Please find attached an update on the biopharma market for the week of May 13, 2024.
Macro and Biotech Market
The University of Michigan Survey of Consumers sentiment index declined meaningfully in April as the average person in the United States remains concerned about inflation and their wallet.
Last week saw the S&P 500 rise on positive comments by Fed officials and anticipation of a reasonable CPI inflation number next week.
The VIX dropped to 12.6% (really low) and the 10-year Treasury bond yield is at 4.5% (flat from last week). The macro situation is slowly settling out.
The XBI dropped last week by 2% and our barometer of the overall global biotech market dropped by 5.7%.
We don’t have a nifty explanation for the divergence between biotech and the overall market other than to say that sector specific factors may have been at play.
Last week we saw broad weakness in cell therapy stocks in the wake of data showing how effective T-cell engagers can be. We also saw Macrogenics stock crash after multiple deaths in a recent ADC trial.
On the other hand, there was plenty of positive news as well including a positive TIGIT update from ITeos and a meaningful vaccine pact from Sanofi for Novavax.
You might recall that we earlier showed that the rally in Q4 last year disproportionately benefitted small caps.
This year we have seen biotechs jump another 17%. The rally this year again has been strongest among small caps.
Interestingly, biotech returns in Q2 thus far have been negative across all size classes. The result is that today’s market features revaluation of many former microcap biotechs.
To illustrate, the group of biotechs that we had enterprise values less than $100 million at the start of 2024 are up 55% YTD.
But the same group was up 76.4% as of the end of Q1. This group gave up some gains.
The group of biotechs that we were worth over $1 billion at the start of the year are only up 7.1% for the year to date. But they were up 13% at the end of Q1 and have given back roughly 40% of their gains.
It’s clearly a great year to be a small / micro cap biotech.
Curiously, historical biotech rallies have started with large caps and have then filtered down to small caps.
We think the change in pattern seen in the last six months is due to evolving investor structure of biotechs.
In the hallowed days of yore, specialist investors were much less important than today and large, long funds were the main drivers of the market’s movements.
When they returned after a downturn, long funds tended to place their capital in the largest “bargains” first – before moving to small caps.
Today’s specialist investor, in contrast, is less focused on risk mitigation and more focused on opportunity relative to value.
Thus, they have returned to the smaller cap neighborhood of biotech first.
Another curiosity consistent with this view of the market is the distribution of returns this year by headquarters country of biotechs.
The U.S. biotech group in 2024 has rallied by a whopping 23%. In contrast, biotechs from China (the second biggest country now for biotech) are flat for the year and those in all other countries are down 7%, on average.
This is a stunning statistic and reflects the absence of a large population of specialist investors outside U.S. borders.
U.S. specialist investors rarely stray outside their home country.
Economists refer to this as home-country bias.
The life sciences sector overall rose 1% last week in sympathy with the broader stock market.
The average short interest of life sciences companies has risen to its highest point since we started keeping statistics. As the market is rising, short sellers are returning in even greater force than before.
The population of negative EV life sciences companies continues to shrink. As of last week, there were 118 such companies – down 232 last October.
We have encountered several investors who have generated strong returns by buying these companies as market conditions have improved.
With 2023 financials now fully reported it’s possible to look at what happened to R&D spend in 2023. It did well in big pharma and dropped in biotech and Japan.
It seems obvious that the capital drought in biotech took its toll on innovation.
The downturn in Japan R&D follows years of mandatory price cuts – which have taken an obvious toll on innovation.
One can’t help but wonder what R&D spend is going to look like for global pharmas in the years ahead as the impact of the IRA is felt on pharma pocketbooks.
Revenue multiples in HCIT, diagnostics, API and pharma services have steadily dropped over the last three years.
In contrast, we have seen a recovery in revenue multiples in the CDMO sector. Commercial pharma revenue multiples have been steady for several years.
As of this writing we are seeing investors become much more interested in early and mid-stage biotech stories.
There is less investor herding into late-stage companies. Thus, late stage biotechs like Cytokinetics and Rocket have seen their shares decline in the last month.
To illustrate, at the start of this year, the average U.S. Phase 3 biotech had a $809 million enterprise value. Today, that average is $730 million.
In contrast, the average Phase 1 biotech had a $303 million value at the start of the year. Today, that average is $407 million.
The premium for high quality clinical data is also dropping. While biotechs with very good datasets continue to trade well above those with “good” or “medium” quality datasets, the differential between the two is dropping fast.
Investors in the market are coming out of their foxholes and are willing to bet on riskier datasets.
We view this as an important sign of market normalization.
One way of thinking about this is that specialist investors are increasingly taking an offensive rather than a defensive strategy to stock selection in today’s biotech market.
The most valued therapeutic areas in biotech today are obesity, cardiometabolic, B-Cell, vaccines, RNAi, AI and radiopharma.
Nonetheless, Q2 2024 has seen value drops in the some of the hottest areas like obesity, B-Cell and cardio.
In contrast, radiopharma and T-Cell immunity stories have been continuing to gain value.
It has been a particularly tough period for companies pursuing autoimmune disease and cancer with cell therapies.
The average public cell therapy company lost 18% of its value over the last month. Some companies, like Mustang and Kyverna dropped more than 40% for the month.
We have communicated with investors and management teams in the last week to understand what is going on with cell therapy in biotech.
Investors have cooled, in general, on complex therapeutics in oncology and immunology such as CAR-t, NKs, TCRs and, even, oncolytic viruses. They increasingly favor ADCs, antibodies and engagers which are less complex and don’t involve ex vivo management of cell samples.
The thinking is that while engagers can’t quite get the full benefit of a CAR-t, they are far less expensive and don’t involve lengthy vein-to-vein times.
Investors have also noted slow uptake of CAR-ts commercially, slow enrollment of studies in autoimmunity and cancer and difficulty in the supply chain.
Management teams, in contrast, note that CAR-t can eliminate pathologic B-cells with far more profound benefit for patients and can avoid the chronic use of antibodies, engagers and the like.
Our own view is that there will be room for both types of therapies. We do think that there will be room for cell therapies in the autoimmune treatment pantheon but it’s going to take some time for us to get to key utilization decisions.
Capital Markets and Deals Update
The IPO market remained inactive last week. The last company to go public in the U.S. or Europe debuted five weeks ago.
The pipeline of IPOs on file has continued to swell as issuers anticipate an opening of the window after Memorial Day.
Let’s see what happens with next week’s CPI data and the upcoming PCE inflation data.
The follow-on market remained quiet last week as the inflation situation sorts itself out.
A total of $416 million was raised across 15 issues in the follow-on market. The largest issues were by Kelun Biotech ($155 million), ADC Therapeutics ($105 million) and OptiNose ($55 million).
The venture private market was quite active last week with $951 million raised by issuers in this market. The largest issues were Zenas ($200 million), Bluejay ($182 million), Taiyi Guanjia ($127 million), Attovia Therapeutics ($105 million) and Aardvark Therapeutics ($85 million).
The average weekly volume of venture privates has doubled in just six weeks. The average volume of privates six weeks ago was $500 million. Over the last four weeks, by contrast, the average weekly volume has eclipsed $1 billion.
That’s quite a big move!
If one looks at history, private investment volume tends to lag public markets. When markets fall, private volumes stay up but eventually come down. Likewise, when the market rallies, it takes time for the privates market to pick up steam.
In part, this reflects the long lead times to put together a private deal. The parties in private deals do far more detailed diligence than those in the public market, for example.
Recent Pitchbook data show that biopharma private valuations have held up reasonably well.
Pitchbook data also show that it has become tougher for first-time VC funds to raise another fund.
Last week saw Jim Simons, the well-known hedge fund manager and former math professor pass away at the age of 86. His remarkable life featured high interest in math, investments and philanthropy.
He took a serious but quiet interest in the life sciences sector in his later years.
Simons’ family office Euclidean Capital has kept a low profile but, according to Crunchbase, has made investments in more than 30 life sciences companies.
Jim Simons was a major supporter of biotech companies and is likely to continue to be so – posthumously – through Euclidian Capital. Recent investments have been in cell therapy and neuroscience, Kenai and Neurona, two very promising companies.
He was also a major supporter of research in autism and is likely to continue to be after his death.
The Simons Foundation Autism Research Initiative (SFARI) has a budget of approximately $90 million per year. Since 2003, the Simons Foundation has provided or committed more than $570 million in external research support to more than 600 investigators in the U.S. and abroad.
Last week was exceptionally busy in the private debt market with $1.1 billion issued across nine different offerings.
Funds are rushing to put out capital knowing that long-term rates are likely to be coming down in the months ahead.
The last five weeks have been the most active for the private debt market since mid-2020.
There were two royalty deals in the last market last week. Royalty Pharma invested $525 million to acquire a royalty in Sanofi’s CD40 antibody frexalimab. The seller, Immunext, is a small private biotech that commercializes the inventions of Randolph Noelle, a Professor of Immunology at Dartmouth.
That was quite a payday for a company that never raised venture money.
In the second royalty deal, Ligand invested $75 million in the partnered programs of Agenus and also took a royalty on botensilimab, Agenus’ improved CTLA4 antibody. We look forward to hearing an update on Agenus’ data for this drug at the upcoming ASCO conference.
Last week saw no meaningful M&A volume although there was an increased offer for Vanda Pharma and the acquisition of Serendipity, a gene editing biotech by Arbor Biotechnologies.
Overall, it was a very quiet week for M&A.
Licensing was a different matter.
A key licensing deal announcement last week was Novavax’s CoCo deal with Sanofi. Sanofi paid $500 million upfront to access the Novavax Covid vaccine.
This deal is great news for the vaccine sector, giving a major helping hand to struggling Novavax. On the other hand, it was a very bad day for short sellers.
Novavax is the second most shorted life sciences company. The 98% bump in Novavax shares on Friday would have caused more than $200 million in losses for short sellers.
Short selling is obviously a hazardous game.
Another key licensing deal last week took place when Shionogi paid $150 million upfront plus milestones and royalties for Maze’s Pompe program. This deal was in lieu of the Sanofi deal done on similar terms that drew protest earlier this year from the FTC.
Industry News
Last week saw a markup of the BIOSECURITY bill emerge from the U.S. House of Representatives.
The proposed law gives U.S. manufacturers until 2032 to disentangle themselves from Wuxi and other Chinese CDMOs.
A story over last weekend in the Financial Times highlighted the rush to find alternative CDMOs:
“Companies, including US-based Eli Lilly, Vertex Pharmaceuticals and BeiGene in Switzerland, have been talking with rival contract manufacturers to diversify production away from WuXi companies, according to several people familiar with discussions.”
Takeda Pharma reported annual results last week and profits weren’t great. Takeda announced a major restructuring and portfolio refresh with this news. Takeda shares dropped one percent for the week.
Vertex posted a strong quarter with 14% year-on-year revenue growth. Vertex stock was up 5% for the week.
argenx reported slowing revenue growth last week. Their shares were down 4% for the week. We were, nonetheless, impressed by its plan to expand its clinical trials for efgartigimod to additional indications over time.
Researchers from argenx published an important paper last week in JCI Insight. This paper compares the Dyax/Momenta/J&J FcRn scaffold to that of efgartigimod and that of Hanall/Immunovant’s Batocalimab. Batocalimab is associated with substantial downregulation of albumin. The J&J Nipocalimab scaffold has the same effect but not to the same degree.
The Argenx scaffold for efgartigimod does not suppress albumin at all.
The JCI publication did not look at Immunovant’s IMVT-1402 as its structure has yet to be published.
Venrock published its much-anticipated 2024 Healthcare Prognosis Survey last week. It always makes interesting reading.
Last year’s survey participants had some notable misses and are now making further bold predictions.
Bryan Roberts and Bob Kocher of Venrock wrote:
“Once again, we tapped into our network of super smart healthcare friends to conduct a pulse-check of sentiment and perspectives around hot topics in healthcare. Looking back at last year’s wisdom of the (intelligent) crowd, we missed on several fronts believing that the Fed rates would have dropped by now and only a quarter of us were optimistic that the stock market would end the year up. We were also way off on Ozempic, predicting disillusionment after early adoption. Looking at 2024 views, GLP-1s are firmly consensus, with ever broader clinical benefits, while CMS is expected to make even more headway with drug price negotiations. In the less exciting camp, “talk not translating to action” by the FTC remains the norm - but how about those non-competes! Contrary to last year, almost three quarters of us anticipate a good year for the stock market… three cheers for the optimists!”
A key topic highlighted by the Venrock survey was concern over drug prices. Over three fourths of participants felt that drug price negotiations will filter into the commercial market – causing drug prices to fall across the overall market.
The ISPOR conference took place last week in Atlanta. ISPOR is a professional organization that focuses on health economics and outcomes research.
The normally staid conference features geeky bookworm attendees speaking knowledgeably about things like demand curves, market equilibria, real-world evidence and HTA’s.
Last week saw ISPOR attendees increasingly focus on the critical topic of incorporating social value estimates into work on drug industry economics – a topic that should be of high interest to all of us who advocate for investment into pharmaceutical innovation.
To mark the conference, Jason Shafrin, Louis Garrison, and Mel Whittington wrote an opinion piece in Stat news. They argued:
“Value should be measured as the total societal value, but this rarely happens. NICE uses a payer perspective — rather than a societal perspective — and sets a value per quality-adjusted life year (QALY) at around £30,000 ($38,000). That is far below the $100,000 or $150,000 QALY valuation more commonly used in the U.S. and reflects the fact that the U.K.’s National Health Service is a budget-constrained health system. … the U.S. makes up 43% of global pharmaceutical sales, so any changes in U.S. drug pricing policy will have a large impact on R&D decisions and the number of drugs that come to the global market. In short, while U.K. drug pricing may matter a lot in the U.K., U.S. drug pricing policy matters around the globe. Value-based drug prices should be judged in the context of all societal costs and benefits for patients today and potential patients tomorrow.”
The trustees for Medicare published their annual report last week and, fortunately, found that Medicare’s balance sheet is in far better shape than previously thought.
At this point, Medicare is funded to go for at least another dozen years from now.
This is an important development with respect to the IRA as the financial state of Medicare will be a key driver of Congressional decisions on drug pricing.
Senator Sheldon Whitehouse of Rhode Island introduced an interesting Medicare bill last week.
It’s well known that Medicare Advantage insurers liberally use prior authorization requirements to throttle back demand for drugs.
Unfortunately, these requirements generate huge amounts of paperwork and waste in the system.
Whitehouse’s bill would require that any insurer that requires a prior auth get authorization themselves from CMS before imposing the requirement.
We salute Senator Whitehouse.
Turnabout seems to be fair play!
A striking survey finding emerged from the Kaiser Family Foundation last week. They surveyed a broad group and that one in eight Americans has already tried a GLP-1 drug.
Wow.
The ASGCT conference was held last week in Baltimore.
There was an outpouring of interesting news in both the cell therapy and genetics field. Technology is advancing decisively and quickly in the gene editing field.
We would note two pieces of particularly interesting clinical news.
First, Freeline reported stunning clinical data for its Gaucher’s program. Four treated patients have exhibited remarkable and robust expression of GCase, the key biomarker associated with this disease.
We normally don’t talk about stocks but it’s worth noting that Syncona owns 100% of Freeline and that this product has potential to be a billion-dollar drug.
Despite this, Syncona stock didn’t move at all on the Freeline news (which was previously unknown) and has a market cap of $788 million despite a rich and diversified biotech portfolio.
Second, Regeneron reported restoration of hearing in two children with otoferlin hearing loss. Other companies developing gene therapies for improving otoferlin hearing loss include Sensorion and Eli Lilly.
An article appeared last weekend in the Wall Street Journal written by Lawrence Ingrassia. Mr Ingrassia’s family has been devastated by a genetic cancer.
In the article, he recounts the story of how Professors Li and Fraumeni used careful genetic detective work to identify P53 mutations as the cause of his family’s cancer. The article makes for a fascinating read.
In the super-cool innovation department, we couldn’t help but note the article in Science last week by a group of Chinese researchers who have designed a point-of-care MRI machine that operates at 0.05 Tesla.
For those of you that have had to go through a 45-minute claustrophobic session one of those Siemen’s million-dollar MRI behemoths, this is welcome news.
The new approach could be used at bedside and could revolutionize access to MRI scans. MRIs are a great tool to pick up early cancers and other physiological abnormalities.
Lichtman Lab at Harvard Maps the Human Brain
Also notable last week was as astonishing paper in Science that mapped the human brain in great detail.
Researchers from Lichtman Laboratory at Harvard worked with Google to take a 1mm cube piece of human brain and map it down the cell level.
They cut the tissue sample into 5,000 slices and scanned them with an electron microscope. Then they used a machine-learning model to help electronically stitch the slices back together and label the features.
The pictures published last week of brain features are amazing.
This Herculean project generated spectacular images and shows that one millionth of the human brain has 57,000 cells and 150 million synapses.
That would imply that the brain has 57 billion cells and 150 trillion synapses.
Holy smokes!
The implications for neuroscience research are many.
Simple bioelectronic brain-machine interfaces like those of Neuralink seem unlikely to work. Current BMIs use hundreds to up to a thousand probes. That seems to be far too few to be useful.
The problem of brain interface is far more complex than one might have imagined.
On the other hand, the fact that we can actually map the brain down to cellular level is itself remarkable and suggests that one could do pharmacologic work at the cellular level of the type done by companies like Eikon and Recursion and could obtain far more power for therapies than has heretofore been possible.
There are other possibilities. If you can map the brain you can begin to do a much better job of inferring function than today’s crude tools such as functional MRI.
One can only begin to glimpse today what will be coming in future decades in neuroscience.
In the same sense that the last fifty years of scientific progress in biology have featured dramatic advances in immunology and genetics one sense that the next fifty years could be led by advances in neuroscience.
AlphaFold 3 and Protein Languages
Last week saw Google introduce AlphaFold 3 which is commercially available through its Isomorphic Labs subsidiary.
Google said on the occasion:
“In a paper published in Nature, we introduce AlphaFold 3, a revolutionary model that can predict the structure and interactions of all life’s molecules with unprecedented accuracy. For the interactions of proteins with other molecule types we see at least a 50% improvement compared with existing prediction methods, and for some important categories of interaction we have doubled prediction accuracy. We hope AlphaFold 3 will help transform our understanding of the biological world and drug discovery. Scientists can access the majority of its capabilities, for free, through our newly launched AlphaFold Server, an easy-to-use research tool. To build on AlphaFold 3’s potential for drug design, Isomorphic Labs is already collaborating with pharmaceutical companies to apply it to real-world drug design challenges and, ultimately, develop new life-changing treatments for patients.”
We carry quite a few comments on what AlphaFold 3 means for biology and the biopharma sector. We reproduce a somewhat long but insightful exposition on protein languages by Stanford Ph.D. student Elliot Hershberg.
All observers agree that the advances in AlphaFold 3 are meaningful and point to more rapid understanding of biology and discovery of drugs. On the other hand, there is also consensus that AlphaFold 3 is not about to put pharma industry R&D departments out of business as the understanding the structure of something is not the same as understanding its function.
Derek Lowe wrote in Science:
“Structure is not everything. It's very useful, very good to have, and it will accelerate a lot of really useful research. But it does not take you directly to a drug, nor to a better idea about a target for a drug, nor to a better chance of passing toxicity tests, nor to a better chance of surviving oral dosing and the bloodstream and the liver. Better structure predictions are tools that we can use to attack those crucial problems, but they don't answer any of them. Drug discovery has not been solved by software, no matter what you might read.”
Further, protein interactions are dynamic and hard to model in the static manner facilitated by AlphaFold 3. Eric Dai of Dimension Capital, a healthtech investment firm, wrote:
“We’ve begun to model the static structure of monomeric and multimeric proteins. However, proteins are remarkably and necessarily dynamic entities, and their function (and druggability) can rarely be modeled via static structures. Just as a viewer of a film would have an impossible time deriving its full script, score, cast and plot from a single still, so too is our ability to infer functional characteristics and druggable pockets of a protein highly limited from its AF3 representation alone.”
Our own view is somewhat more optimistic. While protein folding and interactions information does not itself lead to causal analysis of biological pathways it gets you a long way there. Other methods can be automated that can provide causal information such as mining of multi-omic databases or CRISPR knockout gene experiments. As these methods are combined with the emerging world of protein languages it should be possible to substantially accelerate drug discovery in the years to come. One can appreciate the thinking that, for example, went into the billion-dollar investment recently made in start-up Xaira. Elliott Hershberg wrote last week:
“One of the most promising fields of biotech is de novo protein design, which aims to explore the full space of possible proteins for new types of molecular machines beyond what Evolution has already produced. This is a really big idea. Directed evolution—the set of laboratory techniques for rapidly sampling new beneficial mutations to known proteins—was a Nobel-worthy idea that has already produced a lot of value. Sampling beyond known proteins opens up an entirely new world of possibilities. Recently, de novo protein design has gotten a big boost from AI. This isn’t just a big idea—it’s apparently a billion-dollar idea. Last week, a new startup called Xaira Therapeutics announced its $1B Seed round of financing. David Baker, the senior author of the paper with the figure above, is a co-founder. While the vision for the company spans everything from basic biological research to clinical trial design, a major focus is to design new antibody therapies by improving recent generative AI algorithms from the Baker Lab.”
We live in incredible times. To recap, in the last week we’ve seen:
- A major breakthrough in MRI machine economics and design
- A substantial breakthrough in mapping the human brain
- A much-improved protein language that will facilitate improvements in drug discovery.
IQVIA Institute Report on U.S. Use of Medicines
Last week saw the IQVIA Institute publish a detailed report on the use of medicines in the United States. This report is of high interest because the U.S. pharma market is the world’s largest by far.
Key findings in the report include:
- Overall spending growth in the U.S. market for medicines slowed to 2.5% in 2023, reaching $435 billion at net price level, reflecting a sharp decline in COVID-19 vaccines and therapeutics.
- Spending growth accelerated to 9.9%, when COVID-19 vaccines and therapeutics are excluded, driven by innovation in areas such as oncology, immunology, diabetes, and obesity.
- Health services utilization including visits, diagnostics, elective procedures and drugs declined 3% from 2022, reflecting a 4-6% reduction across all indicators except for new prescriptions, which rose 3%.
- The average out-of-pocket cost per retail prescription increased in 2023, driven primarily by higher brand costs for GLP-1 agonists in diabetes and obesity; however, patient out-of-pocket costs remained less than $20 for 90% of prescriptions.
- Immunology drug use reached 1.2 trillion days of therapy in 2023 up 60% from 2019.
- There were nearly 700,000 GLP-1 prescriptions in February 2024, up 181% from two years ago.
- Drug shortages are far more common today than two years ago.
- Contraceptive use is down but use of emergency contraception use is up.
- U.S. medicine spending at estimated net manufacturer prices reached $435 billion, up 9.9% excluding the impact of declining COVID-19 spending.
- Market growth of 9.9% matched the 2015 growth rate during the early period of adoption of Hepatitis C therapies and has only been exceeded in recent years by 2021, when spending was boosted by the first year of adoption of COVID-19 vaccines.
- Net spending in the past five years increased $102 billion with a 5.5% CAGR.
- U.S. medicine spending at estimated net manufacturer prices reached $435 billion, up 9.9% excluding the impact of declining COVID-19 spending.
- Market growth of 9.9% matched the 2015 growth rate during the early period of adoption of Hepatitis C therapies and has only been exceeded in recent years by 2021, when spending was boosted by the first year of adoption of COVID-19 vaccines.
- There will be nearly $100 billion in revenue lost due to patent expiries in the next five years.
- Historical above market growth rates in oncology drugs will recede to below normal by 2027.
We highly recommend taking a spin through the report. We learned a lot from the careful work of the IQVIA Institute.
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