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The biopharmaceutical anomaly

Investment and funding has continued to flow into biotech, unlike most business sectors. But with healthcare and hospital budgets increasingly under pressure, do belt-tightening and consolidation lie ahead? Melanie Senior investigates, with additional reporting by Riku Lähteenmäki.

The biopharmaceutical industry largely has been spared from the public market rout that has gutted most economic sectors since COVID-19 hit. After an initial, indiscriminate shock to stock prices in March 2020, investment in biotech companies listed on the stock exchanges has actually increased. The Nasdaq Biotechnology Index emerged from the slump to reach a five-year high — up 11% since the start of the year, following a 20% rise in 2019. Biotech initial public offering (IPOs) have also picked up; in June, the over two dozen 2020 listings had together raised nearly $8 billion — more than over the same period in 2019. In early June, CAR-T cell therapy maker Legend Biotech raised $424 million in the largest ever Nasdaq listing by a Chinese biotech.

Ruslan Grechka / Alamy Stock Photo.

“The capital markets remain open and active,” to the surprise of many, says Geoffrey Porges, senior biopharmaceuticals analyst at SVB Leerink. The non-discretionary nature of healthcare — and the sector’s key role in finding solutions to the pandemic — have also attracted a flood of generalist and retail investors as they flee struggling sectors like retail, restaurants and airlines. Private biotech financing also had a record first quarter. The pandemic, which has been poison to most sectors of industry, has brought funds to biopharmaceutical enterprises from an even wider spread of investors than normal.

Crisis? What crisis?

For some biotech companies, listing now — in the midst of what economists call the worst recession in living memory — is easier than in late 2019, when the China–US trade war caused market jitters. ADC Therapeutics, for instance, pulled an IPO in October 2019 and raised an oversubscribed $235 million in early May 2020 (Table 1). Others are seizing the advantage to raise money, even if they don’t really need to: gene therapy venture Generation Bio raised $230 million in a June IPO, after raising $110 million in private money just four months earlier. Its assets are still preclinical. So are those of Boston-based gene therapy group Akouos, which recently filed for a $100-million IPO, having raised $105 million in a series B in March.

Table 1 Top ten IPOs of 2019

Follow-on public financing has also been healthy, topping $19 billion so far this year, including almost $2 billion raised by RNA-focused Moderna in two separate share offerings in February and May 2020 — the earlier one at $19 per share, the later at four times that. Moderna is the breakout ‘COVID-19 performer’ so far: its shares have trebled since the end of 2019 on the back of heated excitement around its RNA-based vaccine candidate against the novel coronavirus (SARS-CoV-2), slated to start phase 3 trials in July. (Press-released interim data on eight patients from a small study led by the US National Institute of Allergy and Infectious Diseases claimed that the candidate, mRNA-1273, generated an antibody response similar to that seen in convalescing patients.)

Valued at over $23 billion, loss-making Moderna is just one of a growing list of biotechs who have mobilized resources to find a vaccine or therapeutic for COVID-19 — and seen their shares rise as a result. Also riding the COVID-19 wave: Gilead Sciences, whose failed hepatitis C virus (HCV) small-molecule candidate remdesivir, an injectable nucleoside analog that inhibits viral RNA-dependent RNA polymerase, was the first COVID-19 therapy to receive US Food and Drug Administration (FDA) Emergency Use Authorization. Regeneron’s 60% share-price gain since the start of the year comes thanks to a monoclonal antibody (mAb) duo due to enter the clinic in June and rheumatoid arthritis drug Kevzara (sarilumab), a human IgG1 mAb targeting the interleukin-6 receptor, being investigated as a therapy for patients with severe COVID-19 disease. Infectious-disease- and immunology-focused Vir Biotechnology has also nearly trebled in value since January, to $4 billion, after announcing COVID-19-related collaborations on antibody therapies with GlaxoSmithKline and Alnylam Pharmaceuticals, itself up 20% since the start of the year.

By mid-May 2020, there were over a hundred treatments and more than a dozen vaccine candidates in human testing across the wider biopharmaceuticals industry, academic institutions and non-profits. This extraordinary effort is in part enabled by the healthy financing environment for biotech during 2019 (and much of the previous decade). Last year saw large boosts to industry revenue, even higher rises in R&D spending, and chart-topping up-front partnership financing.

The COVID-19 effort has generated its own flurry of deals — including, most recently, Merck’s May 2020 acquisition of private Austrian biotech Themis, with its measles virus vector-based vaccine technology. The pandemic has not curbed big biotech or big pharma’s broader pipeline hunger, either. Non-COVID-19-related deal-making has slowed, but not stopped. It is mostly restricted to partners with an existing relationship. (Carrying out first-time meetings and due diligence over video conferencing is tricky.) Prices are holding up, at least for popular assets. In late May, Gilead bought a $200-million equity stake in Hayward, California-based Arcus Biosciences, at a price nearly triple the company’s valuation during most of 2019. The deal mirrored Gilead’s noteworthy 2019 collaboration with Galapagos of Mechelen, Belgium — in structure, if not size. A further $175 million up front sealed Gilead’s access to a palette of cancer drug candidates, led by a humanized IgG1 mAb targeting TIGIT (T-cell immunoreceptor with immunoglobulin and ITIM [immunoreceptor tyrosine‐based inhibitory motif] domains) in phase 2 trials for non-small-cell lung cancer, in various combinations with the anti-PD1 (programmed cell death receptor 1) fully human IgG4 mAb zimberelimab and AB928, a small-molecule adenosine A2a/A2b receptor antagonist. (On March 2, before the pandemic roiled markets, Gilead forked out $4.9 billion, also at a healthy premium, for five-year-old immune-oncology firm Forty Seven and its humanized IgG4κ anti-CD47 mAb antibody magrolimab, in phase 2 trials for myelodysplastic syndrome and acute myelogenous leukemia.)

The sector’s public prominence amid the pandemic may also have reduced the threat of immediate curbs on US drug pricing, according to many analysts — a threat that cast a shadow over the industry during 2018 and 2019. President Trump is looking to the sector to help him navigate out of the lockdown, restart the economy and win another election: hardly the time to clobber it with unfriendly new rules, such as an international reference price index.

Clouds may be looming

It’s unclear whether the good times will last. “It’s quite understandable that companies are raising capital now, while markets remain strong,” says Joshua Schimmer, senior managing director of biotech at Evercore. “We may still see a lot of volatility,” he says — though acknowledging that, if the sector continues to weather the crisis as well as it has been, “it’s hard to imagine what else could derail it.”

Until now, trillions of dollars of government support have cushioned the full impact of lockdown on employment and household budgets (including, in the United States, the affordability of health insurance) and created a sharp disconnect between stock markets and the underlying economy. If and when that support dries up and markets collapse, all but the best-capitalized companies could suffer. Negative news from the COVID-19 pipeline will also take the heat off healthcare stocks and some firms’ ability to raise capital. A second lockdown before a drug or vaccine is found will mean further trial delays across non-COVID-19 R&D, stretching the resilience of biotech companies and their investors even more.

Slowing markets will disproportionately affect smaller and pre-revenue companies, including those whose clinical trials have ground to a halt during the pandemic lockdown. The biotech industry has raised over $140 billion in debt over the last five years — including a further $10.9 billion so far in 2020. Some of this debt is plain vanilla loans to large, cash-generative biotechs like Amgen. But ‘convertible’ loans — which can be converted into equity at a later date, such as at a subsequent financing round — have also become more popular over the past several years among smaller, pre-revenue companies, in part because they delay the tricky business of valuing such groups. In early March 2020, BridgeBio Pharma raised a higher-than-anticipated $475 million in convertible notes; Gossamer Bio raised $200 million’s worth in May, alongside a smaller equity offering.

In good times, borrowing is easy, and it allows companies to avoid diluting the value of their shares (which is what happens in an equity offering). But in tougher times, some companies may be unable to service or repay their debt, leading to bankruptcy — or a fire sale. Convertible loans, whose terms may vary from months to several years, may also need to be repaid in full if a company fails to meet fundraising targets; lenders get priority over shareholders in the case of insolvency.

There are already signs of trouble. Companies relying on revenues from a narrow portfolio of hospital drugs have had to cut costs or sell out at bargain prices. In May 2020, Portola Pharmaceuticals, which sells Andexxa (recombinant human coagulation factor Xa inactivated-zhzo) for excessive bleeding, was picked up by Alexion Pharmaceuticals for $1.4 billion, or $18 per share — well below Portola’s pre-COVID-19 share price of close to $30. Sage Therapeutics — whose $575-million follow-on financings topped the league in 2018 and 2019 — in early April announced cuts to head count and costs, facing dwindling sales of its hospital-administered postpartum depression medicine Zulresso (brexanolone) and an idle sales force.

On the IPO markets, Pitchbook reports a flurry of listings by ‘shell’ companies (also known as special-purpose acquisition companies), set up to buy promising yet cash-hungry targets. Tübingen, Germany-based T-cell cancer immunotherapy-focused Immatics Biotechnologies in March 2020 reverse-merged into Nasdaq-listed Arya Sciences Acquisition, raising $252 million.

COVID-19’s full impact on the sector has yet to play out. A funding squeeze may lead to better capital efficiency — a skill some companies lost amid the funding bonanza of the last few years. Industry’s rapid, collaborative response to the virus outbreak, along with some promises, such as from AstraZeneca, to provide any eventual vaccine at cost, may help restore the reputation of a sector criticized for price-gouging, hiding bad data and neglecting diseases of the developing world.

Yet the drug pricing debate, if pushed down the road, hasn’t gone away. The sector’s value to society has never been clearer, but what society can afford to pay for that value is far less so, particularly as economies reopen amid mass unemployment and heavily indebted governments. “It’s a delicate time for the industry,” says one analyst.

Longer term, this pandemic should mean more public funding for the life sciences, driving emboldened private investors to follow. “Investment into pharma and healthcare will continue to increase,” predicts one UK-based fund manager.

The focus of this investment may change, though. Governments are now much more likely to prioritize vaccines, anti-infectives and preventative care. High-priced gene and cell-based therapies and drugs for rare diseases — hot spots in the years up to and including 2019 — may rapidly be viewed as less affordable as population health measures are prioritized, and if economists’ predictions of a deep, dark recession bear out. “I worry that much of the money flowing into the sector today isn’t going into the right places,” says the fund manager.

A look back at 2019

2019 can seem either a long time ago or just yesterday, thanks to the distorting effect of a global pandemic. Yet public biotech companies’ resilience so far is due, in part, to 2019’s healthy financials, increased revenues and robust investment in research and development (Box 1 and Supplementary Table 1).

Capital continued to flow strongly into the biotech sector in 2019, even if the figures didn’t quite reach the heady heights achieved in 2018. Total public biopharma fundraising was over $122 billion, with IPO and follow-on offerings bringing in about $33 billion of that (Fig. 1). Up-front (committed) partnership monies topped $14 billion, beating 2018, largely thanks to Gilead’s $3.95-billion payment to partner Galapagos. The Nasdaq Biotechnology Index also performed a lot better than in 2018. Much of the 20% overall rise came in the last quarter of 2019, more than making up for 2018’s 9% decline (Fig. 2).

Fig. 1: Global biotech financing.
figure1

Financing over the past six years. Source: BCIQ BioCentury Online Intelligence.

Fig. 2: Nasdaq Biotechnology Index over time.
figure2

As of 6/1/2020. NBI, Nasdaq Biotechnology Index; S&P, Standard & Poor’s 500 Index.

The $10.6-billion total IPO haul — only a fraction below the previous year’s — was dominated, as usual, by listings in the United States. But Asia’s share of IPO money increased from 32% to 42%, filling the hole left by a dwindling number of European listings. Targeted cancer immunotherapy and rare genetic diseases remained white-hot (Table 1 and Box 2).

Follow-on financing in 2019 totaled $22.5 billion — a slight fall from 2018, but still including four late-stage companies that each raised over half a billion (Table 2). Two of those, cancer-focused antibody–drug conjugate (ADC) company Seattle Genetics and depression-focused Sage Therapeutics, were also in 2018’s top ten. Three dozen others banked over $200 million each to fuel their pipelines; gene-therapy venture Sarepta Therapeutics and Agios Pharmaceuticals, focused on cancer and rare genetic diseases, featured in that category both years.

Table 2 Top ten follow-on financings of 2019

Higher revenues spawn R&D splurge

For many of the sector’s large- and mid-cap companies, 2019 was a good year. Large-caps recovered from a miserable twelve months during which generics, biosimilars and actual and threatened pricing curbs caused investor caution. A new cohort of unicorns benefited from profligate private investment and average IPO sizes above $100 million. Total industry revenues were up 11% to $135 billion, with Amgen, Gilead and Biogen accounting for 44% of that (Table 3, Box 3 and Supplementary Table 1). But the biggest revenue rises were among mid- and small-cap companies, whose aggregate revenues were up 19% and 21%, respectively, thanks to rapidly progressing pipelines and portfolios, including across cancer and rare diseases. The top ten revenue-generating companies (including both product and partnership revenue) accounted for almost two-thirds of the total.

Table 3 Top ten revenue-producing biotechs of 2019

The increase in revenues coincided with increased industry R&D spending — an increase even more substantial than that over the previous year. A total of $60.1 billion in R&D spending represented an increase of 27% and a healthy 44.5% share of these larger revenues (Fig. 3). In 2018, just 39% was reinvested into R&D. Seven companies spent more than a billion dollars on R&D, including Gilead, which doubled its R&D spending to over $8 billion as it seeks to fill the hole left by its declining HCV franchise. Regeneron’s $3 billion R&D investment in 2019 was up almost 40% on the previous year, leading to lower net income, despite revenue growth of 17% driven by wet age-related macular degeneration treatment Eylea (aflibercept; a recombinant fusion of portions of the extracellular domains of human vascular endothelial growth factor (VEGF) receptors 1 and 2 to the Fc portion of a human IgG1) and a higher profit-contribution from partner Sanofi’s sales of atopic dermatitis drug Dupixent (dupilumab; a human IgG4 mAb targeting the interleukin-4Rα subunit) (Table 4 and Box 4).

Fig. 3: Public biotech barometers.
figure3

a, Number of companies and employees by market capitalization. b, Public biotech revenue, R&D spending, and net profit and loss. Large cap, ≥$5 billion; mid-cap, $1 billion to <$5 billion; small cap, $250 million to <$1 billion; micro-cap, <$250 million.

Table 4 Top ten R&D spenders of 2019

Beijing-based BeiGene, working on targeted immuno-oncology drugs; rare-disease companies Alexion and BioMarin Pharmaceuticals; gene-therapy player Sarepta; and RNA interference (RNAi)-focused Alnylam Pharmaceuticals all spent more than half a billion dollars each on R&D.

New approvals, modalities — and sources of capital

Cancer and rare diseases, plus RNA-based technologies, antibodies, ADCs and gene- and cell therapies enjoyed continued popularity in 2019, as reflected in the list of highest R&D spenders, as well as those with the biggest increases in R&D. These new modalities were boosted by regulatory nods and growing confidence of their utility among prescribers and the physician community. Last year, the FDA approved 48 new medicines, more than in any year in the decade other than 2018, which saw a bumper 59 approvals. Nearly half of the new drugs were for rare diseases, including rare cancers. They included BeiGene’s Brukinsa (zanubrutinib) for mantle cell lymphoma, a rare form of non-Hodgkin’s lymphoma; Alnylam’s Givlaari (givosiran), an RNAi-based medicine for adults with acute hepatic porphyria; and two gene therapies: the ex vivo Zolgensma (onasemnogene abeparvovec; an adeno-associated viral vector serotype 9 (AAV-9)-based gene therapy encoding the human survival motor neuron (SMN) protein under the control of a cytomegalovirus enhancer/chicken-β-actin hybrid promoter) was approved for spinal muscular atrophy by the FDA’s Center for Biologics Evaluation & Research division (Novartis acquired developer AveXis for $8.7 billion in 2018); and Sarepta’s Vyondys 53 (golodirsen; an antisense phosphorodiamidate morpholino oligonucleotide) got the nod, after an earlier rejection, for Duchenne muscular dystrophy (DMD) in patients with a confirmed mutation amenable to exon 53 skipping.

The high number of drug approvals in 2019 allowed several large-cap (valued at over $5 billion) yet loss-making biotechs to graduate from single- to multiple-product companies, moving them a step closer to self-sustainability. Cancer company Seattle Genetics, RNAi-focused Alnylam and antisense oligonucleotide developer Sarepta were among them. Biotech companies’ increasing contributions to overall medicines approvals means more companies with steady revenue streams (whether from product sales or royalties) that lenders feel confident lending to. In early 2020, private equity group Blackstone Life Sciences lent Alnylam $750 million as part of a larger, $2 billion deal designed to bridge the biotech across to financial self-sustainability (Box 5).

Billion-dollar babies

Acquisitions and partnerships, as usual, accounted for the lion’s share of public biopharma financing in 2019. Merger and acquisition (M&A) totals were dominated by the completion in January of Bristol-Myers Squibb’s previously announced acquisition of Celgene. The year’s M&A cash haul of $90.5 billion was below 2018’s $103 billion, but there were 25% more deals worth over $1 billion upfront (Table 5 and Box 6). Many of them underscored the continued popularity of targeted oncology, immunology and rare-disease assets, as well as an increasing confidence in experimental therapy platform technologies using oligonucleotide, gene- or cell-therapy modalities.

Table 5 Top ten mergers and acquisitions of 2019

The ghost of Roche’s now decades-old yet pioneering partnership with Genentech featured in 2019’s biggest partnership deal. Gilead’s ten-year tie-up with Galapagos, announced in July, included a $3.95-billion up-front payment and $1.1 billion in equity investment. It gave Gilead first dibs on all of the group’s pipeline of small molecules, spanning inflammatory diseases, fibrosis and osteoarthritis (Table 6). Notably, the deal fell short of an outright acquisition: Galapagos maintains R&D independence, but can’t sell out to anyone else (or indeed to Gilead). The tie-up drove a 170% increase in Galapagos’s share price over the year, valuing the 20-year old company, which has yet to produce a marketed drug, at $13 billion by 31 December.

Table 6 Top ten licensing deals of 2019

The rest of 2019’s top-ten licensing deals featured the same heady mix of oncology and rare-disease assets, underpinned by oligonucleotide, gene- or cell-therapy technologies. Roche in December paid $750 million for ex-US development and commercialization rights to Sarepta’s clinical-stage gene therapy SRP-9001 (an AAVrh74 vector containing a codon-optimized human microdystrophin transgene driven by MHCK7, a cardiac-muscle-specific hybrid promoter comprising enhancer and promoter regions of the murine muscle creatine kinase and α-myosin heavy-chain genes) for DMD. Sarepta’s valuation had already doubled during 2018 as revenues rolled in from its first DMD drug, Exondys (eterplirsen); the company finished 2019 another 25% higher, worth $9.6 billion — a whisker outside the top 20 biotechs by market capitalization.

Alnylam and Regeneron joined forces in April to discover, develop and sell RNAi therapeutics, primarily for eye and central nervous disorders. Elsewhere, Lexington, Massachusetts-based Dicerna Pharmaceuticals — which, rather than 21-mer double-stranded RNAs, uses Dicer-substrate 25/27-mer asymmetric double-stranded RNAs containing stabilizing RNA tetra-loops (DsiRNAs) — signed up Roche and Novo Nordisk in the final quarter of 2019.

Most biotech companies aren’t in the multi-billion-dollar league. Many will have started 2020 with much less generous cash cushions; more than a few of those will have seen their clinical trial progress slowed or stopped by the pandemic, making lucrative deals or refinancing even less likely. The sector as a whole may be weathering the COVID-19 storm very well indeed, but at company level, there will be plenty of losers, too.

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Senior, M. The biopharmaceutical anomaly. Nat Biotechnol 38, 798–805 (2020). https://doi.org/10.1038/s41587-020-0593-1

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