Key Points
- New modalities are leading a surge of biopharma innovation, boosted by FDA support
- Competition is intense in some therapeutic areas, but this too is helping to drive innovation
- Imminent loss of drug exclusivity is set to hit revenue hard, which may galvanize M&A activity
- The Inflation Reduction Act (IRA) threatens revenue tails; pending legal actions on implementation could have a big effect on biopharma stocks
- There is potential opportunity in undervalued small innovators, and bigger companies that succeed in diversifying
Discovery and promise
Innovation is the lifeblood of biopharma, and the Biotech Halftime report showcases the wealth of recent and potential breakthroughs in new modalities.
“We’re excited about the launches of some innovative drugs in areas like Alzheimer’s and psychiatry, and we’ve started to see really promising clinical data in areas like Nash and TTR,” notes Brian.
Regulatory input, under FDA Commissioner Robert Califf, is supportive of this innovation. “There’s a lot more communication between drugmakers and the FDA, with increasing flexibility and permissiveness for earlier approvals and high unmet-needs diseases – even before the traditional Phase 3’s are completed,” Abrahams points out.
Crowds of competitors
It’s an exciting space, but one that’s in danger of overcrowding, as multiple companies compete in overlapping therapeutic areas, often pursuing similar modalities. “We know there are at least nine companies focused on sickle cell disease alone,” remarks Renza.
While competition certainly has its drawbacks, there are several benefits; data from competitors can serve as an additional catalytic event. Whether the data is positive or negative, the results can be informative.
“This competition drives new learnings and better productivity – it just leads to a greater rate of innovation,”
M&A: signs of recovery?
Several large market biopharma drugs are poised to lose exclusivity which could add up to approximately $150bn in losses by 2028.
“We believe the need to plug these gaps should provide greater impetus for M&A activity,” says Renza.
Deal volumes are significantly down on recent years, but a pick-up in activity could happen in the near-term – despite increasing deal scrutiny from regulators. “The tone and sentiment on M&A from biopharma management teams has been consistently positive throughout the year,” Renza adds.
A fight for revenue tails
Besides looming patent cliffs, another key challenge is the potential for unintended consequences arising from the Inflation Reduction Act (IRA). The prospect of price cuts could have “a chilling effect on revenue tails” for drug makers, Abrahams says.
Legal action is pending, and the analysts believe any preliminary injunctions over the next few months could have an outsized, positive effect on revenue and stocks, if they result in preliminary injunctions that delay drug pricing negotiations.
Tomorrow’s winners
The slowing of M&A has held back the small and mid-cap biopharma space. However, the report suggests several stocks with exciting pipelines are trading below fair value – “an opportune time to step in, especially ahead of clinical data readouts,” Abrahams suggests.
As for the larger cap companies, he suggests that diversification initiatives could restore confidence in their longevity. According to Abrahams, “These are going to be the bigger winners who can actually invest their cashflows effectively into R&D and business development successfully – and that could start to broaden enthusiasm about the group overall.”
