Joe Colletti
Welcome back to Pathfinders, a podcast series from RBC Capital Markets, where we explore the fast moving world of biotech and pharma. I'm your host, Joe Coletti. In today's episode, we'll hear from Brian Abrahams, Head of Global Healthcare Research here at RBC. In the 2025 Global Biotech Outlook that him and his team put out. Brian will dive into what's shaping biotech from new US healthcare leadership and AI driven drug success to GLP-1 expansion, and the return of M&A. Now let's dive into the conversation.
Joe Colletti
Brian, thanks for joining us today.
Brian Abrahams
Happy to be here
Joe Colletti
Brian, let's set the broader context to kick things off, following a mixed year for the sector, biotech was thrown a curveball post-election with a slate of unconventional health care leadership nominees. This uncertainty could be the biggest factor shaping the industry's outlook this year. But how do you see this evolving in 2025 that's probably better.
Brian Abrahams
Well, the bottom line is, there's still a lot we just don't know. The prospect of HHS head nominee, RFK JR and others impacting us Healthcare Policy and drug reviews is definitely still a headwind, an antiestablishment tone, if it were set from the top, could espouse public mistrust in western medicine and reduce screenings and utilization and also weaken public health initiatives around things like vaccinations. Incoming FDA commissioner, Dr Marty McCary, we think, is still a net negative for the group, just given his historical anti industry stances, which will probably impact new drug approval flexibility and upend a regulatory environment where things have been going pretty smoothly of late, with drug approvals and priority views having remained steady in 2024 and a record number of accelerated approvals last year. Interestingly, in a number of meetings with biotech companies our sense was that most were actually pretty supine about the new administration with Dr Marty McCary viewed as credible and probably somebody who's more focused on food safety anyway. CDER head Dr. Cavazzoni’s recent departure, spun positively as that could potentially pave the way for a more flexible leader and optimism out there that a more unified Congress could land more favorably for the sector. That was before we got the news that Vivek Ramaswami is leaving the administration, and I've sensed a lot of folks, both investors and people in industry, had viewed him as providing kind of a backstop in the face of potential cutbacks, just given his pro industry stance. So we'll really have to see how all this plays out.
Joe Colletti
Despite all the uncertainties that you just mentioned, there's still plenty of opportunity in the sector. Can you talk about some of the ones that are emerging that you're most focused on?
Brian Abrahams
We’re still seeing world class innovation in the group, and successful companies are being rewarded with substantial stock appreciation and capital access. So that's encouraging, so nice payoffs for those willing to take the risks. Changes at the FTC could catalyze more M&A this year, which is always a big driver in biotech. Sentiment among our surveyed investors, seems incrementally more optimistic as compared to six months ago, and we're still hearing companies are able to get good pricing power without a ton of payer pushback as they launch new drugs, particularly in rare diseases, and they're also able to increase prices of more mature therapies to sustain some growth. On that backdrop, we see the best opportunities. First off, in commercial stage, companies looking most out of favor, perhaps following exaggerated recent downside moves. Secondly, companies that could be M&A targets if BD activity picks up again in the space, and third, names that have underappreciated near term upside, catalysts grounded in sound mechanistic rationale and prior data.
Joe Colletti
What about the investment landscape? How has that changed? Or how do you see it changing right now?
Brian Abrahams
I think that the macro has become increasingly dominant. Biotech, at least smaller cap, pre commercial names, tends to have a long time horizon. Drug development can be a five to 10 year cycle. That doesn't play that well in a persistently high interest rate environment, which is part of why we think the group's underperformed, and is probably something that's going to remain an overhang here. Policy and regulatory uncertainties have been more prominent now than in the past, not just under the new leadership, but also as people try to digest the impact of the Inflation Reduction Act, or IRA, on revenue tails. IRA is the most sweeping change to drug pricing that we've seen in years, and it's complex, and there's still a lot of unknowns about exactly how it's going to affect the whole biopharma group. Pharma last year deployed $6 billion to in license or partner Chinese pharma assets. So that's definitely a growing trend worth watching, which we haven't seen in the past. Some worry that cheaper assets coming out of China could undermine values of some of the innovative US listed, small and smid cap companies. Despite those headwinds, though, new drugs are getting approved, many new drug launches are going well. And the underlying science in terms of how drugs are developed, the modalities we have to hit a molecular or genetic target, and the tools we have to measure and predict future success have never been more advanced. So it's still a really exciting time to invest in the biotech space.
Joe Colletti
Brian, let's talk a little bit more about technology and innovation—themes which have really been driving and catalyzing investor excitement and opportunity throughout the space for the last at least 18 months, maybe more. Can we talk a little bit about the technologies and the therapies that we should see breakthroughs in in your view, in the next year, and some of the key launches that you're really zoning in on.
Brian Abrahams
So this year we're looking at a number of things, next generation oncology, targeting cancer cells more specifically to avoid side effects. Obesity, we know the GLP-1s have been huge successes, but how can we find better tolerated and more convenient options, either as replacements or as add-ons? In neuropsych, we're closely watching Huntington's disease, depression and epilepsy, all spaces with novel approaches that are rapidly advancing. We’re seeing increasing interest in large-market spaces like cardiovascular and pain - with key LPa data and cardiomyopathy launches from several biotechs this year. These are areas that weren't even recognized just a few years ago. The launches of new Alzheimer's drugs have been slower than anticipated, but that could pick up as doctors get more experience and the agents become easier to administer, and whether GLP-1s will work in that setting, will also learn this year. That's something that could further disrupt the space. And lastly, rheumatological disorders, that's a huge sub sector that's likely to remain high profile with many promising new targets and approaches.
Joe Colletti
There's a long list of breakthroughs that you mentioned there, and I know we're just scratching the surface, not just on that, but on the overall outlook for next year. And I encourage our listeners definitely it's worth contacting your RBC representative to take a look at the full global biotech outlook. Let's move on to the deal environment. What do you expect to see in terms of activity and trends out there this year?
Brian Abrahams
We calculate that large biopharma companies have over $350 billion in global annual sales that are going to be at risk over the next decade due to patent cliffs. They have over $150 billion in cash on their balance sheets, and likely way more dry powder to do deals if they're willing. So the stage is set, we think, for more deal activity, and we note that premiums and we note that 30 day premiums on deals have been getting higher, peaking at 120% this past year. So finding those takeout targets has proven fruitful. Deal flow was slower in 2024, but we've already started to see things pick up again with a nearly $15 billion biotech deal just announced earlier this month, starting off the year with a bang. That's almost three times the size of the biggest deal in all of last year. We think that could continue, especially with a more permissive FTC.
Joe Colletti
Now to wrap up and to leave the listeners with a little bit of directional input, I want you to just give me, you know, your one phrase, or really your headline that you feel will define the biotech story in the next year.
Brian Abrahams
Uncertainty and opportunity, a lot of unknowns, but a lot that could move the needle if you find the right stories with the right teams. Underlying science, clinical development approach and commercial prowess.
Joe Colletti
Brian, thanks very much for joining us.
Joe Colletti
That's it for our conversation today. Thanks again for listening to Pathfinders in Biopharma, brought to you by RBC Capital Markets. Please remember to subscribe to get more great content and be alerted about future episodes. This episode was recorded on January 24th 2025. If you'd like to learn more or continue the conversation, please visit rbccm.com/biopharma, or contact your RBC representative. See you all next time.