2024: Rebuilding investor trust by translating fundamental progress into capital returns

Biotechnology industry adapting to higher cost of capital

2024 is set to be a pivotal year for biotech equities, heavily influenced by the US Federal Reserve's policy direction. The critical issue is the trajectory of the Fed's interest rate policy over the year and its impact on the biotech sector, especially regarding companies' financing costs. Navigating these monetary policy changes is essential for our investment strategies and portfolio management. Despite the rising interest rates over the past two years, BB Biotech has focused on its core holdings, cautiously expanding its portfolio. The addition of two new mid-cap companies in Q4 2023, with plans for more development stage company investments in 2024, marks a strategic shift.

We expect a more dynamic financing environment for biotech in 2024, with increased capital raising activities, PIPEs, and potentially more IPOs. Monitoring public biotech investment fund flows will be key, as we anticipate a shift from the recent trend of outflows to potential inflows, driven by renewed market confidence and promising returns. Notably, venture capital funding has decreased, reaching a multi-year low, presenting a complex but potentially rewarding scenario for performance turnaround.

We expect a more dynamic financing environment for biotech in 2024, with increased capital raising activities, PIPEs, and potentially more IPOs.

Engagements with management teams reveal a strategic focus on navigating volatile capital markets, with companies bracing for prolonged higher capital costs and bolstering their financials for sustained investment in pipeline projects and product launches. Partnerships and M&A activity, which picked up in late 2023, are expected to play significant roles in meeting the sector's capital needs.

Technology serving as basis to transform standards of care across therapeutic areas

The coming year is poised to bring groundbreaking developments in biotechnology, with our focus intensifying on the clinical advancement of cutting-edge gene editing techniques, including base and in vivo editing. A notable highlight is the launch of Casgevy, a pioneering gene editing therapy developed by Crispr Therapeutics and Vertex, now approved as a curative treatment for sickle cell disease and beta thalassemia. While its administration remains complex, Casgevy represents a transformative «once and done» solution for severe genetic disorders. Its premium pricing is justified by the potential to circumvent lifelong medical expenses and significantly enhance patient quality of life. As the field evolves, gene editing treatments must become more user-friendly, capable of addressing intricate genetic corrections, and more affordable to address widespread diseases effectively.

The coming year is poised to bring groundbreaking developments in biotechnology, with our focus intensifying on the clinical advancement of cutting-edge gene editing techniques, including base and in vivo editing.

In the realm of RNA-based medicines, substantial opportunities for expansion are on the horizon. Notably, Moderna's second prophylactic vaccine is on track for approval in 2024, with its RSV vaccine expected to receive full clearance. We are keenly monitoring progress in therapeutic vaccines, including personalized cancer vaccines, and Moderna's endeavors to target various tissues through innovative delivery routes or sophisticated mRNA packaging. For Alnylam, our RNAi-centric entity, we anticipate crucial data from a late-stage trial of vutrisiran in TTR cardiomyopathy patients, potentially broadening its market from ultra-rare to more common diseases and reaching a larger patient demographic. Similarly, Ionis Pharmaceuticals is set to embark on a parallel commercial path with its latest antisense oligonucleotide (ASO) therapy, aiming for a wider disease target range in the forthcoming years.

Emerging chemical modalities, such as PROTACs and LYTACs, are making strides in clinical development, targeting intracellular and extracellular protein degradation, respectively, and showing promise as orally administered therapies. Meanwhile, cell-based treatments, including CAR-T therapies, are being explored beyond oncology to address severe autoimmune disorders, with early clinical results spurring investment in clinical development, as seen with Fate Therapeutics.

In summary, we anticipate significant advancements and additional product approvals in 2024 and beyond, and expect biotechnology and platform-based products will have a clearly positive impact on patient benefit and sales potential.

New targets for diseases with limited to no progress over past decades

For many years, numerous diseases have faced a stagnation in the development of new drug modalities, due to high hurdles in surpassing established standards of care, a lack of new pathways and drug modalities, or a shift in the pharmaceutical industry's focus towards other areas. However, 2024 is set to be a year of significant progress, with expectations for multiple data readouts spanning from early human studies to registrational trials.

Vertex is set to release initial top-line data from several registrational clinical studies evaluating VX-549, a small molecule aimed at voltage-gated sodium channels such as NaV1.7 and NaV1.8, for the management of acute pain. This molecule is under investigation for its potential to block pain signals from reaching the brain. Additional trials in 2025 will explore VX-549 in chronic pain settings, where not only efficacy but also the drug's side effect profile will be critically assessed, especially considering the prevalence of addiction issues in current chronic pain treatments using opioids.

Recent mergers and acquisitions have spotlighted psychiatric medications, with Neurocrine Biosciences, a company within our portfolio, advancing a diverse pipeline for schizophrenia, major depression, and other central nervous system disorders. The company is exploring drug candidates across various neurotransmitter systems, including muscarinic receptors and pathways such as NMDA, AMPA, and DAAO, while also developing a next-generation VMAT2 inhibitor with potential improvements over valbenazine.

Incyte, known for its JAK1/2 inhibitor Jakafi – a first-in-class and standard of care in myeloproliferative neoplasms like myelofibrosis, essential thrombocythemia, and polycythemia vera – is investing in the next wave of treatments for these conditions. Beyond combination strategies with Jakafi, Incyte is exploring novel approaches with particular interest in the progress of INCA33989, an anti-mutant calreticulin (mCALR) monoclonal antibody, and a targeted therapy for the JAK V617F mutations, a key driver in various MPNs. These innovations hold promise for disease-modifying potential beyond the capabilities of current standard treatments.

M&A cycle has started to roll – more to be expected in 2024

The M&A landscape in 2024 is anticipated to be dynamic, with particular emphasis on sectors such as obesity, autoimmune disorders, and oncology. In oncology, the spotlight on antibody-drug conjugates (ADCs), radiotherapies, and intellectual property (IP) and immuno-oncology (IO) considerations has intensified activity, surpassing that of targeted small molecule development. The ADC sector, having seen many of its focused companies acquired or licensed, presents a unique scenario for the remaining entities, posing questions of exclusion or advantage due to scarcity. Recent trends also show an increased interest in addressing widespread diseases, including psychiatric and autoimmune disorders. However, the potential of these large markets is tempered by the complexities of market launches, often characterized by larger patient volumes and lower annual drug prices.

The looming patent cliff, with numerous loss of exclusivities (LOEs) expected by 2028, compels large pharmaceuticals and biotech firms to pursue strategic acquisitions to secure future revenue growth, pipeline diversity, and technological advancements. Industry analysts highlight the substantial financial capacity of these large entities, a fusion of existing leverage opportunities and projected robust cash flows, positioning virtually every company in our portfolio as a potential acquisition target. Given continued attractive valuations and the allure of smaller and mid-cap companies with promising drugs and technologies, the momentum for acquisition activity is expected to persist, reflecting a strategic pursuit of growth and innovation in the biotech and pharmaceutical sectors.

Healthcare politics with the focus on the IRA implementation

The healthcare sector, notably the pharmaceutical and biotechnology industries, is consistently influenced by political shifts in major markets, including the US. With the presidential election scheduled for November 2024, healthcare investors are particularly attentive to the US Congress and the potential policy directions that could significantly alter the healthcare framework. A critical focus will be on discussions surrounding the Inflation Reduction Act (IRA) and proposed Senate reforms targeting pharmacy benefit managers (PBMs).

As we move into 2024, BB Biotech is on the cusp of a period marked by substantial transition and potential. Our strategy is to navigate these changes proactively, ensuring our investments not only align with the evolving landscape but are also optimally positioned to benefit from forthcoming innovations in the biotech sector.