drug ap­provals and launch­es, which has left the bio­phar­ma in­dus­try scram­bling to ad­dress these op­er­a­tional fail­ures.

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How­ev­er, as process com­plex­i­ty is in­creas­ing due to next-gen­er­a­tion drugs, third-par­ty man­u­fac­tur­ers are be­com­ing spread-thin. CAR-T, ra­di­oli­gand, and gene ther­a­pies are key ar­eas where man­u­fac­tur­ing set­backs have al­ready been not­ed; their pro­duc­tion time­line and QC will be close­ly watched in the sec­ond half of 2023.

  1. The long-term con­se­quences of the IRA

The In­fla­tion Re­duc­tion Act in­cludes three note­wor­thy pro­vi­sions that have sent shock­waves through the bio­phar­ma sec­tor:

  • Up to 20 drugs per year will have manda­to­ry dis­counts of 25%, 35%, and 60% af­ter 9, 12, and 16 years on the mar­ket, with small mol­e­cules el­i­gi­ble for ne­go­ti­a­tion af­ter 9 years and bi­o­log­ics af­ter 13.
  • Medicare price in­creas­es are capped to the rate of in­fla­tion.
  • Com­pa­nies will be re­spon­si­ble for a 20% re­bate for pa­tients in the cat­a­stroph­ic cov­er­age phase.

The long-term im­pact of these pro­vi­sions re­mains to be seen, par­tic­u­lar­ly giv­en that there could be more puni­tive health­care re­form ahead. Some mem­bers of Con­gress are ad­vo­cat­ing for fur­ther ex­pan­sion of the IRA to in­clude fifty drugs and com­mer­cial plans, along with cost ef­fec­tive­ness re­views. How­ev­er, Con­gress has his­tor­i­cal­ly strug­gled with pass­ing re­form, which can mit­i­gate the risk some­what.

  1. In­creas­ing scruti­ny for ac­cel­er­at­ed ap­provals

The ac­cel­er­at­ed ap­proval process is un­der pub­lic scruti­ny in 2023 and fac­ing re­form. Con­gress moved to in­crease en­force­ment pow­ers and tight­en loose ends by sign­ing in­to law the FDO­RA bill, which al­lows the FDA to re­quire con­fir­ma­to­ry tri­als to be un­der­way be­fore AA and the au­thor­i­ty to with­draw the drug from the mar­ket if these tri­als fail. The FDO­RA bill in­cludes nu­mer­ous oth­er re­quire­ments that are aimed at ad­dress­ing pub­lic con­cerns and restor­ing faith in this process. How­ev­er, while it is in the best in­ter­est of all stake­hold­ers in­volved to re­store the in­tegri­ty of AA, these mod­i­fi­ca­tions to the process could in­crease de­vel­op­ment and rev­enue tail risk.

  1. Ris­ing in­ter­est rates

Ris­ing in­ter­est rates may in­crease the cost of cap­i­tal, which is par­tic­u­lar­ly dam­ag­ing for ear­ly-stage biotechs that need to raise mon­ey in or­der to con­tin­ue drug re­search and de­vel­op­ment. While a full out re­ces­sion is look­ing less like­ly giv­en strong stock per­for­mance, in­vestors are still wary of riski­er ven­tures. His­tor­i­cal analy­sis pro­vides some com­fort giv­en that drug de­mand tends to be in­elas­tic, the in­dus­try has the pow­er to set prices (though this may have been weak­ened some­what by the IRA), and com­pa­nies gen­er­al­ly have less re­liance on raw ma­te­ri­als and bet­ter mar­gins than oth­er in­dus­tries. While it has been a tough mar­ket en­vi­ron­ment for ear­ly-stage biotech’s, con­vinc­ing clin­i­cal da­ta should still be enough to gain fi­nanc­ing.

  1. In vi­vo gene edit­ing

In vi­vo gene edit­ing is a ground­break­ing tech­nol­o­gy that has the promise to treat the root cause of many ge­net­ic dis­eases by di­rect­ly tar­get­ing and cor­rect­ing DNA mu­ta­tions, and the scope of this tech­nol­o­gy that al­lows for pre­cise DNA mod­i­fi­ca­tion has the po­ten­tial to ad­dress can­cer and in­fec­tious dis­eases as well with high dura­bil­i­ty and ef­fi­cien­cy. The dis­rup­tive na­ture of in vi­vo gene edit­ing stems not on­ly from its ap­plic­a­bil­i­ty to nu­mer­ous in­di­ca­tions, but al­so its po­ten­tial to sup­plant ex­ist­ing ther­a­peu­tic ap­proach­es, in­clud­ing gene ther­a­py, an­ti­sense knock­down, and even small mol­e­cule drugs.

In Q1 of 2023, the FDA cleared its first IND for an in vi­vo CRISPR/Cas9 treat­ment — a note­wor­thy mile­stone. Fur­ther pro­gres­sion is ex­pect­ed as oth­er com­pa­nies are ex­plor­ing us­ing in vi­vo gene edit­ing to tar­get in­di­ca­tions be­yond the liv­er. An ad­di­tion­al de­vel­op­ment is the dis­cov­ery out of CRISPR pi­o­neer Pro­fes­sor Feng Zhang’s lab, which sug­gests that eu­kary­otes may al­so car­ry gene edit­ing en­zymes, which could have high­er speci­fici­ty rel­a­tive to bac­te­ria-de­rived CRISPR sys­tems. How­ev­er, long-term safe­ty pro­files have yet to be char­ac­ter­ized, so while this tool re­mains an ex­cit­ing area of in­ter­est, there is no rea­son yet to piv­ot away from ex­ist­ing and es­tab­lished tech­nolo­gies.

  1. The age of AI

Ar­ti­fi­cial In­tel­li­gence has the po­ten­tial to rev­o­lu­tion­ize how tech­nol­o­gy is uti­lized in the biotech sec­tor, and many lead­ing com­pa­nies be­lieve AI could en­hance mol­e­cule de­sign, en­able iden­ti­fi­ca­tion of new tar­gets, fa­cil­i­tate clin­i­cal tri­al con­duct, and im­prove both R&D and SG&A ex­pens­es. Some com­pa­nies pre­dict that the more da­ta in­ten­sive com­po­nents of biotech could be dra­mat­i­cal­ly al­tered by the im­ple­men­ta­tion of AI; it may soon be pos­si­ble to re­duce re­search pro­cess­ing times from weeks to hours us­ing this tool and in­crease tar­get iden­ti­fi­ca­tion by 20-30%.

How­ev­er, AI will have to be par­tic­u­lar­ly so­phis­ti­cat­ed to rep­re­sent an ad­van­tage over cur­rent ap­proach­es, giv­en that com­pu­ta­tion­al bi­ol­o­gy and high–through­put da­ta analy­sis is al­ready read­i­ly uti­lized in bi­o­log­i­cal sci­ences.

“With AI, it may soon be pos­si­ble to re­duce re­search pro­cess­ing times from weeks to hours and in­crease tar­get iden­ti­fi­ca­tion by 20-30%.” – Bri­an Abra­hams, M.D., Head of Biotech­nol­o­gy Re­search, RBC Cap­i­tal Mar­kets

  1. Cli­mate change

Ever warm­ing tem­per­a­tures are bring­ing trop­i­cal dis­eases fur­ther north, with Flori­da and Texas ex­pe­ri­enc­ing an en­dem­ic Malar­ia out­break, which, ac­cord­ing to the CDC, is the first time this mos­qui­to-borne dis­ease has been lo­cal­ly ac­quired in the U.S. since 2003. Ex­perts are pre­dict­ing that warm­ing glob­al tem­per­a­tures will pre­cip­i­tate a no­table in­crease in mos­qui­to-borne dis­ease cas­es in pre­vi­ous­ly un­af­fect­ed ge­o­graph­ic lo­ca­tions.

The emer­gence of Ne­glect­ed Trop­i­cal Dis­eases in the Unit­ed States is not the on­ly ca­su­al­ty of cli­mate change; an al­ready stressed biotech pro­duc­tion line is like­ly to ex­pe­ri­ence fur­ther pres­sure as se­vere weath­er pat­terns put in­fra­struc­ture at risk. In­fra­struc­ture chal­lenges due to cli­mate change have al­ready been not­ed, with the de­struc­tion of Pfiz­er’s North Car­oli­na man­u­fac­tur­ing fa­cil­i­ty in the wake of an EF3 tor­na­do. Even more ba­sic re­search is un­der threat as Biotech’s Boston hub is at risk of flood­ing, with wa­ter lev­els pre­dict­ed to rise 1-2 feet by 2050.

The im­pact to bio­phar­ma in­fra­struc­ture can be mit­i­gat­ed by pre­emp­tive plan­ning and man­age­ment in at-risk ar­eas; en­sur­ing that lo­cal fa­cil­i­ty struc­tures are re­silient and ro­bust sup­ply chains are es­tab­lished will go a long way to­wards di­min­ish­ing the ef­fect of cli­mate change on the biotech sec­tor.


In­form your de­ci­sion mak­ing with in­sights and analy­sis on the change dri­vers im­pact­ing biotech. Learn more.

Author

Brian Abrahams

M.D., Head of Biotechnology Research, RBC Capital Markets