November 26, 2014
By Karl Thiel for BioSpace.com
1. The likely repeal of medical device tax.
The 2.3 percent excise tax on medical devices is one of the least popular parts of the Affordable Care Act, at least among industry. It’s unpopular enough, in fact, that the new Republican majority in Senate will find plenty of sympathetic ears among Democrats listening to their calls for repeal. Sen. Orin Hatch (R-Utah) is a particular opponent of the excise tax, and with him set to become the new chairman of the Senate Finance Committee, he’ll be in a prime position to push through a repeal. While President Obama could veto any new legislation, there may be enough Democrats willing to side with Republicans on this issue to overcome it. Even if not, President Obama may choose to bow on this unpopular item.
2. The likely continuation of most other parts of the Affordable Care Act.
The new Republican Congress might like the repeal of Obamacare wholesale (they have already voted to repeal, revamp, tweak, or defund the law over 50 times already), but that’s not going to get them anywhere as long as a Democrat with a veto stamp is in the White House. While the GOP-controlled Congress now has more opportunity than ever to make some changes to the law—see above—changes will only come at the margins. And while Americans remain equivocal at best about the law—polls numbers continue to show that a slight majority disapprove, largely unchanged over the past year—the pharmaceutical and biotech industries are enthusiastic proponents. More insured patients getting drugs that they have carte blanche to set the pricing for? What’s not to like?
3. The Patent Cliff.
Ok, being thankful for this may seem like a bit of a stretch, but blockbuster patent expirations mean something very different for biotech than they do for pharma. In fact, FDA has approved exactly zero biosimilars to date. Amgen‘s Enbrel was expected to go off the patent cliff in 2012, but Amgen managed to swing an extension, causing Merck to give up on its plans to create a biosimilar.
And it’s not finished fighting. In July, Novartis’ Sandoz division, with a version of Amgen‘s Neupogen, became the first company to file for approval of a biosimilar under the pathway laid out in the Biologics Price Competition and Innovation Act of 2009. But Amgen is going to test the law, claiming Novartis didn’t properly follow the correct patent resolution procedures (see Legal Briefs).
Biotechs have generally fared better than their pharma counterparts when it comes to extending product lives with follow-on patents, while the technological hurdles keeps down the number of companies even willing to try to make a knock-off. And even when biosimilars do eventually get to market, it remains to be seen how much they will erode market share of the innovator products. All this isn’t just cause for biotech Schadenfreude; the industry also directly benefits from the patent cliff. Just look at the pipeline-fueled dealmaking and M&A that have taken place this year.
4. The FDA.
Few people like to give government bureaucracies credit for much, but the FDA is a fact of life. And in fact, it’s getting better. The bull market for biotech stocks that began in 2012 owes a considerable debt to the ramp in approvals that began around the same time. This year, FDA is on track to approve 38 new molecular entities—one less than were approved in 2012. That would put 2014 in the number three spot for the highest number of approvals in a single year, going all the way back to 1940.
5. The Stock Market.
Just about any way you slice it, biotech has been hot this year, extending an epic run that began in 2012. The Nasdaq Biotechnology Index has outperformed the S&P 500 year-to-date, up about 30 percent versus a less-than 12 percent gain for the broader market. If you’re just looking at just the last 6 or even 3 months, well, it’s outperformed then, too. The larger cap focused NYSE Arca Biotechnology Index? Even hotter, up 44 percent year-to-date.
This summer, Fed Chairwoman Janet Yellen singled out the biotechnology industry, saying it (along with social media) had “valuation metrics [that are] substantially stretched.” As you might expect, the market paused a moment to reflect on this bubble talk, then shrugged it off. What biotech and social media have in common is that valuations are often based more around what will happen tomorrow, rather than what is happening today. (Actually, that’s true of all stocks, but particularly these kind of high-growth.) Given the brisk pace of clinical development and approvals, there’s good reason to be optimistic about tomorrow, so maybe those valuations aren’t so crazy after all. (Hint: You know what’s going up faster than biotech stock prices? The price of new biologics.)
6. Plentiful capital.
It might have a little something to do with the aforementioned hot market, but there’s plenty of money flowing into the biotech sector these days. The IPO market continues to cook along. Just this month, the industry broke the prior record for biotech IPOs in a single year (the former milepost was 66, from 2000)...and still they keep rolling in.
Global life sciences M&A activity for 2014 to date is the highest it has been since 2001 (although some megamergers distort those figures). The cloud to this silver lining, if there is one, is in venture capital investment. It’s been a pretty good year: Through the first three quarters of 2014, $4 billion has gone into 344 biotech deals, up from $3 billion into 322 deals at this point in 2013. But deals dropped off sharply in the third quarter, and biotech—perennially the second biggest area for VC investment after software—fell to number three, behind media/entertainment.
The good news is that, unless things really slow down, biotech is on track for its best year for VC financing since 2008. The bad news is that things are still nowhere near where they were in 2008 and prior.
I hope there is plenty more for all of you to be thankful for, individually. Have a great Thanksgiving!
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