December 15, 2014
By Karl Thiel for BioSpace.com
1. Activists take control.
Considering that most biotech investors had a lot to smile about in 2014, there sure were a lot of activist investors talking about mismanagement, locked-up potential, and so on. Bill Ackman tried (and failed) to put Allergan in the arms of Valeant Pharmaceuticals. He lost out to Carl Icahn, who preferred to see the company with Actavis, and got his way. Third Point’s Dan Loeb urged Amgen to split into two companies, although the company has hardly been a laggard this year.
Prediction for 2015: Activists will get even bolder. A recovering economy will keep the stock market robust, but without the kind of returns we saw this past years, and activists will land more punches. True laggard companies will have few excuses for poor performance. Just for fun, I’ll make some specific predictions: Incyte, Puma Biotechnology, and Receptos will be acquired in 2015. (Just to be clear, this doesn’t mean I think this companies are underperformers—they’re not—or mismanaged). Achillion would be an easy name to add to the list, but it’s kind of weird they haven’t been acquired already. Maybe that means something?
2. Tax inversion.
Tax inversion wasn’t invented in 2014, but it sure got popular. There were about $40 billion in inversion deals in 2013 (the second most popular year on record). That more than tripled in 2014—and a lot more than that if you count proposed deals that never happened. In fact, over half of all inversion deals in the past decade took place in 2014. In the life sciences, that included deals like Medtronic and Covidien, Endo Health Solutions and Paladin Labs, Forest Labs and Actavis. But the trend is more notable for its rapid obsolescence, scuttling deals like Pfizer’s proposed acquisition of AstraZeneca and AbbVie’s play for Shire. Allergan and Valeant also didn’t happen, but for reasons that went well beyond the politics of tax inversion.
Prediction for 2015: With the Obama Administration openly hostile to tax inversion deals, this trend will likely go the way of Crocs and parachute pants. A Republican-controlled Congress may tip the scales in favor of inversions once again—Pfizer has already said that it hopes for more favorable legislature. But that probably won’t be enough. It was the Administration’s frustration with a lack of Congressional action, even before the mid-term elections, that caused it to take executive action to scuttle the AbbVie-Shire deal by reinterpreting existing rules. Of course, just like overplayed fashions, inversions will be back eventually—2015 may see a lot of legal challenges to the Administration’s new interpretation of law, paving the way for future deals.
3. Booming stock market and IPO window.
Although the year isn’t quite over yet, it’s clearly been a winner for biotech. The large cap-oriented NYSE Arca Biotech Index (BTK) is up about 47 percent year-to-date, and the broader Nasdaq Biotech Index is up about 35 percent. Needless to say, these performances thrash what has been a very good year for the S&P 500. On top of that, it has been a record year for biotech IPOs—70 so far, beating the former record of 66 from 2000.
Prediction for 2015: What some pundits are openly calling a “biotech bubble” will not deflate in 2015. The overall stock market will rise next year, and biotech with it—although it may underperform other sectors on a relative basis. Large cap biotechs, in particular, won’t be able to repeat their performance from 2014, but they’ll hold up well.
4. Ebola panic.
A massive Ebola epidemic in western Africa was responsible for more than 6,000 deaths. And 2014 also saw the first case of Ebola contracted on U.S. soil which, combined with widespread ignorance about how the disease spreads, helped spur a nationwide panic. But it did also encourage a lot of new R&D investment in developing a vaccine against a disease that has, for centuries, spelled death for most people who contract it.
Prediction for 2015: The public will pretty much forget about Ebola. But industry will move forward, and 2015 will see widespread deployment of some experimental vaccines. Without another widespread outbreak, however, it will be tough to determine how well they really work. That’s ok.
5. VC Funding improves, but only somewhat.
The final numbers aren’t in, but 2014 is on track to be the best year for biotech VC financing since 2008. The thing is, that’s not saying all that much. There’s a seeming disconnect between a booming IPO market and rising stock prices...and a seeming dearth of new investment. But there’s also an explanation for it: Biotech investing is hard, particularly at the earliest stages, and most VC firms just aren’t good at it. The best are sticking around, but many others are giving up or sticking to later-stage deals.
Prediction for 2015: VC funding will continue to pick up, but we won’t return to pre-2008 levels. Instead, more money will come from corporate venture financing, courtesy of big pharma and blue chip biotech. More companies will also look to bootstrap their startup costs so they can get far enough to win an option deal from industry. That could mean government backing, foundations, philanthropy and even (somewhat appallingly) crowdfunding. More ideas will advance through academia far enough to reach the partnership stage.
6. Drug prices soar.
Gilead’s Sovaldi, with its $84,000 price tag for a course of treatment, became the poster child for high drug prices and—from some perspectives—abusive practices on the part of drug companies. But it was hardly alone. Just a few years ago, the approval of Dendreon’s Provenge resulted in a lot of anguished articles about its $93,000 price tag. Now that sounds cheap. Novartis’ Gleevec, $30,000 when it was first approved in 2001, has reached the $100,000 mark. Mostly newly approved novel cancer drugs are priced even higher. Nor is this limited just to name-brand drug—prices of some generics have also soared, in part from an apparent lack of competition. A recent commentary in the New England Journal of Medicine observed that the price of some old meds like doxycycline, clobetasol, and clomipramine have jumped as much as fifty-fold over the past several years, much of it in the past 12 months.
Prediction for 2015: For brand name drugs, it will be the same old same old. We are reaching a point when drug companies will no longer be able to price drugs without any restrictions whatsoever, but that day won’t come in 2015. Drugs for orphan diseases and cancers will continue to be priced at nosebleed levels, going up rather than down. An alternative hepatitis C cures from AbbVie will be priced similarly to Sovaldi and Harvoni, at least initially, although AbbVie will eventually have to cut its price. Eventual cures from gene therapies or other modalities will be priced even higher than the drugs of today. A straight-up cure for a rare genetic illness could be priced at over $1 million, although we won’t get there in 2015. But if generic drug manufacturers continue to imitate innovator companies and jack up prices, their day of reckoning may come sooner.
7. New treatment paradigms arrive.
Most of the new molecular entities approved in 2014 were small molecules and therapeutic antibodies, but the launch of Merck’s Keytruda marked an important step forward for cancer immunotherapy, an area that has heated up incredibly in the past couple years. Amgen just joined the party with the earlier-than-expected approval of Blincyto. Aimed at getting the human immune system to work better against invaders like cancer, immunotherapies have attracted a lot of new investment. But it’s not the only emerging area to gain prominence. Over this past year, investors have embraced commercially-unproven treatment modalities, like RNAi, antisense, and gene therapy, showing a willingness to take on some extra risk on concepts that have struggled for decades without concrete results.
Prediction for 2015: The cancer immunotherapy area will heat up further. The imminent IPO of Juno Therapeutics will heighten attention on the area, with more large drug companies putting more money behind this approach. And while there won’t be rush of approvals for RNAi, antisense, and gene therapy drugs in 2015, we’ll get data that puts us a lot closer.
Read the BioPharm Executive online newsletter December 17, 2014.
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