Within the past 12 months (as of this writing), the Dow Jones Industrial Average has experienced its largest daily point gain (+1,068.25; 12/26/18) along with its fourth largest loss (-800.49; 8/14/19). Such volatility can impact the biopharmaceutical industry, as it costs significant sums just to get a venture going and $1 billion more to actually bring a new therapeutic to market. So, how might we assess how biopharma is doing? Through Oct. 11, 2019, there have been 39 biopharmaceutical industry IPOs. And though we are likely to surpass the number of IPOs for biopharma in 2017 (40), it is doubtful we will beat the 56 IPOs garnered in 2018. It makes you wonder what might be on tap for biopharma in 2020, especially as we head into a U.S. presidential election where Democrats and Republicans have previously demonstrated a penchant for bipartisanship when it comes to questioning the practices of the biopharma industry. Remember the seven executives who testified during the Senate hearing (Drug Pricing in America: A Prescription for Change, Part II, Tues., Feb. 26, 2019)? Though they represented our industry admirably and professionally, it was obvious that most participating senators had greater interest in generating sensational soundbites as opposed to actual solutions. As politics, finance and biopharma seem forever intertwined, we sought the counsel of five biopharmaceutical industry financial experts toward helping you prepare for what to expect in 2020 – and beyond.
WHAT BIOPHARMA FINANCE TRENDS ARE YOU PAYING CLOSEST ATTENTION TO IN 2020, AND WHY?
HENRIJETTE RICHTER MANAGING PARTNER, SOFINNOVA PARTNERS
Since we are a Series A investor, one thing we often discuss and will continue to follow in 2020 are the trends around mega-rounds, especially for startups, because these deals put extra pressure on getting large exit value. Furthermore, there is an even stronger demand for experienced leadership that can effectively execute on an individual company’s strategic plan. This is also the reason that in most of these mega-rounds, we see either serial biotech CEOs with significant track records or very senior ex-pharma executives in the C-suite. Closely connected is the increasing difficulty that non-U.S. investors face when trying to invest in U.S. biotechs due to the regulations of the Committee on Foreign Investment in the United States (CFIUS). For example, some of the earlier mega-rounds were significantly sponsored by Chinese investors. However, we are now seeing a decline in the amount of money Chinese investors deploy in the U.S. In mid-2017, we saw more than $2 billion from Chinese investors go into U.S. biotechs. Two years later, this number is now closer to $750 million. As a result, we expect these mega-rounds will decrease in 2020. An outcrop of this falloff has been a growing interest from Chinese investors in the European biotech markets which, historically, have been undervalued. So far in 2019, Chinese investors have invested more than $400 million in European biotech companies, compared to less than $100 million in 2017. We see this as an opportunity for European biotechs.
WHAT BIOPHARMA DEAL STRUCTURES DO YOU ANTICIPATE GAINING POPULARITY IN 2020?
TERI LOXAM CFO, SQZ BIOTECHNOLOGIES
As equity raises come at higher and higher cost of capital as economic environments tighten, we may see alternative options becoming more popular as well as a resetting of valuations. We may observe biopharma CEOs and CFOs getting more creative, for example, by doing more out-licensing of ex-U.S. rights for pipeline candidates, more mergers and acquisitions due to the increasing scarcity of assets, and more reverse mergers into private companies. Innovation and developing products that truly add value to patients will continue to be paramount, especially in uncertain markets, and will drive companies to find ways to fund those innovations.
WHAT SHOULD BIOPHARMACEUTICAL EXECUTIVES BE PAYING CLOSE ATTENTION TO IN 2020?
ADAM KOPPEL, M.D., PH.D. MANAGING DIRECTOR OF LIFE SCIENCES, BAIN CAPITAL
The U.S. presidential election will almost certainly generate discourse around topics important to the life sciences industry. We’ve found that political rhetoric unfortunately leads to misperceptions of drug pricing rather than a focus on some of the truly innovative therapeutic solutions to unmet medical needs that are being developed and brought to market. Executives will likely be paying close attention to who the Democratic Party nominates and their rhetoric on drug pricing. The drug pricing issue may, in fact, be one of the very few where we will hear alignment among the major party candidates.
Perhaps this coming election season will be one where our industry can better frame the issue for perception’s sake and better manage the issue for reality’s sake. There are several new innovative therapies to medical problems that have had no solutions. We need to ensure that patients have access to these new therapeutics while investors and the companies that developed them are able to realize fair profits for taking the risk to develop and bring those products to market. On the other hand, we should strongly discourage radical price inflation on existing therapies that have been marketed for a long time and are not providing new value to society. Our industry has to drive growth through innovation and new product development, not with price inflation on existing products.
WHAT IMPACT WILL TRADE WAR ESCALATION BETWEEN THE U.S. AND CHINA HAVE ON BIOPHARMA IN 2020?
JOSEPH FERRA CFO, SYROS PHARMACEUTICALS
I am in the minority, but I see the trade war escalation as a political game of chess that will not result in permanent policy change. We are seeing an increase in nationalism in the West, but the reality is that economies are now inherently global, and that will be difficult to unwind. China and the U.S., more so than most other countries, rely on good economic conditions and low unemployment as a foundation to political and national success. While we are still likely to experience multiple iterations of the trade war narrative, and that uncertainty alone will have an effect on markets, I see it as a limited long-term risk.
WHAT COMPANIES ARE YOU PAYING ATTENTION TO, AND WHAT CAN BIOPHARMA LEARN FROM THEM?
KUSH PARMAR, M.D., PH.D. MANAGING PARTNER, 5AM VENTURES
The cell and gene therapy field has been incredibly dynamic for some time, and now we are on the verge of some important commercial launches of these never-seen-before medicines. So, I am paying attention to Novartis with its launch of a gene therapy for spinal muscular atrophy and Bluebird Bio with its launch of an impressive cell and gene therapy for beta thalassemia. These novel therapies are amazing achievements for medicine, and it will be important for the field to see these clinical breakthroughs translate into access for patients and some reasonable commercial traction. We are also continuing to keep a close eye on AI/machine learning (ML) companies in biotech. The biopharmaceutical industry is challenged by a consistent decline in R&D productivity year over year, and there is this sense that AI/ML applications toward drug discovery have the potential to improve, if not overhaul, the R&D process as we know it. Further, large pharma seems to be buying into the thesis as well, as companies like Pfizer, AstraZeneca, and Merck are inking target discovery and even joint venture agreements with early-stage AI/ML companies. We expect this to accelerate, especially as datasets continue to grow, and are excited about the potential synergistic effects. And lastly, in China, I think Wuxi is an absolute force, and I am interested to see where this company goes after its already meteoric rise in services and joint ventures — clearly it is very well-positioned to break any conventional barriers of biotech in China.
ARE WE ON OUR WAY TO A RECESSION AND, IF SO, HOW SHOULD BIOPHARMAS PREPARE?
HENRIJETTE RICHTER MANAGING PARTNER, SOFINNOVA PARTNERS
The growing concern of a potential near-term recession is, of course, something we discuss. This is something that would affect everyone — including investors in the biotech sector. With a European public market that is already suffering from very little liquidity, we need NASDAQ to be open and liquid. At Sofinnova, approximately half of our companies take the IPO path, so we would definitely like to see a healthy IPO market in the years to come. Additionally, we have our eyes on the constant discussion in the U.S. about drug prices as we believe this, combined with the upcoming U.S. election, will result in increased pressure on the healthcare system in 2020.
WHAT BIOPHARMA SECTOR DO YOU FIND MOST EXCITING AND EXPECT BIG THINGS FROM IN 2020?
TERI LOXAM CFO, SQZ BIOTECHNOLOGIES
We’re particularly excited about advances in the cell and gene therapy space. Cell therapy companies are breaking out of their traditional boundaries and pushing the limits on what was once thought impossible, driven by a better understanding of human biology and immunology. For example, while it was once thought that cell therapies were primarily suited to treating B-cell malignancies, we’re starting to see cell therapies being developed for solid-tumor indications, as well. On the gene therapy end, it’s exciting to see more data come out of companies with more creative approaches, expanding beyond the immune-protected space of ophthalmology. These therapies have the potential to transform the space, especially when it comes to rare disease. Additionally, the drumbeat has gotten louder on efficient manufacturing to lower the cost of goods.
WHAT GLOBAL FINANCE TRENDS ARE YOU WATCHING CLOSELY, AND HOW MIGHT THESE IMPACT BIOPHARMA IN THE NEAR FUTURE?
JOSEPH FERRA CFO, SYROS PHARMACEUTICALS
Brexit, trade wars, and continuing global and regional political unrest as a result of extremism are challenges that will continue to have a major impact on global finance trends. They all create substantial uncertainty that affects global markets and impacts biopharma. With increasing global uncertainty, investors become more risk averse. We are a high-growth and inherently high-risk sector, and time horizons associated with drug development are long. Growing uncertainty in the near term makes it hard for investors to focus on long-term value. We’ve seen this dynamic repeat itself many times — one recent example being the economic crisis of 2008, which resulted in a multiyear dearth of public market capital for cash-dependent biotech companies. Taking these lessons into account, and factoring in the current global trends, should remind us that access to the capital resources we rely upon so heavily as an industry should not be taken for granted. With that in mind, we need to be good stewards of capital resources, take advantage of tools that give us the most amount of flexibility, and make sure we are up to speed on alternative sources of capital.
ADAM KOPPEL, M.D., PH.D.
MANAGING DIRECTOR OF LIFE SCIENCES, BAIN CAPITAL
We believe that life science investing is more about analyzing the details of specific companies and understanding upcoming value-creation events than it is about global finance trends. That being said, there are a couple of prominent global finance trends that we do watch closely and consider in our investment process, particularly the interest rate environment and the state of the IPO financing market.
Low interest rate environments are generally constructive for higher-risk, innovation-based investment opportunities. Generalists and life science experts alike are more willing to place high-risk capital behind uncertain ideas with high-return profiles. Rising interest rates may reduce the number of investors looking at such ideas, since generalists have more options to invest in lower-risk ideas that could generate a reasonable return. One question to consider is whether truly low interest rates (even negative interest rates) may contribute to a change in the capital structure of life sciences companies, generally. This could lead CFOs to consider using more debt instead of equity to capitalize their companies.
The IPO financing market in life sciences has been robust since 2012. While this is well-appreciated, what is less certain is how long this market condition will hold and what signals could indicate a shift toward a less-open financing market. A more-selective IPO market may ultimately have a positive impact on our ecosystem. Fewer high-quality ideas receiving funding from more concentrated sources may better enable innovation to reach the market in an expeditious and impactful manner. The heated market has created situations where companies have become over-capitalized and over-priced early in their life cycle. This puts pressure on management teams to execute to perfection, while overhyping their stories. Slight imperfection can lead to dramatic changes in market capitalization and management reputation.
KUSH PARMAR, M.D., PH.D.
MANAGING PARTNER, 5AM VENTURES
The major finance trends we tend to watch can be bucketed into private and public finance. We have certainly noticed, participated in, and welcomed the substantial inflow of funds into private companies via several VCs with larger fund sizes, the entry of later-stage firms into earlier companies, and a few new funds. This access to capital can truly enable the conquest of otherwise insurmountable problems to discover breakthrough medicines, and generally good ideas will have no problems raising early-stage capital. This is great, and we will see companies taking on truly tough and worthy problems. But this general state of affairs also can lead to slightly less discipline, less entrepreneurial-minded teams like those that emerge out of leaner times. The record levels of private capital injection are fueling the steady flow of companies accessing and entering the public markets. Many of these are terrific and deserving companies, but not all, and some have raised private rounds at valuations that may be out of touch with public markets today. Public funds have generally seen outflows from the sector for much of this year, and the question is how that progresses or stabilizes going into 2020. While we are not very concerned about the so-called biotech IPO “window” closing shut, we are closely watching IPO investor sentiment as we head into a year of many domestic and geopolitical unknowns. So, the increase in funds on the private side is here to stay and will back great ideas and entrepreneurs for a good while — but the relationship to public markets will likely be refined heading into next year. Overall, I feel if companies are focusing on transformative science and on execution toward de-risking these medicines thoughtfully, they will be able to access capital.