Crystal Ball Gazing: Biotech Predictions for 2017

Posted January 5th, 2017 in Biotech financing, Business Development, Capital markets, Pharma industry

Good riddance to 2016, and a warm embrace to 2017 – or so is the sentiment of most biotech investors as they head into the 35th annual JPM Healthcare Conference. Many have bemoaned last year as an abysmal one for biotech (here, here), and it certainly was tough for the public markets.

But while it had its challenges, 2016 was a strong year by many metrics for those of us in the biopharma venture ecosystem.

  • Biotech venture funding likely topped $7B in the US alone – a marker met only met one other time in biotech history (2015!), according to PwC MoneyTree. Approximately 500 private biotech companies successfully fundraised last year, in line with the past decade.
  • We witnessed an above-average number of biotech IPOs in 2016, including several exciting preclinical companies in the gene editing space ($NTLA, $EDIT, $CRSP). Depending on who and how you count, over two dozen young biotech completed IPOs – making it the 5th or 6th best year for number of IPOs since 1995 (here).
  • Pharma continued buying aggressively in 2016, with many significant private M&A deals closing, including Acerta, Afferent, Selexys, StemCentryx, and Tensha, among others. Atlas also had a strong year on this front, with solid deals at Nimbus with Gilead and Padlock with BMS.

But, stating the obvious, 2016 wasn’t all “puppies and rainbows” though.

  • The NASDAQ Biotech Index got hammered in 2016 – but mostly due to the market melting in January 2016. Since mid-Feb 2016, the biotech stock markets ended flat. And given the multi-year run-up, the NASDAQ Biotech Index is still up 160+% over past five years (vs 75% for S&P) – massive outperformance despite giving back 30% plus since its peak in July 2015.
  • FDA product approvals, often seen as a bellwether for sector health, were way down at just 22 new medical entities. Although well off the boom years of 2014 and 2015, we did see some innovative new medicines reach the market, such as the RNA splice corrector Spinraza (nusinersen) for SMA, Ocaliva (obeticholic acid) for liver disease, and Rubraca (rucaparib) for ovarian cancer, among others. The FDA’s John Jenkins did a farewell review of 2016 that is worth reading (here). And many of these new medicines were discovered by small and mid-sized biotech firms (here), which is good validation of the external collaborative R&D model emerging in the industry.

But enough with the rear-view mirror; it’s more fun to move on to crystal ball gazing for 2017.

Others have already shared their thoughts; Adam Feuerstein had 17 Thoughts on the subject worth reading, and Luke Timmerman put a few hot areas in his sights.

I’ve got a dozen or so biotech predictions for 2017, focused mostly on the venture side of the ecosystem. Having just come out of more than a dozen compensation committee calls, I’m going to use the SMART technique (specific, measurable, achievable, realistic, and time-based) for formulating these, so that my predictive capabilities can be held to account in January 2018.

So here’s the list:

We’ll see more than 30 life science IPOs on the NASDAQ in 2017.  Most of these will be biopharma companies, and many of them will be early stage companies whose lead programs are still pre-Proof-of-concept in the clinic. I expect a bolus of IPO activity in the winter following #JPM17, a spike in 2Q, and a strong second half after labor day driven by a wave of young companies currently advancing into the clinic. Recent filings include Jounce, Braeburn, ObsEva SA, and BeyondSpring (here), and there are a good number of prior S-1 filings in the queue. I also think it’s likely that both of biotech’s big private unicorns, Moderna and Intarcia, will go public in 2017 if positive market conditions prevail (if only just to remove the likely large liquidation preferences on top of those management teams).

The dispersion in trading performance of the 160+ IPO cohort of 2013-2016 will continue: by end of 2017, less than 40% of these offerings will be trading above their IPO prices. For context, back in September 2016, 43% were above their IPO prices (here). Over the course of 2017, I expect the challenges of drug development to take its toll on a few more of these companies and push that metric below 40%. That said, many of the winners will be significantly higher (100%+ gains), as their programs advance favorably. The underperformers will struggle to raise money, and see their stocks get clobbered. Although obvious to most readers, it’s worth mentioning that biotech post-IPO stock performance is both of function of R&D pipeline progress (which is hard, and failure is a common occurrence) and overall sentiment toward small cap companies (e.g., rising/sinking tides and fund flows). I anticipate the latter will be positive or neutral in 2017, so the former will be the big driver of performance for these recent biotech offerings.

Lastly, a number of these underperformers are now just public shells with NASDAQ stock tickers, with or without cash. Many of these will run strategic processes for merger partners. I expect at least 10 reverse mergers to occur in 2017, which will add to the number of private biotech’s that get public.

M&A will continue to drive liquidity in biotech venture with over $10B in private acquisitions (upfront and milestones) by year end. In 2015 and 2016, we saw over $10B in private M&A deal value, and I expect this heavy volume of activity to continue into 2017. Innovative early stage private companies will be able to demand a premium as big biopharma compete for these scarce assets. If the politicians in Washington move quickly and ex-US cash has a chance to be repatriated in 2017, I’d revise this prediction upwards to at least $15B in deal value for private biotech acquisitions. In addition, deal-making in general will continue aggressively, with more and more big companies seeking to emulate Celgene’s seven successful habits in setting up large and broad-based early stage external R&D collaborations.

On the public side, which is not my focus, there’s certainly plenty of speculation around which SMID-cap player is likely to get bought: Incyte, Alexion, BioMarin, Tesaro, and Clovis are on the buying list for many. Acquisition multiples for commercial-stage biotechs have gone up considerably in recent years (here), so I’d be very surprised if we didn’t see more than five public biotech M&A deals of over $5B+ in value next year.

Venture capital firms, reloaded with new funds, will lead the deployment of over $7B into US-based biotech firms in 2017. This funding rate, which is similar to 2016, is way above the historic average of ~$4.5B per annum since 2000. A reasonable share of the private biotech funding (20-30%) will continue to come from atypical sources, like public investors crossing over into venture rounds, or large non-conventional investors like Baillie Gifford and the Alaska Permanent Fund. Like last year (and most of the last decade), this capital will support roughly 500 biotech companies in 2017.

We’ll continue to see Boston and San Fran consolidate the market for both capital and talent. Biotech venture funding in these two geographies has moved from 40% of the national funding total in 2005 to north of 70% in 2015. Expect these two first-tier clusters combined to continue to receive over 70% of biotech venture funding in 2017.

The pace of new startup creation will remain modest, with 100-120 new biotech’s receiving their first venture capital financing in 2017. This pace, as tracked by PwC Moneytree, is right in line with the past five years – reflecting a stable but constrained venture creation environment in biotech (here). This will be in continued contrast to the startup glut in the technology venture world.

Although the number of startups will remain constrained, expect funding levels per startup to be ~2x higher than the historic average. We saw this increased funding in 2015-2016, where funding per first financing hit nearly $15M on average, versus the 2009-2014 historic average of $7M. This elevated funding trend will likely continue. Further, many of these startups will have lower levels of investor syndication than 5 or 10 years ago: deals with only a single investor will be increasingly common as more venture creation activity occurs within venture firms themselves (Atlas included).

The FDA will approve more than 30 new medicines. Coming off 2016’s very light year for approvals (22), I expect this macro biomarker of the industry to rebound. We’ll likely see the first gene therapy approved in the US. And the first CART product in ALL (Kite), maybe a second (Novartis). The number of approvals in 2017 will also benefit from a carry over from 2016 rejections (CRLs); several were from GMP manufacturing issues, which should get resolved in 2017 and contribute to the total of new approvals. Its unlikely to reach the heights of 2014-2015 given the projected PDUFA calendar, but a sizable uptick over 2016 is likely.

Although there’s been lots of noise about the FDA adopting lower efficacy standards (“approve drugs if they are safe”) during a Trump administration, this won’t likely happen. Rational heads will prevail, and the agency will continue to hold a high bar for new medicines – which is good for all of us. The Sarepta legacy of the FDA approving drugs without definitive benefit won’t become a precedent for bad regulatory practices in the future.

Drug R&D will remain hard: we’ll see at least 10 major clinical blow-ups that will destroy massive shareholder value.  I’ll define massive as either 50% or more of their market cap, or greater than $5B in value, on the day of the announcement. 2016 certainly had its fair share of these: from Opdivo’s 1L Lung data, to Biogen’s LINGO, to Seres’ crappy outcome, and recently to Ophthotech’s big disaster.  John Carrol at Endpoints just covered these 2016 blow-ups, setbacks, and snafus nicely.  The reality is that project attrition is a fact of life, and only a minority of Phase 2-3 programs will make it to market – so blow-ups should be expected to happen. Possible contenders in 2017 include Axovant’s Phase 3, further unexpected CART trial deaths, a gene therapy safety scare, a Merck BACE failure, or a PCSK9 blindside.

Drug pricing will continue to be a massive source of sentiment volatility, but nothing dramatic is likely to come out of Washington in 2017 on the topic. We’ll continue to see periodic tweets from Trump (and Sanders) about big-bad-drug-companies, but there will be little movement here related to the pricing of innovative new medicines. Expect more firms to openly adopt something similar to Allergan CEO Brent Saunders’ social contract with patients; those that don’t will likely get publicly challenged and chastised more, like Pfizer’s Iain Read by Regeneron’s Leonard Schleifer on a Forbes Healthcare Summit stage in December. The battle between real Innovators and price Exploiters will continue to rage in our sector both in the media and with formularies/payors. (Note: this prediction is hard to measure, so let’s say “no major legislation” passes restricting innovator drug pricing in 2017).

The immuno-oncology supernova will continue to explode with over 1000 clinical trials open or recruiting actively involving PD-1 axis antibodies by year-end. Right now, just among the three approved PD-1 axis antibodies, as well as durvalumab and avelumab, there are over 842 “open” studies, according to clinicaltrials.gov.  This is likely to increase in 2017 to over 1000 “open” studies as momentum continues around the quest to find the right combinations. That said, I expect very few of these combinations in the I/O treatment stack to truly differentiate themselves from the noise in 2017. We’ll get lots of data, but also lots of mixed enthusiasm. By extension, I think we should expect exciting, albeit modest, news at ASCO 2017 from a number of checkpoint combinations (with chemo, with other checkpoints, with other I/O agents), but with relatively few truly transformative clinical improvements over existing checkpoints alone or current standard of care. I’m hopeful for patients here, but worry about the signal-to-noise clinical challenge in this space right now.

In addition, the Pharma world is splitting between the PD1 “have’s” and “have-not’s.” Players in oncology that lack an approved or late stage PD1 will face enormous pressure to find creative solutions for accessing that part of the I/O treatment stack. I expect to see a number of creative deals between Big Pharma “haves and have-nots” along this front that facilitate new combinations, set up “privileged” relationships, and solve the access/pricing issues around future combo products.

Lastly, #JPM17 won’t be a bust, nor will the NASDAQ Biotech Index. Rain or shine, we won’t likely see a repeat the disaster of #JPM16 and the subsequent weeks in January, when the biotech markets shed 20% in a few weeks. Investor sentiment isn’t great, but it’s more positive than it’s been in a while, with a majority of investors believing the markets will improve according to the latest Evercore ISI survey.  I, too, suspect markets will settle out by end of the month modestly up, as macro uncertainty reduces and 2016 fades behind us. Beyond that, #JPM17 will be a lot like past meetings: I expect that I’ll hear nearly every one of JPM’s perennial Little White Lies – “hey buddy, let’s do something together this year” is one of my favorites.

In early January last year, I wrote a piece about “This Time is Different”, trying to put the turmoil of the biotech markets in 2H 2015 in context.  A lot of the drivers that were highlighted there remain intact today, despite the poor timing of publishing it in the worst biotech month in years. I still think we are in a very different world today versus prior cyclic periods: biotech products are advancing to patients, companies are maturing into real businesses, capital markets are deepening, and industry R&D productivity is improving.

But following last year’s surprises, like Brexit and the US election, I didn’t realize quite how different 2016 this time would actually be. Let’s hope 2017 delivers a set of much more positive surprises.

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  • Jake Ge

    Biotech has a bright future and is developing at a rate we have never seen before. A new biotech company called OXIS International Inc. (OXIS) developed medicine and treatments for cancer that just got approved by FDA. http://bit.ly/2whVu4q