By Karl Thiel
Barring a last-minute reversal, it looks like 2018 will end as a down year for the biotech industry, at least in terms of stock performance. To add insult to injury, biotech has underperformed broader indices like the S&P 500, the Dow, and even the tech-heavy Nasdaq. But that’s just one way of looking at the industry, and probably not the best one.
It’s been an incredible year of scientific progress. And in terms of novel new drug approvals—which is what this is all about, after all—2018 stands out as the most prolific year in over two decades. Will that finally find favor with investors in 2019? We’ll have to wait to know for sure, but here are some of the tectonic plates moving beneath the industry.
- The IPO market keeps humming, but is quality on the decline? New issues keep coming despite some pretty meh performance. There have been 55 biotech IPOs so far this year, up from 40 in 2017. In fact, this has been the busiest year for biotech IPOs since 2014 (which was shortly before the market peaked, for what it’s worth). One not-so-encouraging sign is that over half of this year’s IPOs are underwater from their debut price. So far that doesn’t seem to be dampening demand for new issues, but if this trend continues, investors will surely lose their appetite. Pundits often say that the biotech industry has had four major IPO windows since in its history: 1999-2000, 2003-2007, 2013-2015, and 2017 to present. Arguably, we’ve really just been in a mega-window since 2013. But it may be getting long in the tooth. More companies are coming public and a very early stage in their clinical development, and if that can’t count on a rising stock price to help raise more cash, they’ll need to get bought out. Speaking of which…
- M&A has stayed weak. The year began with a bang: There was Celgene and Impact Biomedicines; Celgene and Juno Therapeutics; Sanofi and Bioverativ, and Sanofi and Ablynx—all multi-billion deals that happened in January. But with the exception of Takeda’s proposed $62 billion takeover of Shire (admittedly a big outlier) and Novartis’s $8.7 billion acquisition of AveXis, there was little excitement in the way of M&A for the whole rest of the year. This was likely a factor in biotech, despite a good start to 2018, underperforming all the major indices. That includes the maker of….
- The first-ever RNAi drug (but probably not the last). While it hasn’t gotten much love from investors this year, Alnylam Pharmaceuticals achieved a historic milestone with the FDA approval of Onpattro, an RNAi drug for hereditary transthyretin-mediated amyloidosis. It marks the culmination of two decades of work, from a 1998 discovery that later garnered a Nobel Prize for Andrew Fire and Craig Mello. Alnylam itself was founded in 2002. It looks unlikely to be the company’s last success—it is now filing a rolling NDA for its second drug, and a third filing by one of the company’s partners could happen late next year. The commercial success of Onpattro is still a question mark. It is nominally priced at $450,000 a year, but it’s not quite so simple. Alnylam has been forced to get creative, in part because…
- Drug price reform didn’t happen…again. Nevertheless, changes are quietly taking place. While Congress isn’t acting, FDA has gotten aggressive about speeding generic drugs to market through a number of initiatives. Companies, too, see the writing on the wall and are trying to act on their own before action is forced upon them. New, expensive therapies like Kymriah and Onpattro come with contingent pricing—insurers get a discount or a money-back guarantee if they don’t work. Companies working on potential one-time treatments like gene therapy are developing annuity pricing models to spread out costs.
- CRISPR keeps things controversial. The biotech discovery of the century has led to a lot of speculation and the launch of several pure-play companies. But over the course of the year, investors have had to grapple with a number of worries. Will CRISPR drugs prove immunogenic to most people? Will current mechanisms introduce massive errors into DNA? Will it prove oncogenic? Beyond that, there’s been even more controversy about how the nascent technology is being harnessed. Early this year, it was reported that scientists in Japan had made human cells immune to HIV in the lab. Late in the year, it was reported that a rogue Chinese scientist had actually introduced CRISPR editing into twin girls, theoretically making them immune to HIV. Say what you will, things are moving fast.
- Liquid biopsies are transforming diagnostics. Recent IPO Guardant Health isn’t the only company working on a liquid biopsy platform, but its Guardant360 test for lung cancer could be illustrative of how cancer treatment could be transformed by cheaper, less-invasive, and someday maybe even routine screening. Even before a formal FDA approval, insurers are paying for this test because it does what they want: saves them money. When it comes to liquid biopsy, the low-hanging fruit is in companion testing for targeted therapies and recurrence testing. But routine blood tests could soon be used to check for a variety of early stage cancers that would otherwise not be noticed until they became much more difficult to treat.
- Approvals are off the charts. FDA has approved 56 novel new drugs this year, way up from the total of 46 in 2017, which was itself a banner year. A counter to the argument that companies are coming public too early is the fact that some, at least, are proving very efficient at moving new concepts from the lab bench to the market. And that’s good for everyone.
As for 2019, I believe it will be a better year for many biotechs—particularly some of the large, profitable companies that are trading at a discount due to fears of price controls. But this is clearly an industry in a period of transformation, and investors don’t yet know what to make of it. We’re still grappling with the idea of cures instead of treatments and how to price new kinds of therapies. The relatively disappointing sales of new gene therapies and CAR-T drugs have many observers feeling skeptical. Until it becomes clearer that advancing science means advancing profits, investors may remain on the sidelines.