Pathfinders Podcast

The Big Picture for Biotech

In this latest episode, our head of biotech research Brian Abrahams shares a big picture analysis of the industry, outlining the long-term disruptions and opportunities ahead for biotech.

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By Brian Abrahams
Hosted by Joseph Coletti

Published December 21, 2022 | 3 min read
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Key Points

  • Biotech firms haven’t been hit as hard by supply chain constraints, but they’re still experiencing some disruption, particularly in trial participants.
  • Biotech deals have slowed, which could set the scene for continued M&A.
  • The impact of the Inflation Reduction Act reforms to Medicare will hit revenue, but recent innovations are fueling sentiment.
  • Greater FDA flexibility could see drug approvals in new diseases such as hemophilia and muscular dystrophy.

The biopharma market has seen a significant slowdown in the last 12 months, but the industry is more resilient than most against the worst effects of war and recession. Its capacity for innovation, and recent treatment breakthroughs, are fueling continued excitement in the sector. And, despite some disruption at the policy level, the long-term prospects for the space are bright.

The pandemic not only put a spotlight on the R&D capability of biopharma companies, but it also showed how healthcare is an area that often defies market downturns.

“The defensiveness of the sector and its the insulation against pandemic headwinds helped get people excited,” said Brian Abrahams, Head of Biotechnology Research at RBC Capital Markets.

“But we ended up having somewhat inflated valuations for early stage companies, and perhaps a lack of appropriate discounting for drug development risks.”

As markets overall recovered in 2021, biotech reset as investors started to factor these risks in. However, biopharma has shown recent signs of recovery in the second half of 2022.


Supply chain resilience

Macro factors like the war in Ukraine and COVID have caused supply chain upsets for many companies, but biotech has been more insulated from these effects. Higher inventories and lower production costs compared to other sectors help protect firms from disruption. Pandemic-related constraints have also eased, and strong procurement teams can help manage any supply-related cost increases.

“Biotechs are not that reliant on China, and they tend to have good redundancy in terms of their supply chains.”



“That being said, overall costs have increased for biotech companies, which could have an impact on operating expenses going forward, although not by as much as the headline inflation rate, which is about 7-8%,” said Abrahams.

“Coming out of third quarter earnings, there's a general sense that companies are steering investors to expect higher than consensus operating costs going into next year.”

Companies are also reporting slowdown in clinical trials, which have been impacted by reduced numbers of participants because of the war in Ukraine. Ukraine, Russia, and surrounding countries account for an estimated 10% of people in clinical trials, due to a strong need in the region for treatments for a range of diseases from cancer to neurological conditions1. Other factors have also hindered enrolment, including industry competition, and staffing issues.


Increased appetite for M&A?

Biotech deals have sharply declined in the last year, with $10 billion raised in the first half of 2022 compared to $36 billion in the first half of 2021.

Smaller companies are increasingly trimming their programmes to preserve capital, while finding creative finance routes, such as monetization with royalty companies, debt agreements and creative partnerships. However, companies with strong fundamentals have been able to secure capital through more traditional means, and have mostly maintained their stock prices, with some dilution.

“We remain bullish on the prospects for M&A to pick up as we get into 2023,” said Abrahams. “We've seen almost $200 billion on the balance sheets as of mid-year, near record levels. Over a quarter of the biotech universe in our calculation is trading below cash-negative enterprise values.”

Many larger companies have an appetite for significant M&A deals and others are showing a preference for smaller deals and internal investment. Both rising interest rates and increasing FTC scrutiny of big deals are factors for consideration in any deal. But many companies are facing patent cliffs, with an expected loss of $225 billion by the end of the decade, and have a need to expand their pipelines. And non-recurring revenue from COVID vaccines and treatments will also need to be replaced.

Overall though, the stage should be set for more M&A activity in the space. And we think that would be positive for SMID-cap valuations, we usually start to see read-throughs there, as well as helping improve large cap fundamentals, so this effectively could be a win-win.

“We remain optimistic on the prospects for M&A to pick up as we get into 2023.”



The impact of the Inflation Reduction Act

One aim of the Inflation Reduction Act (IRA), signed into law in August 2022, is to reform Medicare by improving drug affordability. Under the act, Medicare would have the power to heavily discount medications, by up to about 60%.  This will have an impact on drug pricing and revenue, although the full effects won’t take place until later in the decade.

“The IRA is going to affect most drugs at the end of their lifecycles, when they will be getting close to patent cliffs,” Abrahams said. “Initial proposals included price controls for commercial insurance, which would have been even more extensive.”

Companies could potentially mitigate against disruption by raising prices following drug approval. There could also be an artificial shift of focus towards biologics - which have longer exclusivity periods and are exempt from Medicare negotiations - and away from small molecule treatments. Diseases affecting younger patients could become prioritised over older patients, who are more often subject to Medicare.


Greater FDA flexibility

At one time, the FDA would only consider fast-tracking for cancer-related treatments, but recent approvals for treatments in ALS and Alzheimer’s show this stance is flexing. Crucial upcoming decisions on treatments for haemophilia and liver disease will be important litmus tests of FDA flexibility, and not all recent decisions have been permissive.

“There have been some recent delays and clinical holds which shows that the FDA is still very, very focused on safety. So I think it’s important for investors to keep in mind the individual merits of a company's program,” said Abrahams.

“Just because something is for a tough disease doesn't mean it's definitely going to sail through. But we are seeing more FDA amenability and engagement of late.”

However, recent innovations are motivating improved sentiment and seeing the return of investment into the sector.

“We've started to see a lot of positive clinical data points over the last six months that I think have justifiably gotten people excited about next-gen medications in areas such as Alzheimer's disease, schizophrenia, and eye diseases,” said Abrahams.

View audio transcript

[1] Reuters, March 2022 (

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