Mark Odendahl
Welcome to the Industries in Motion podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast-moving markets and industries to help you stay ahead of the curve. Please listen to the end of this podcast for important disclaimers. My name is Mark Odendahl, and I am Head of US Capital Markets Research. Let's get into today's episode. I'm happy to introduce our next guest, Dr. Brian Abrahams. Brian is Co-Head of Biotech Research here at RBC. He's been here nearly five years, he's been on the street 17 years, and brings leading insights in both large, mid and small cap biotech companies. Brian, thanks so much for joining us here today.
Brian Abrahams
It's great to be here. Thanks for having me, Mark.
Mark Odendahl
There's been a large amount of investor focus on biopharma in the last couple of years and the global pandemic has really shone a light on pharmaceuticals, particularly as we all witnessed the heroic effort that went into producing vaccines for COVID-19. Brian, we'd like to kick it off today talking about your Imagine Game Changer series of reports and take it from there as it relates to the biotech space.
Brian Abrahams
Biotech is a rapidly changing industry. And as we think about the sector for the long term, there are a number of dynamics beginning to percolate today that we believe have the potential to dramatically transform the way medicines are developed and delivered for years to come. Gene editing using cutting-edge technologies like CRISPR CAS9 has started to take center stage of late and this is something that could be highly disruptive in terms of the way we treat rare genetic diseases, as well as cancers and infectious diseases as well.
This year, we've seen the first evidence that a drug that edits and fixes a genetic mutation can be given directly to a patient. Now, while we still need to learn a lot more about how safe this technology will be over the longer term, and how broadly it can be utilized for different disease states, that's certainly a significant step forward.
In the psychiatry space, we're also seeing a lot of changes in our approaches to serious chronic mental health disorders. For years, the way we've treated diseases like depression and schizophrenia has been predicated on what's called the neurotransmitter hypothesis, giving people drugs like SSRIs, or antipsychotics that modulate up or down chemical signals in the brain like serotonin and norepinephrine. And while those can have some beneficial effects, they don't work that well for most people, and they often have side effects that make them hard to take for long periods of time.
Scientists and drug makers are now trying a different tactic, leveraging our latest understanding of neurobiology and looking at novel therapies with different mechanisms in order to try and get better efficacy without as many tolerability issues, or to change the brain circuitry more durably - sometimes even with short courses of treatment. We've even seen derivatives of psychedelic drugs show some early promise in treating mental health disorders.
Mark Odendahl
And how has the COVID pandemic impacted the way biotech companies position themselves for the future?
Brian Abrahams
Far and away the biggest impact COVID-19 has had on the delivery of healthcare has been on the acceleration of telemedicine. Telemedicine offers greater convenience to patients and doctors, as well as the potential for greater cost savings. Use of telemedicine for outpatient visits comprised over 40% of US doctor appointments at the peak of the pandemic and, while numbers have since stabilized now that in person is possible, some reports say it remains up to 38 times higher than it was before the pandemic. Even as COVID-19 potentially abates going forward, it's clear that telemedicine is here to stay. That means companies are going to have to figure out how to navigate this new environment and develop new strategies in order to engage with patients and physicians.
Mark Odendahl
Could you give us an example of some companies that could potentially be winners in telemedicine?
Brian Abrahams
Absolutely. Psychiatry, endocrinology, dermatology, rheumatology, and neurology are therapeutic categories that have the highest degree of telehealth engagement. These also happen to be areas of significant focus for many biotech companies. Diseases that rely on in-person physician exams in order to diagnose may see a headwind to market growth, making it important for companies who are going to be successful in these spaces to find new ways that doctors can identify these disorders by asking certain questions over the phone or over the internet.
Doctors may also be reticent to switch a patient's therapy via telemedicine as compared to an in-person visit, which could favor drugs that are well-entrenched incumbents and make it tougher for companies launching new drugs. And this may especially be true given that these company’s commercial teams are likely to get less in-person time now in doctor's offices or in medical meetings in order to talk about their product.
And then lastly, convenience could become increasingly important. Drugs that are easy to take and don't require a lot of monitoring or bloodwork have gained a lot of traction during the pandemic with all the bandwidth constraints among hospitals and providers. And it may be hard for patients to go back to less convenient therapies. So, in short, I think companies that are going to be successful navigating the new telemedicine environment are those who can optimize their drug’s properties, the diagnostic paradigm and patient engagement to align with the new world of healthcare delivery that's likely to be long-lasting.
Mark Odendahl
Brian, I don't think we can discuss biopharma without discussing the FDA approval of a new Alzheimer's drug earlier this year. It has been met with kind of mixed reviews. So I was wondering what your thoughts were on that?
Brian Abrahams
So Alzheimer's disease is a devastating illness that affects over five million people in the US alone, and the treatment options out there are extremely limited. Biogen had worked on a novel therapy called Aduhelm, aimed at reducing the beta amyloid plaques that accumulate in the brains of people with this disease. But the development and approval process hasn't altogether been smooth. First, the two Phase III trials were stopped when an interim look at the results showed that the drug wasn't likely to work. But then, follow-up data from the studies actually showed that there might be a small signal of benefit that the drug was having on people's cognition and function. They put the mixed results up before a panel of experts convened by the FDA and the experts all wanted to see more data before the drug would become available.
But then the FDA subsequently decided to approve the drug in light of its potential to help these patients who had no real other treatment options, and on the basis that reduction in these brain plaques might ultimately lead to more meaningful clinical benefits for Alzheimer's patients down the line.
As one can imagine all this back and forth, along with the high price tag for the drug at $56,000 per year, five-to-ten fold what the market had expected it might cost, stirred up some controversy. We've seen key opinion leaders in the space write editorials arguing against the use of the drug. But several major academic centers have said they won't use Aduhelm, at least for now. Uptake has also been very slow since it's become available in June, in part because of all this backlash and also because the logistics of screening patients that are best suited for the drug and starting them on a monthly IV infusion can be challenging.
Also, because the full reimbursement from Medicare, which most Alzheimer's patients are on, is not expected to be potentially available till the spring. So for now, there's still some time before we're going to be able to gauge what the true demand for this drug looks like. And also whether other companies developing similar therapies are going to be able to get their Alzheimer's drugs on the market in the near term as well. One risk we're keeping an eye on is whether this controversial approval stimulates greater potential for a disconnect between approval and access.
Mark Odendahl
Brian, you talk about this decoupling of approval and access, could that have ramification for other companies in the sector?
Brian Abrahams
So typically, in the past, drugs that are FDA approved, are usually covered by Medicare and commercial insurers, albeit sometimes with prior authorizations. But a potential concern is that the Aduhelm experience might empower insurers to further scrutinize data for new drugs even more so, before allowing reimbursement.
Mark Odendahl
Let's talk about drug pricing. It's always a big topic with investors. And the other day the HHS put out a new report outlining the Biden administration plans to help control drug spend. Do you have a reaction to that report?
Brian Abrahams
Prescription drug prices and affordability have indeed been important topics because of how important they are to people's ability to pay for their medicines and get the care they need – certainly a hot-button topic of political focus of late. And what we're seeing coming out of the Biden administration are many of the same concepts we've seen policymakers talk about a lot in recent years.
But while the rationale may be legitimate, achieving these goals may not be so simple. And even if there's more legislative emphasis on trying to get something done, there's still a lot of discord and disagreement, even within the same political parties, as to what the right approach should be. So the bottom line for us is, when we think about the biotech sector overall, we do acknowledge that with drug pricing continuing to be a key policy focus, rhetoric could remain an overhang on the space through year-end. And that could spook some folks from stepping in. But that being said, we see limited substance and a high likelihood that if anything ultimately gets passed, it would either be so diluted after all the back and forth, or just not broadly implementable from a practical standpoint, that the effect on long-term revenue for most innovative biotechs would be limited.
Mark Odendahl
Brian, you recently also published a report on M&A in the sector, giving us an update on what's happened and what could happen in the M&A markets and biotech. Could you expand on that?
Brian Abrahams
So biotech as a group has been down on the year after peaking in February, with major indices down close to 25% off their peak. One of the important things we think has kept sentiment weaker in the group has been a slowdown in M&A activity. And that's in addition to other factors like weaker commercial performance during the pandemic, a string of negative data catalysts and FDA unpredictability. We see several fundamental reasons why this should start to pick up again, though. Biopharma balance sheets remain strong. Maturing franchises and patent cliffs create the need for larger companies to buy growth and diversification, and valuations have become more attractive. Our analysis indicates that historical trends suggest the potential for M&A to pick up again. Over the past five years, any sharp downtick in the number of major biopharma deals in a half-year has always been followed by an immediate sharp uptick. We're running at only about a third the aggregate annual deal value since 2018 of $125 billion, so we're due to catch up. And the only time the SBI Biotech Index has had a downtick over a half year – that's the back half of 2018 – deal flow and size were also down as we saw in the first half of this year, but then picked up substantially again over the next six months. So we think the stage is set for an increase in deal activity, and that tends to create excitement and upside for the sector. In fact, after only six notable buyouts before mid-year, we've now seen three takeovers in biopharma in just the past several weeks.
Mark Odendahl
Are there are regulatory issues to think about?
Brian Abrahams
Yes, increasing FTC scrutiny could dissuade M&A. And while it's been difficult to predict what types of deals regulators would push back on – it’s not necessarily super common in the biopharma space – that can certainly play into company's minds as they think about the stage and size of companies they may want to require. There are other potential challenges as well. For instance, we're seeing more and more largescale partnerships in the group such as Gilead Arcus, and Biogen Sage, where larger companies put up an upfront payment, and then pay milestones on the back-end based on clinical, regulatory and commercial progress. Those can be fundamentally fruitful for both companies involved and provide a risk-mitigating strategy for the larger party. But they also can be less enticing for investors who might be looking for a more immediate exit strategy at a premium.
Now, while the aggregate deal value remains well below typical levels, we expect the number and potentially size of deals to pick up throughout the rest of this year and into next, and we believe this is going to start to help the sector bounce off its lows. There's also been some interesting trends we found in terms of disease area and market cap size that seem to be sweet spot targets for potential acquirers of late. Oncology, immunology and rare disease companies have all been most attractive to acquirers of late, a pattern we expect to continue. Oncology offers cutting-edge science, good reimbursement and fast drug approval opportunities. And immunology and rare diseases offer unmet need and conditions with room for improvement. We're also seeing a lot of deals taking place at the $1-$3 billion market cap level. So we could see small and SMID caps be the most in play, but we still wouldn't rule out the potential for another large acquisition or merger, as we've seen quite a few, including Celgene and Alexion, taking place in the past few years.
Mark Odendahl
Brian, this has been a great conversation, your insights, along with the rest of the team contribute to what we think is the leading biotech research franchise.
Brian Abrahams
It's been a pleasure, Mark. Thanks so much.
Mark Odendahl
What else lies ahead in today's ever evolving markets and industries. We'll be keeping track right here on Industries in Motion. Until then, thank you for joining us on this episode recorded on September 13 2021. Make sure you subscribe to industries in motion wherever you listen to your podcasts. If you'd like to continue this conversation, or interested in more information, please contact your RBC representative directly or visit our website, www.rbccm.com/industriesinmotion for further insights.