Snow, Skiing, And My 2018 Outlook For Biotech

Posted January 4th, 2018 in Uncategorized | 1 Comment

As 2018 begins, and we prepare for the biopharma sector’s annual kickoff in San Francisco next week, my thoughts are focused on the snow. I’m literally watching bombogenesis unleash a blizzard white-out in Boston right now. As a winter sports enthusiast, I really love a good snow watch.

Last year I offered up some crystal ball predictions for 2017 on a bunch of topics, and I got a few of them right (and a couple wrong). This year, in light of the weather, I’m going to share my snow-infused thoughts on biotech’s 2018 outlook with a few things to be both excited and worried about for the year and beyond. And with a strong reference to skiing and the mountains, I just can’t help myself…

Reasons To Be Excited About 2018

  1. The pace of innovation today is truly breathtaking and likely to continue. The biopharma sector is discovering and developing new transformative therapies for patients across a huge range of diseases; although we saw proportionately fewer first-in-class agents get approved by the FDA in 2017 than prior years, many of these new drugs are fantastic additions to healthcare. There’s also a steep and deep pipeline of new innovations emerging in R&D, with both big companies and small startups blazing fresh tracks with unprecedented mechanisms and novel medicines. Many are reaching the summit of actually curing diseases, rather than simply treating them: today’s latest example is the treatment of severe scleroderma by HSC transplant, just published in NEJM, with 79% event-free survival after four years. But it’s not all about just the new-fangled modalities and cell therapies, even new riffs on conventional small molecule drugs are exploding: NCEs that bind RNA, or allosteric regulator sites, or induce the targeted degradation of proteins. Looking beyond the AI hype, computational technologies, like machine learning and quantitative free energy perturbations, are contributing in new and important ways to drug discovery. Or think about next generation protein therapies with multiple effector functionalities, tissue-specific activation, inducible control of their actions. Across all the major modalities (NCEs, biologics, RNA/oligos, gene therapy/editing, etc), it appears that nothing is too off-piste to explore today if it promises to have a big impact on patients. These meaningful innovations are truly the heart of our sector; it’s a great adrenaline-filled time to be in biotech.
  2. The venture funding blizzard is likely to continue (in a good way). Last year was one huge powder day for venture capital funding – reaching north of $16B in global private biotech financings, according to Pitchbook data. This week alone, in line with the ongoing bombogenesis, more than $700M in venture funding will be announced, including BioNTech’s $270M, Expansion’s $55M, and Scholar Rock’s $47M. We also announced the launch of GenerationBio today, a bold new gene therapy player. I’m very bullish on a strong private financing climate in 2018, as many venture firms have reloaded with fresh funds. There’s a perfect storm of interested investors ready to step-up in 2018: well-funded VCs are being augmented by a triad of corporate investors eager to participate in “early stage” innovation, public market crossover investors seeking alpha by getting in before an IPO (especially since returns on the large end of biotech are limited right now), and unconventional investors keen to put long-term patient capital to work behind innovation (e.g., Softbank Vision Fund, Baillie Gifford, Temasek, etc). While I’m optimistic on another big year, I’d be positively surprised if we broke 2017’s huge accumulation of capital ($16B). As we found out last winter season in Boston, it’s simply hard to follow a record-breaking year: 2015 had nearly 109 inches of snowfall, the most ever recorded here, while 2016 got only 41 inches (below average).
  3. M&A will likely provide renewed lift to the sector in 2018. The speed and capacity of chairlifts, trams, and gondolas to cart passengers uphill is a key metric of any ski resort, as these are critical for achieving the vertical feet a great ski day requires. And so goes M&A in biotech: strong M&A is critical in the sector if we are to achieve new heights in the overall market. For the past five years, we’ve seen significant M&A activity acting as a lift for the sector. Investor expectations of M&A have provided a “Pharma put” underpinning the stock prices of many SMID-cap’s. 2017 witnessed a decline in biotech M&A from its lofty peak in 2015 (a failed annual prediction of mine), though still well-above historic ranges for R&D-stage M&A activity. With the passing of corporate tax reform and the availability of offshore cash, as well as scarcity of unencumbered clinical assets, I’m going to double-down on last year’s prediction and affirm again that we should see more M&A activity from the larger players. Further, with continued revenue and pricing pressure, more product launches will be required to match their long-term growth needs – launches that over the next 5+ years will require much more external-sourcing of R&D and thus more M&A (see thesis here). This M&A activity, both of private and public SMID cap biotechs, will lift the markets to higher vertical during 2018, and help recycle investor capital into new stories.
  4. IPOs will likely be strong during the first half of 2018, with anyone’s guess thereafter. We should see another 30+ IPOs this year based on the backlog of well-financed private biotech’s with premium valuations – the next step in their growth has to be public offerings. There’s a bumper crop of highly-valued private companies in biotech today. But I suspect this year will be much like a typical ski day in New England: get your runs in during the morning when the snow is good, because it could all be scraped off by the afternoon. By waiting for it to warm up later in the year, potential offerings may find un-skiable terrain. With the midterm elections and a likely Democrat landslide in Congress, and elevated rhetoric from the Sanders’ anti-Pharma wing of the party, I expect drug pricing concerns and Beltway politics to create uncertainty and anxiety amongst public biotech investors – much like we saw in the fall of 2016 when the $NBI dropped 15-20% and no IPOs went out above the range. Not to mention added potential volatility from things like North Korea and Trump’s twitter feed. All in all, I expect we’ll have a strong first half of new offerings, with a burst of IPOs in Jan/Feb and then again from May through July. But the good snow could be off the slopes in the latter part of the year, though hopefully I’m wrong.

A Few Worries Keep Me Up At Night

  1. Traditional catalysts behind biotech’s bull run are losing their edge. And dull edges mean the sector can’t ski with confidence on the terrain, potentially impairing the market’s sentiment towards biotech overall. In the winter of 2009, the NASDAQ Biotech Index ($NBI) dropped to a low around 615. At the start of 2018, it’s above 3000, or nearly 5x growth. That market appreciation was largely driven by the massive revenue (and cash flow) increases of the large-cap biotech stocks: Gilead’s revenue went from $7B in 2009 to over $30B in 2016 and Celgene’s went from $2.7B to over $11B, just to name two. Similar or greater trajectories or product stories existed for many other large cap biotechs: Regeneron, Biogen, BioMarin, Novo, Vertex, etc. These large players were the catalysts that drove fund flows into the sector and opened up the IPO spigot in 2013. They also used their new-found cash flows to become some of the most aggressive partners and deal-makers in the business – driving M&A activity and valuations. But their edge is being worn down of late, and, as any skier knows, worn edges hurt your confidence. Celgene missed revenue forecasts in the fall. Gilead’s wrestling with the terminal nature of its curative HCV franchise. Others have also struggled. Across the board, pricing increases have been more muted, limiting revenue growth, and competitive forces are increasing. Many analysts are down on the prospects for large cap biotech: the title of Leerink analyst Geoffrey Porges’ 2018 Outlook sums it up: “No End in Sight As Pressure Mounts”. Without strong large cap stories – with confident edges – I worry we don’t have the big-name catalysts to help support the vitality of the broader sector.
  2. The private venture sector is potentially out over its ski’s regarding capitalization rates. More and more funding is going into roughly the same pool of private companies, raising round sizes significantly of late. This is putting significant upward pressure on valuations. This dynamic works when the public markets are healthy and receptive to premium offerings, which it largely has been for the past five years. Crossover investors get into great stories early, and then help support those debuts at IPO and beyond. This has been a win-win for the sector as a whole, and will likely continue to be. But elevated post-money valuations, especially in early stage private stories, can actual reduce attractive optionality for emerging biotech companies: although they have cash to fund more things (though maybe not better things), they often get priced out of the “normal” band of attractive M&A activity given their valuations, and become increasingly reliant on downstream investors willing to provide lower cost capital and invest at higher values. But without those later stage growth capital partners (public or private), aspiring companies (especially the “near” unicorns) can get stuck with few alternatives other than big down-rounds or ones with punitive preferred terms. Being out over your ski’s leads to bad things, and falling down this black diamond valuation slope isn’t fun – especially for founders and early stage investors. Optimizing capitalization rates is only really known in hindsight, but backing great science led by great teams with adequate although capital efficient resourcing is the only prospective approach that works across market cycles.
  3. Crowded terrain makes for challenging markets. Great ski reports often bring out the crowds to the mountain, but lift lines and competition for powder on the trails often make for unhappy skiers at the end of the day. Several spaces in biotech feel like crowded ski slopes today. After the initial reports of impressive clinical activity in harnessing the immune response against cancer in 8+ years ago, the I/O space has exploded with interest and brought the crowds in. Over 2000 active clinical programs in this area alone, with 164 PD-1/L1 checkpoint mAbs in development, according to the Cancer Research Institute. That’s a huge amount of “me-too” activity. The rise of combinatorial benefits in the clinic only further increases the pressure on everyone to develop their own checkpoint in order to offer the full combination product. Competition for patients, investigators, and sites is incredibly fierce – and is very costly. Small biotechs, even well capitalized ones, will find it hard to compete with the expansive clinical and post-marketing programs at Merck, BMS, Roche, Novartis, Pfizer, etc in this arena. While we have a stable of I/O-focused programs in our portfolio at Atlas, the bar is incredibly high for starting new companies in this space: few ideas are truly novel, so fresh tracks are hard to come by, and crowds can move in fast. It’s nice to see some new terrain being opened up to the public in fields like neuroscience, with Denali’s debut as a public company; there are lots of advances in CNS and elsewhere that warrant some of the attention that’s currently being wasted chasing the same trails in I/O.
  4. People. People. People. Where will we find them all? A great day on the mountain is often about the people you ski with, and biotech is no different. Our success as early stage investors depends entirely on who we “ski with” (figuratively) in our portfolio: the entrepreneurs, executives, scientists, founders, advisors, co-investors, and board members, to name a few. People are by far the most important ingredient in all startups, but particularly scientifically-grounded ones: great science attracts great people, and great people gravitate to great science. But it’s fair to say finding, attracting, and retaining great people is the primary governing constraint on the early stage venture creation business model. We are constantly searching for new inspiring leaders to join us, and recycling those in our network as much as possible. Great people also help build distinctive cultures, critical to biotech success. Access to the next generation of talent is also my #1 longer-term worry about the biotech sector. Where will all the future C-level executives come from? Who is training the next generation of hands-on drug discovery leaders if everything is outsourced to Asia? What does talent acquisition look like in the gig economy that we find biotech entering? With endless headcount changes in Pharma, and hyper-specialization, does anyone truly learn to lead programs from inception to market? Will Pharma wake up and change their culture (or just their compensation models) to make recruiting more challenging for us in startup biotech? Or will biotech get hit with a market cycle swoon, scaring off folks from the “risky” startup world? By analogy, New England was recently hit with an arctic blast making the ski conditions unbearable for all but the nuttiest skiers (like me); it was sad to see so few people out enjoying the mountain, rightfully frightened off by the temperatures. But if the biotech sector faces an arctic blast relative to the temperate life of Pharma, recruiting talent will be tougher. Competing financially against Pharma’s rich packages is already hard to do. But hopefully the charming beauty of the biotech mountains and the excitement of conquering them, along with the thrill of entrepreneurship, will continue to win over hearts and minds. And anyone who wants to ski with us, literally or figuratively, should reach out!

That’s a wrap on my outlook for 2018. Now off to shovel some snow. See (many of) you in San Francisco.

The post Snow, Skiing, And My 2018 Outlook For Biotech appeared first on LifeSciVC.


Report Card For 2017: My Crystal Ball Predictions For Biotech

Posted December 22nd, 2017 in Biotech financing, Capital markets, Exits IPOs M&As, Pharma industry | Leave a comment

Heading into the winter holidays always brings out festive reflections of the past year. Twelve months ago, we were thrilled to say goodbye to 2016 and excited to embrace 2017’s promise.  And in large part, the past year has delivered nicely, with more than a few things to celebrate: the NASDAQ Biotech Index is up nearly 20%, Kite got bought for $12B by Gilead, Denali went public in the stratosphere, and investors have filled their warchests with plenty of new funds.

Back in January 2017, I kicked off the year with a set of predictions, in a piece titled “Crystal Ball Gazing: Biotech Predictions for 2017.”

Today I’m holding myself accountable and providing a (self-graded) report card of how right those gazes into the future were.

Behind each of these six areas, I offered up a number of specific predictions about the year.  Here’s a summary, with grades for the accuracy of my predictions (not grades for industry performance).

IPOs/Public Markets. Grade: A 

We’ve witnessed over 37 VC-backed Biotech IPOs in 2017, nailing my prediction that we’ll see “more than 30 life science IPOs”. The markets were clearly very receptive to emerging biotech stories, and 2017 ranks in the top quartile by IPO volume over the 40-year history of the biotech industry.  Intarcia and Moderna, two of biotech’s private unicorns, didn’t go public in 2017, which I thought might occur; but we did see another unicorn, Denali, explode onto the markets with a near $2B valuation.

We have continued to see dispersion in the post-offering performance in biotech: as of yesterday morning, only 40.9% of the ~200 biotech IPOs between 2013-2016 remained above their offer price – in line with my prediction of ~40%. Unsurprisingly, this reflects the historic norms around the gravity of the small cap biotech markets: roughly three of five offerings go underwater in the years immediately following an IPO, with a small percentage of companies showing massive outperformance. Of the 2017 IPO class, still very young,  60% of the companies are still above their offer price, but I expect further dispersion in performance over the next few years: by 2019-2020, I’d be surprised if more than 40% of these new issuances were above their IPO marks. For more on the concept of dispersion, check out this 2016 post.

Reverse merger activity has been very strong: I predicted at least 10 reverse public offerings, and by my count we’ve seen over a dozen (here for more).  In fact, we had two of our portfolio companies go public via reverses, including MiRagen (NASDAQ:MGEN) and Synlogic (NASDAQ:SYBX). These are likely to continue as more companies in the 2013-2016 IPO cohort face product failures and become “shells” available for reverses.

M&A.  Grade: C

Biopharma M&A activity certainly wasn’t on fire this year, and far less active than I had predicted (and hoped). While Atlas was fortunate to have a few acquisitions in our portfolio (here, here), my statement that “M&A will continue to drive liquidity in biotech venture” didn’t really manifest into reality across the industry at large. Private VC-backed M&A likely fell well short of the $10B target I hoped for (more in the ~$8B or so range).

That said, inclusive of commercial-stage (non-VC) private biopharma acquisitions, the aggregate number is closer to $13B. And alternative cuts of the industry’s M&A data paint a less moribund picture: for instance, R&D-stage M&A of publics and privates wasn’t actually that bad in 2017 (in line with both 2016 and 2014), but nowhere near what it was in the boom year of 2015.

My crystal ball also predicted a pending flurry of public acquisitions, thinking that at least five M&A deals would ring the bell above $5B. I even listed possible targets like Incyte, Alexion, BioMarin, Tesaro, and Clovis. Unfortunately for my report card, all of those remain independent, and to my knowledge there were only three acquisitions greater than $5B: Ariad, Actelion, and Kite. Hopefully this will change in 2018 and build off the momentum of this morning’s acquisition of Ignyta by Roche for $1.7B.

But in summary, I largely missed on these M&A predictions. With grade inflation, and alternative ways of cutting the data, I gave myself a “C” on M&A.

VC Funding/Startups.  Grade: A+

2017 was a blowout year for venture capital funding into biopharma startups, with over $12B of private fundraising coming together, according to Pitchbook’s latest data. This performance certainly checks the box of my optimistic “over $7B” prediction.

As I’ve described before, this flow of funding isn’t about spreading the capital around to more startups though – about 450 companies were financed last year, largely in line with the long term averages (for more commentary see “boom or bubble”).  Further, Boston and San Francisco continue to get the lion’s share of this capital, further consolidating around those two core clusters (here).

Pace of startup creation is still largely flat, as predicted.  According to Pitchbook data, for the past five years, roughly 35-45 new startups get their “first financings” each quarter, and 2017 was no different. While numbers of financings were similar, there was a dramatic uptick in early stage financing dollars. Of note, this is increasing the capitalization per company, not dramatically changing the number of new startups: essentially more funding into a limited number of players.

FDA.  Grade: A

As was widely lamented, 2016 was a light year for new drug approvals. Back in January 2017, I predicted that this “macro biomarker” of the industry would rebound with a “sizeable uptick” and we’d see “more than 30 new medicines”.  That has for sure been the case: the FDA’s CDER division has approved 45 new drugs as of today, and CBER also approved several highly innovative new cell and gene therapies, including Kymriah, Yescarta, and Luxturna. It does appear, however, that more FDA approvals this year were to “precedented” drug targets rather than addressing first-in-class new mechanisms (here), reflecting the increasingly competitive nature of the industry against proven targets.

Fortunately, the FDA has also not dropped its standards on efficacy, which was a legitimate worry given some of the rumblings from the Trump administration early in 2017 (here, here, here).  Scott Gottlieb’s appointment and subsequent leadership has been a resounding positive for the agency.

Industry R&D.  Grade: B+

I had several predictions for industry R&D activity last year but only got the last one partially right.

Drug R&D has, of course, remained hard and there’s been no lack of unexpected clinical blow-ups (1H2017’s failures covered here): for example, Celgene’s Phase III failure of mongerson, Axovant’s Alzheimer’s miss (specifically called out in Jan 2017), the Mystic whiff from AstraZeneca, Otonomy’s hearing failure, Inotek’s tradbodenoson, Dimension’s hemophilia B gene therapy, Ophthotech’s Fovista’s third blowup, Cempra’s antibiotic disaster, and many others.  Lots of shareholder value was destroyed by these blow-ups. These negative clinical surprises are the norm in our industry, much in the same way as positive data surprises.

I also discussed the I/O explosion that’s continuing to consume the industry, expecting more than 1000 trials to be open related to the PD1-axis in 2017, which is indeed the case (up 20% or so from 2016). This was undoubtedly a sandbagger’s prediction reading it in hindsight – the world would have had to flip on its head for this trial explosion not to occur in 2017.

But I also speculated that there’d be more creative deal-making between the PD “have’s” and the “have-not’s” – and this hasn’t really happened with the expected enthusiasm. Where are the consortia and low-cost PD1 approaches that would change the playing field, directing value to the combination products rather than PD1 foundation? Everyone continues to think they need their own PD1 agent, which is unfortunate – and for this reason I give myself a B+ for failing to appreciate the never-ending power of the status quo as a force of inertia.

Drug Pricing.  Grade: A

While the drug pricing issue was expected to be a source of continued volatility in the sector, I rightly predicted that “nothing dramatic is likely to come out of Washington in 2017 on the topic.” Despite intermittent tweets and such, no legislation regarding the pricing of innovator drugs made traction. Beyond this topic, the noise out of Washington regarding the pharma business was largely positive throughout the year: for instance, Gottlieb’s support for more generic manufacturers helps on the competitive issue around irresponsible pricing increases of old drugs. In addition, the recently passed corporate tax reform should benefit the broader Pharma industry as offshore cash and profit repatriation has been an important issue.

That’s my Report Card on the 2017 predictions.  Other than missing on M&A, largely “on the money” with regards to the major trends in the industry this past year.

So what are my thoughts for 2018?  Well, let’s leave that for next year, and turn off for the holidays.  Best wishes to all.