5 questions facing emerging biotech in 2024
08 Jan 2024
Acquisition
Ask a biotechnology company executive, investor or analyst how they feel about the sector in 2024, and the answer tends to include, in one way or another, the word “optimistic.”
They have some reason to be, despite a downturn that’s dragged on for more than two years. Dealmaking, a key source of returns for biotechs and their investors, perked up in 2023. The Federal Reserve has signaled interest rate cuts may be coming, bolstering a market rally for biotech stocks that some expect to continue this year.
Still, industry watchers are cautious. Last year brought a six-year low in initial public offerings, mixed returns for those who did go public and a wave of layoffs at small and large companies alike. Investors remain skittish, making funding rounds harder to complete.
“We are not out of the woods yet,” Jonathan Norris, a managing director at HSBC’s innovation banking division, wrote in the firm’s annual recap.
Here are five questions emerging biotech companies face in 2024:
Is this the new normal for IPOs?
Only 19 biotechs went public last year, down slightly from 2022 and far below the 104 that priced in 2021, BioPharma Dive data show. The question no longer appears to be when biotech IPOs will bounce back, but rather whether the bar for young drugmakers is now higher.
In 2020 and 2021, nearly two-thirds of biotechs that went public had drugs either in preclinical or Phase 1 testing. By comparison, only eight IPOs last year were from companies that early in development. About one-third of the drug developers going public were already in Phase 3 trials, a higher percentage than in any of the previous six years.
While a smaller sample size, last year’s numbers suggest the road to an IPO may be longer for young biotechs. That is forcing startups to lean more on their existing backers for funding. Even when biotechs have priced IPOs recently, insiders are closely involved. HSBC Innovation Banking noted how last year’s offerings were “more heavily covered by insider syndicates” than previous years.
Investors and analysts are also monitoring whether newly public companies can hold their value. About half of biotech’s 2023 IPO class did, led by radiopharmaceuticals developer RayzeBio, which Bristol Myers Squibb acquired only months after its stock offering, and obesity drug developer Structure Therapeutics. But many trade well below their IPO price.
“There's been a very mixed performance,” said Jackie Spencer, head of relationship management for SVB’s life sciences and healthcare practice. “A number of companies have gone out earlier in the year and are trading significantly down. We've seen some trade up, we've seen some stabilize, so I think continuing more of that performance will be pretty key.”
Will the layoff wave continue?
Nearly 150 drugmakers announced layoffs last year, according to BioPharma Dive data, a wave of restructurings that engulfed both startups and public companies.
The source of the problem was a financing crunch that made equity offerings for public companies difficult to pull off, and rounds for privately held startups harder to raise. The current climate contrasts with the last decade, when investors poured into biotech, giving fledgling companies the financial wherewithal to build up staff and pursue a wide range of programs.
Layoffs in biotech have always been “binary,” Spencer said. If a drug fails in testing, cost-cutting usually follows. But in the current environment, difficulty raising subsequent funding rounds is a common culprit.
As a result, companies now have to make tough decisions about which programs to fund, or even whether to dial back their research. A report earlier this year from investment bank Stifel indicated that smaller biotechs accounted for the bulk of industry layoffs in the first half of 2023.
“We're going to continue to see companies needing to do more with less,” Spencer said.
Startups may have to look elsewhere for cash. That could mean partnering with larger companies, raising debt or selling royalty rights to prospective programs, all of which involve trade-offs.
“It's imperative for companies to use every tool in the toolbox these days and not just rely on equity financings as route one for getting capital for the company,” Kevin Eisele, a managing director at investment bank William Blair, said in an October panel hosted by BioPharma Dive.
Will the specter of FTC action hurt startups?
The Federal Trade Commission’s December announcement it would sue Sanofi to block the company’s licensing of a rare disease drug candidate from Maze Therapeutics sent a chill through biotech.
Federal regulators’ opposition to the deal could mean increased scrutiny for early-stage licensing deals, not just large pharmaceutical M&A. The FTC’s complaint against Sanofi claimed the French firm sought to kill competition for its own drugs for Pompe disease, which progressively weakens the heart and skeleton muscles.
“How can a risky, early-stage candidate requiring years of R&D be a competitive threat?” analysts at Cantor Fitzgerald wrote in a December industry report.
While alarming to those in industry, the FTC’s action may not turn off the dealmaking spigot, especially after Pfizer and Amgen were able to close their respective deals for Seagen and Horizon Therapeutics. And pharmas still rely heavily on young biotechs to supplement their own research laboratories, particularly as many face looming patent ”cliffs.”
Can startups break into the obesity drug race?
2023 was the year weight-loss medicines broke through. A poll from the Kaiser Family Foundation found nearly half of adults surveyed were interested in taking a safe and effective obesity drug. About 70% had heard at least “a little” about therapies like Novo Nordisk’s Wegovy and Eli Lilly’s Zepbound, drugs known as GLP-1 agonists.
Already there have been multiple deals announced. Roche, for instance, bought startup Carmot Therapeutics before it could go public. Lilly and Novo brokered deals for startups. AstraZeneca turned to Ecogene to get an experimental drug.
Yet Lilly and Novo have set a high bar. Structure, which went public last year on the back of its obesity drug work, lost nearly half of its value when its top treatment appeared less potent than a Lilly medicine in clinical testing. The setback was a cautionary tale for startups aiming to compete. Many, among them Carmot and Regor Therapeutics, are developing their own GLP-1 drugs.
”What are the other opportunities around diabetes and obesity?” said Jakob Dupont, an executive partner at Sofinnova Investments. “Are they things that are complementary to GLP-1s? Maybe that's the next company we should be focusing on.”
Will platform companies remain out of favor?
Last year, pharmaceutical companies showed they’re willing to pay up for derisked products that can quickly fill their pipelines.
A number of the sector’s top acquisitions involved medicines either nearing regulatory approvals or in advanced testing. Bristol-Myers Squibb agreed to pay $14 billion for Karuna Therapeutics, which has a schizophrenia drug that could be cleared by the Food and Drug Administration this year. Astellas Pharma bought Iveric Bio for an eye drug a few months prior to its approval. Novartis and AbbVie, meanwhile, each gambled billions of dollars on medicines close to a study readout.
Those deals continued an investment shift favoring companies narrowly focused on drug candidates, rather than broad technology platforms that can be more expensive and time-consuming to develop. HSBC’s report showed that funding for biotechs with drugmaking platforms fell by more than half in 2023 as the “focus shifted towards clinical assets or funding for initial clinical data.”
Single medicines are also easier to sell to investors than a broader technology, said Armon Sharei, the founder of two platform companies, and currently the head of startup Portal Bio.
Yet drugmaking platforms are the foundation of some of the sector’s largest companies, like Alnylam Pharmaceuticals and Moderna. They can pioneer new ways to develop medicines, enabling companies to treat previously intractable diseases or reach tough drug targets.
In the current environment, though, platform biotechs are in a tough spot. Pressured to hit milestones quicker to raise cash, they may need to cut research, lay off staff or focus resources on only one or two medicines. That can lead to bets on something that ”can go right or wrong for 1,000 reasons that might have nothing to do with the broader platform,” Sharei said.
BONUS: How will cell and gene therapy companies fare?
Cell and gene therapy developers have had a particularly tough time during the market’s pullback. Many have had to cut programs, retrench or lay off workers to save cash. Some startups have shut down for lack of funds.
“There are some real development and logistical problems” getting genetic medicines to patients, especially those who can’t receive cell or gene therapies because of the toxic preconditioning regimens they usually require, said Dupont, of Sofinnova.
Nonetheless, investors are still investing in cell and gene therapy, a trend some expect to continue.
Data from HSBC, for instance, show that four of the sector’s five largest funding rounds last year went to cell and gene therapy makers. The largest, Kriya Therapeutics, brought in $430 million. According to DuPont, companies that can help solve the field’s ongoing delivery challenges are likely to gain traction, as are those targeting autoimmune diseases — an increasingly competitive area of genetic medicine.
But sentiment around the field may depend on how several recently approved gene therapies, including the first CRISPR treatment, fare on the market. Gene therapy launches have generally been slow, making their commercial trajectory moving forward an important barometer.
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