2023: numerous catalysts for the biotech sector

Higher capital costs the new reality

Biotech companies all have gone through, or are in the midst of their life cycle, requiring years of substantial capital investments, first in technology and drug discovery and selection, followed by years of clinical development. If approved, the business model to launch drugs is a capital-intense undertaking and in general takes two to three years to reach profitability following a successful launch. With drug development companies’ profits years away and often multiple rounds of intermediate financing required, the hurdle has all the more increased in the current capital environment with Fed fund rates per end of 2022 at 4.5%. This implies that the expected returns on invested capital have increased and thus increasing discount rates are applied to discounting of future cash flow that in aggregate yield a net present value.

With many companies paralyzed by these steep interest rate hikes, the industry is starting to adapt and the upper echelons of quality asset and technology companies are rediscovering the old paths of partnering with larger, profitable and well capitalized biotechnology and pharmaceutical companies.

Dialogue with management teams has become more centric around business models and available options – or alternatives in such an environment. Most companies’ executives are planning for many years of higher capital costs despite having seen more takeover activity in mainly revenue-generating companies and a clear acceleration in licensing deals over recent quarters. Hybrid models between partnership and fully owned assets have become a new reality, mostly for the platform companies. Single asset companies can still succeed, but can easily fall into a trap of dwindling valuation in the face of their stable capital demands.

Technology as basis to transform many disease areas

mRNA vaccines have gained the upper hand in the pandemic, both in terms of efficacy and speed to markets as well as scaling of manufacturing capacity. Similarly, recent Phase III data from Moderna for its RSV vaccine are highly promising, at par with the best and newest vaccine candidates. We expect a similar outcome for influenza, with mRNA being on par in terms of efficacy with the potential for superiority in future iterations by leveraging intrinsic advantages of the technology for extension of antigen valency and strain coverage. Combined with the more rapid selection and adoption to new variants and the combinability allowing to cover the two or eventually three largest respiratory virus markets with a single shot provides the basis for our assumptions on mRNA vaccines’ ability to capture substantial market share.

Technologies that are undergoing more classical market cycles, initially starting in orphan indication followed by addressing more prevalent diseases with next generation assets are for example the RNA targeting agents based on short interference RNA (siRNA) and antisense oligonucleotides (ASOs). These companies (e.g. Alnylam or Ionis) are making steady progress, which is most evidently provided by the current and future product offerings in the transthyretin amyloidosis. In hereditary TTR patients with polyneuropathy, both platforms have shown positive late-stage results and the second generation drug of both technologies are in registration or already approved. For the substantially larger indication of TTR cardiomyopathy the same assets are in late-stage clinical development with outcomes trials expected to read out within the next few years. Both companies are developing siRNA and ASO-based drugs for other large patient populations, such as for patients suffering from high triglycerides, high lipids or other cardiovascular risk factors such as liboprotein (a), resistant hypertension and larger neurological indications such as Alzheimer’s disease. The basis for targeting these larger patient populations lies within the significantly improved technology, allowing to deliver the drugs less frequently and at lower doses, more convenient administration, with high efficacy and a very good safety margins and few adverse events. We expect substantial progress and further product approvals in 2023 and beyond, with the class to grow substantially in patient reach and revenue potential.

Antibody drug conjugates – again of key interest in oncology

Similar to the progress of new formats, antibody drug conjugates are impacting many solid tumor indications. The successful launch of ADC drugs by large pharma as treatment options for breast cancer patients, and more recently approvals for Immunogen and clinical trial results for Mersana are expected in the second half or 2023. ADCs have become the hot property in the oncology space, not really the new kid on the block given decades of development due to continued challenging situations for other approaches to improve clinical results against or on top of the PD1/PDL1 antibodies. Macrogenics, Incyte and Exelixis are further portfolio companies of BB Biotech that are developing ADCs for different solid tumors. Challenges of the past such as better targeting of tumors, good delivery of the toxin pay-load to the cells and either uptake or proximal killing are being addressed by novel surface targets, improved linker technology and tumor specific toxins. This allows for a broader therapeutic window and potentially for a better outcome. As most drugs have evolved in the cancer field, ADCs are expected to not only be good last line treatment options but to also demonstrate a good efficacy versus tolerability profile in earlier treatment lines for cancer patients, expected to result in a highly attractive business proposition for the drug development industry.

Similar to the progress of new formats, antibody drug conjugates are impacting many solid tumor indications.

In vivo gene therapies and first ex vivo gene editing approaching reaching the market in 2023

The most advanced platform approaches in gene therapy and in gene editing are starting to impact the healthcare system. Once every few years to even once a lifetime treatments are appealing for patients suffering from monogenetic driven diseases with a high medical burden and costs for the healthcare system. In vivo gene therapy approaches in hemophilia are in the midst of product launches and other diseases with the possibility of replacing dysfunctional genes with a viral delivery system are in late clinical testing. Our portfolio company Generation Bio continues to develop viral free delivery of ceDNA, potentially offering better safety and the possibility for repeat dosing, if required. We expect updates and progress during 2023. Of key interest for the investment team of BB Biotech are initially the ex vivo gene editing products such as CTX001 developed by Crispr Therapeutics and its development and commercialization partner Vertex. FDA and EMA decisions are expected in late 2023, followed by the roll-out of this once-in-a-lifetime functionally curative product for sickle cell disease and beta thalassemia patients. Next generation approaches are testing in vivo delivery of the gene editing enzyme and the required genetic fragments to achieve correction of genetic defects or aberrations. We believe the benefits of avoiding double strand breaks in DNA will enable base editing and as a further iteration prime editing to succeed the vivo setting and we perceive our investment in Beam Therapeutics as the key player in terms of having access, IP and capabilities for these non-nuclease containing approaches. An uncertainty regarding pricing strategies and mostly around patient acceptance of this novel concept and technology remains and will be carefully monitored and gauged by investors over the coming years. Interestingly, most clinical stage assets are being developed by smaller and mid cap biotechnology companies, yet another example of bigger companies initially watching from the sidelines, which may eventually result in an urge to gain access by pricy acquisitions once the visibility on winning assets has improved.

Something is brewing in the business development and M&A world

With M&A activity substantially down over the peak year of 2019, many pharmaceutical companies and large biotechnology company retain flexibility to acquire smaller and mid cap biotechnology companies. Some Wall Street companies quote mid triple digit USD billion capacity, with more or less each company in our portfolio being a potential acquisition candidate. If valuations continue to be attractive, and if smaller and mid cap companies offer promising drugs and platform technologies, we expect a continued takeover activity with an acceleration to be expected in the next years. The core driver of these acquisition remains with the nature of patent cliffs of major revenue and profit contributors of many of the large capitalized companies. It remains to be seen whether large biopharmaceutical companies prefer to consolidate with similar size companies resulting in synergies and costs savings or if they prefer mid cap and smaller cap companies as source to address this top to bottom line looming threat. Many of the larger capitalized companies have experienced a multiple expansion over the past few years, resulting in another source of acquisition currency – offering equity instead of cash. Valuations of smaller and midcap companies continue to be under pressure, as indicated by the fact that the cumulative market cap of the top eight NBI index members is larger than the remaining 265 members.

Healthcare politics with the focus on the IRA implementation

The healthcare sector, and even more so the drug development sectors such as pharma and biotechnology, have always been impacted by political changes in large markets, such as the US. With the midterm election in November 2022 resulting in a split Congress, the Inflation Reduction Act of summer 2022 will start to gain renewed attention in 2023. The companies and investors will carefully monitor how the IRA will be implemented, very importantly when the first drug target list for future price negotiation will be made public, and more specifically which drugs will be on this initial list. Overall, smaller companies with new drug launches will benefit from many exemptions and are expected to be less impacted than pharmaceutical companies with older drug products targeting Medicare and Medicaid patients.