While The World Froze, Biotech Emerged The Hero We Needed: A Historic Year in R&D and Financing

Introduction

In a year tarnished by the global pandemic, biotech was a welcome beacon to investors who were eager to find a haven for growth. Despite the logistical nightmare caused by COVID-19, the Food and Drug Administration (FDA) approved the second highest number of new drugs (53) in history, riding the pro-approval trend that began in the early 2000s. Over 40% of the new drug approvals (23) were designated “first-in-class” by the Agency, indicating that the drug had a unique mechanism of action. One contributing factor to this increase in new drug approvals was the outsourcing of contract manufacturing to Contract Development and Manufacturing Organizations (CDMOs), which have allowed emerging pharma companies to slash operating costs and become serious players in the space by leveraging the operational expertise of these contract manufacturers. Also, biologic therapies continued to draw attention – RNAi, cell and gene therapies, monoclonal antibodies, recombinant proteins, etc. – with 8 new Biologic License Applications approved in 2020.

Increased public focus on pharmaceutical research and development and the FDA regulatory process thrust the industry into the spotlight, and investor confidence soared as many biopharma companies embarked to develop anti-virals and vaccines against SARS-CoV-2. Venture capital (VC) activity in the biopharma space reached a record $30B in capital invested across over 1,000 deals, a 61% increase (and the largest YoY increase in history) from the capital invested in 2019. Unsurprisingly, the public markets reacted extremely favorably to VC-backed private companies looking to exit via IPO – these biopharma companies raised $11.5B across 73 public listings in 2020, totaling a record $37.3B exit value. Over half of the IPOs were companies in the preclinical or Phase 1 stages – a strong signal of the growing appetite that investors have for high-risk/high-reward plays defined by a quick path to IPO (4.6 yrs from VC seed to IPO in 2020 compared to 6.8 yrs in 2016). While the number of mega-deals in 2019 dwarfed those of 2020, the industry still boasted $141B in total transactions. Not too shabby for a world in shambles. M&A activity for VC-backed biotechnology companies stalled at $12.4B across 43 transactions, indicating that Big Pharma is most likely addressing internal operations and stacking their balance sheets with cash before looking for new acquisition targets in 2021.

These 5 giants have shored up their cash reserves and wield a combined $81B.

The first quarter of 2021 has already boasted 175 VC investments in biopharma representing a total value of $5B, and 17 exits with a mean exit value of $404M. A conversation on biotech financing would be remiss without mention of the bloated SPAC market - what was once reserved as a Hail Mary for distressed companies, SPACs have transformed into a legitimate financing route for healthy biotechs to raise significant amounts of capital ($75-150M) while obviating the onerous IPO route. 14 privately-backed biotech companies have gone public via SPAC since 2018, and this number is only going to grow as the SPAC frenzy continues to froth. In 2020, other non-traditional investors jumped into the pool - hedge funds, mutual funds, and large asset managers committed $23B in capital across 417 deals in the VC-backed biotech arena (72% YoY growth) [1] .

In July of last year, we published an article entitled “Murders and Executions: Why Biotech Won’t Stop Slaying’.” In this article we made a few key predictions about how the biotech/pharma capital markets would evolve in 2020 and 2021. Let’s see how we did.

MedicalGold's Predictions for 2021-2021

• More drugs are expected to be approved in 2019-2023 than any 5-year period since 2004 (54 v. 46; IQVIA Institute).
• Big Pharma will bolster their balance sheets with capital repatriated by the United States Tax Cuts and Jobs Act (2017), which cuts taxes on repatriated returns from 35 to 15.5% (cheaper for companies to repatriate returns). More cash on the balance sheet equals more deal activity. The US government will continue to protect the interests of their pharmaceutical companies.
• Competition between VC and Big Pharma will rise as they find themselves competing for the same biotech deals.
• The majority of deal activity will continue to be concentrated in oncology (especially immunotherapies) and orphan/genetic disease, but there will be many new market entrants and competition for private exit will be fierce. Pay attention to infectious disease companies and immunotherapies (for obvious reasons).
• The COVID chaos will ripple through the biotech capital markets and create attractive buying opportunities as small biotechs look to exit turbulent markets and can be purchased at discounted valuations.
• The upcoming election is certainly going to instigate more discussions about the regulation of the biopharma industry, as it pertains to drug pricing, foreign products, and the approval process. Increased pricing pressure will incentivize Big Pharma to look for early-stage drugs to add to their pipelines.

The Verdict

Historic levels of drug approvals

Despite the ongoing pandemic, The Center for Drug Research and Evaluation (CDER) approved 53 new drug in 2020… up from 48 in 2019, and only outdone by the 59 approvals in 2018 [2]. Impressively, the Center for Biologic License Application Approvals (CBER) approved 8 biologic therapies (don’t know the difference between a drug and biologic? Visit our repository of biotech jargon) . Overall, 2020 would have been a historic year for drug/biologic approvals without the hurdles that a global pandemic erected. The FDA canceled face-to-face meetings with pharma executives and was swamped with Expedited Use Applications (EUAs) for a smorgasbord of COVID vaccines and therapies. Many companies were just taking shots in the dark that established drugs in their pipelines may be effective against COVID, clogging the system and overburdening the Agency. The silver lining of this debacle is that the inefficiencies in the FDA’s review process were revealed and can be corrected.

“COVID-19 confronted us with the need to better triage sponsors’ questions. That was perhaps the single biggest takeaway from the pandemic related to product applications.”

- Peter Marks, director of the Center for Biologics Evaluation and Research (CBER) at the FDA, in an interview with Nature Biotechnology

If this trend continues (which, given the approximately linear growth since 2013, is likely), then it is likely that there will be historic numbers of approvals over the next 4-5 years. Extrapolating on the 3 year moving average of number of CDER drug approvals reveals 54-62 new approvals each year.

Big Pharma will bolster their balance sheet with cash and we will see strong deal-making activity

While biopharma M&A did slowdown from the rambunctious deal-making of 2019, there were still some large transactions that illustrate Big Pharma’s appetite for acquisition. Interestingly, the number of deals in 2020 fell just 2.3% from the previous year (242 v. 248) but the total value dropped by 61% ($141B v $231B). The 10 largest deals of 2020 represented $97B worth of pharmaceutical asset transactions, and while this pales in comparison to the $207B recorded for the 10 largest deals in 2019, it is still an impressive figure [3].  But what’s most important looking forward is that Big Pharma has the capital and inclination to expand their deal-making capacity in 2021. PwC predicts that 2021 will see $250B-$275B worth of M&A transactions that will involve a few >$50B acquisitions [4]. PwC’s Sky Milch estimates that the biopharma industry had a total of $1.47T in capital in December of 2020, which was down only 6% from 2019. They certainly had enough fire-power, but perhaps large-cap dealmakers were gun-shy amidst the pandemic? Only time will tell, but it is likely that we will see a number of bolt-on acquisitions ($5-15B) that support the strategic objectives of the acquirers. M&A activity for VC-backed biotechnology companies stalled at $12.4B across 43 transactions, indicating that Big Pharma may be addressing internal operations and shoring up their balance sheet with cash before looking for new acquisition targets [1].

M&A transactions 2019 v. 2020

Top 10 deals of 2020

Top 10 deals of 2019

Competition between VC and Big Pharma will rise as they find themselves competing for the same biotech deals.

VC deal-making in the biopharma industry boasted a record $28.5B capital deployed across 1,073 deals, a 60.5% YoY increase in value over the $17.8B spent in 2019 (the largest year-over-year increase in history). It is well-known that VC-backed IPOs perform tremendously well, and the IPO market in 2020 was illustrative of this phenomenon. VC-backed IPOs boated $11.5B in capital raised across 73 public listings, with a record exit value of $37.3B. Private company’s step-up-multiples between their last financing round and the valuation at their current, pre-IPO round hovered around 1.32x (median), the highest in the last 7 years, signifying private investor confidence in the company’s likelihood of M&A/IPO exit [1]. VC-backed growth through successful IPOs is a major accelerator of a biopharma’ R&D, and the increased liquidity for investors is only a net positive for the market as a whole.

The majority of deal activity will be concentrated in oncology and orphan/genetic diseases.

The 8 largest capital raises in 2020 solidified cell and gene therapies and precision oncology as the hottest focus areas in the industry. Series A financing rounds averaged $34M, a 30% jump from 2019, and 5 of the 7 largest rounds (over $100M) were focused on gene/cell therapies (such as CAR-T) or precision oncology [5]. AstraZeneca’s acquisition of Alexion in December for $39 billion continued the expansion by Big Pharma into genetic medicines and targeted therapies.

“People are buying into these [cell or gene] technologies not for their potential in narrowly defined, monogenic diseases alone, but for their potential well beyond that” in much more widespread conditions."

- Jeffrey Tong, partner, Third Rock Ventures

The COVID chaos will ripple through the biotech capital markets and create attractive buying opportunities as small biotechs look to exit turbulent markets and can be purchased at discounted valuations.

As previously discussed, 2020 featured significantly fewer mega deals ($207B v. $97B spent on the top 10) even though the total volume of transactions was relatively unchanged from 2019 (248 v. 242). Buyers are looking for smaller, “bolt-on” acquisitions that support their strategic agendas. Over half of the IPOs were companies in the preclinical and Phase 1 stages of the FDA regulatory process [1], illustrating the market’s appetite for exposure to early-stage innovation. Over 1,000 partnerships emerged (valued at $183B) highlighting the industry’s strategy for accelerating innovation by combining expertise to achieve similar strategic objectives. Unsurprisingly, 7 out of the 10 top partnerships (by deal value) were focused on oncology.

The upcoming election is certainly going to instigate more discussions about the biopharma industry, as it pertains to drug pricing, foreign products, and the regulatory process.

The silver lining to the global pandemic is that it revealed structural inefficiencies in our public healthcare system, and also reinvigorated discussions about  the access and affordability of healthcare and pharmaceuticals. The Trump administration made a strong effort to curb drug prices by eliminating kickbacks to middlemen (July 24, 2020 executive order: "Lowering Prices for Patients by Eliminating Kickbacks to Middlemen”) by targeting the immoral incentives of pharmacy benefit managers (PMBs) that favor providing insurance coverage for high-priced drugs over more cost-effective solutions. PBMs are the epicenter of the pharmaceutical manufacturing and distribution system, serving as the middlemen between health insurers, drug manufacturers, and pharmacies. PBMs act on behalf of health insurance companies to determine which drugs will be covered under their plans (the "formulary"), and are incentivized by drug manufacturers through rebates which are calculated as a percentage of the drug's list price [6]. These savings are designed to be passed down to the patient, but that never ends up happening as the PBMs pocket the rebates and pay a small percentage back to the health insurer. As you an see in the diagram below, they command a great deal of power over the entire pharmaceutical ecosystem, serving not only as a conduit through which cash flows, but also providing services beyond simply price negotiation.

Trumps’ “American Patients First” blueprint (released back in 2018 [7]) is intended to replace the rebate system with transparent discounts for patients. the former administration's “Most Favored Nation Model” was designed to lower drug prices of certain Medicare Part B drugs to the lowest price that they are sold in other countries [8]. The policy went into effect on Jan 1, 2021. In September of 2020, Trump issued an executive order to give Americans access to cheaper prescription drugs safely imported from other countries [9].

“America’s hospitals and health systems have very deep concerns about the substance and legality of today’s Most Favored Nation Model interim final rule. Instead of holding drug companies accountable for drug prices, it slashes reimbursement to hospitals for drugs. In addition to the continued concerns we have expressed about the impact this model has on the 340B drug pricing program, we strongly question whether attempting to institute such a sweeping and controversial policy in an interim final rule is legally permissible.”

- Tom Nickels, AHA Executive Vice President

The Trump Effect

Two weeks before departing office, Trump proposed a rule to block the federal government from exerting “march in” rights to commandeer the production of drugs that they deem exorbitantly priced. The well-established Bayh-Dole Rule gives the government authority to bypass patent law and grant another manufacturer the rights to produce proprietary drugs if they are not being made accessible to the public on “reasonable terms”. Although the White House has never flexed these powers, drug manufacturers must live in fear that their drug assets may be stolen at a moment’s notice. Trump’s amendment to the Rule would minimize the circumstances under which march-in rights could be invoked. Bayh-Dole is controversial within government agencies – HHS Secretary Zavier Becerra has been an adamant supporter of the march-in rights and went so far as to recommend the government to take control over Gilead’s remdesivir. On the other hand, Francis Collins, leader of the NIH, believes that drug pricing cannot be used to justify march-in authority. Leftist activist groups are currently petitioning the Biden administration to reverse this policy, citing that Bayh-Dole is an important force that curbs exorbitant drug prices. Ultimately, Commerce Secretary Gina Raimondo will make the final decision to overturn Trump’s action or finalize it [10].

Read MedicalGold's editorial on march-in rights and the Bayh-Dole Act

Bringing back Obama Care

Released on 4/19/2021, Biden proposed a “Medicare-like” option for consumers to receive health insurance through their own private insurance and cap the premiums (maximum of 8.5% of yearly income). This individual mandate (formerly repealed by Trump) would bring back the penalty for opting out of purchasing coverage. Biden plans on flexing an executive action to implement his socialist policies, which will include signing up and subsidizing undocumented immigrants in a flagrant display of progressivism. Biden’s plan would also repeal the law that bans Medicare from negotiating lower prices with drug manufacturers and establish limits for price increases for “for all brand, biotech and abusively priced generic drugs” and dictate prices for drugs that do not have competition, according to a Biden campaign official [11]. This would also allow consumers to purchase cheaper prescription drugs from other countries (which is actually pro-capitalist, for once, stimulating competition rather than subsidizing away all incentives for innovation).

References

[1] Biotech Went to Work as the World Stayed Home - PitchBook

[2] https://pharmaboardroom.com/facts/us-fda-drug-approvals-2020/

[3] https://www.fiercepharma.com/special-report/top-10-largest-biopharma-m-a-deals-2020

[4] https://www.pwc.com/us/en/industries/health-industries/library/pharma-life-sciences-quarterly-deals-insights.html

[5] https://www.nature.com/articles/s41587-021-00876-w.pdf

[6] https://www.commonwealthfund.org/publications/explainer/2019/apr/pharmacy-benefit-managers-and-their-role-drug-spending

[7] https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf

[8] https://www.aha.org/news/headline/2020-11-23-trump-administration-unveils-two-drug-pricing-policies

[9] https://www.hhs.gov/about/news/2020/09/24/hhs-takes-action-as-part-of-president-trumps-healthcare-plan.html

[10] https://www.washingtonpost.com/business/2021/03/31/biden-drug-prices-trump/

[11] https://www.nbcnews.com/politics/meet-the-press/blog/meet-press-blog-latest-news-analysis-data-driving-political-discussion-n988541/ncrd1030086#blogHeader