The Burrill Report

As the year comes to a close, biotech visionary G. Steven Burrill issued his annual predictions for the life sciences in the new year. Burrill, CEO of Burrill & Company, a global financial services firm focused exclusively on the life sciences, says that though biotech’s upward momentum in the capital markets is likely to slow after its strong performance in 2013, the pace of innovation, the move toward precision medicine, and continued spending pressures will accelerate the transformation of healthcare.

“By any measure, 2013 was a banner year for the life sciences industry with surging stock prices, a record year for biotech IPOs, and the approval of important new products to help patients,” says Burrill. “We expect 2014 to be another strong year of performance for the sector. But companies will be challenged by continued demands to prove the value of their products and growing pricing pressures on innovative drugs from payers.”

For the life sciences, results in 2013 and predictions for 2014, Burrill expects the following:

PREDICTIONS

Capital Markets
Biotech stocks posted strong gains in 2013, beating the performance of the major indices. The Burrill Biotech Select Index gaining 61.7 percent through the end of November 2013. That compares to a 22.8 percent gain for the Dow Jones Industrial Average, a 26.6 percent gain for the S&P 500, and a 34.5 percent rise in the Nasdaq Composite Index. Although the U.S. economy has improved over the past year, the rest of the world has seen turmoil in the Middle East, continued weakness in Europe, and slowed growth in emerging markets. The political dysfunction that led to the U.S. government shutdown for two weeks in October remains a threat to economic stability and growth.

• IPOs—While we predicted 25 IPOs in 2013, a total of 52 life sciences companies went public on U.S. exchanges through December 12, collectively raising $7.5 billion. At the end of November, these companies produced an average return of 34.6 percent. Therapeutics companies, which comprised three quarters of the offerings, rose an average 39.7 percent from their IPO price. After a hot summer for these issues, when 20 companies completed IPOs, many of which were upsized, oversubscribed, and likely overvalued, the pace of IPOs cooled. Expect the pace of IPOs to slow to 30 completed offerings in 2014 as companies continue to take advantage of the JOBS Act’s provisions and valuations become tied more to a company’s present value than its prospects.

• Fundraising—We are on target with our prediction that the industry would raise $100 billion in capital in 2013. The global life sciences industry raised $90.9 billion through the end of November 2013. Of that amount, debt financings accounted for $52.6 billion in funding. Debt capital as a percentage of total funding fell to 52.6 percent in 2013 from 65.7 percent in 2012 as companies took advantage of robust public markets and strong stock prices to raise capital. Financings from IPOs rose 241.8 percent and financings from follow-on offerings more than doubled. In 2014, expect capital raised by the industry grow modestly to $110 billion as growth outside the United States picks up.

• Private Financings—Private financings for life sciences fell short of the 20 percent growth predicted in 2013 as private life sciences companies raised $11.5 billion globally at the end of November, just 2.1 percent more than the $11.2 billion raised in 2012. This was in part due to companies’ ability to access the IPO market rather than raise later-stage venture capital rounds. Private financings of U.S.-based companies grew 4.5 percent to $8.9 billion. Early-stage financings continued to be constrained for many start-ups, which turned to non-traditional sources including angel investors, philanthropic groups, disease advocacy organizations, and corporate venture. At the same time, Big Pharma and Big Biotech increased their venture activities in early-stage financing through centers of innovation and partnerships with venture capitalists, incubators, and research institutes to launch companies. Expect corporate venture to take a more active role in 2014, especially in early-stage deals. Early-stage capital will remain tight with a handful of companies raising large initial rounds and private financings to grow by 5 percent in 2014.

• Crowdfunding—Although much talked about, crowdfunding has yet to take hold as a viable source of capital for life sciences companies. With the SEC issuing final rules in the fall of 2013, expect to see more early-stage ideas gain access to this source of capital as seed funding in 2014.

Mergers and Acquisitions
M&A activity in 2013 rose to $115.7 billion during the first 11 months of 2013, a 15.8 percent increase over the same period in the previous year and nearing our prediction of a 20 percent increase. Thermo Fisher Scientific’s $13.6 billion acquisition of Life Technologies and Amgen’s $10.4 billion takeover of Onyx Pharmaceuticals were the biggest deals of the year as Big Pharma moved to get leaner and refrained from biotech acquisitions. Although AstraZeneca was one of the most active buyers in 2013 as it worked to bolster its flagging pipeline, expect to see the Big Biotechs in 2014 take the roles previously played by Big Pharma and become the most active buyers of smaller companies. Acquisitions driven by tax advantages, of which there were several in 2013, will continue to be a motivator for M&A going forward. Drug company consolidations in China and deals targeting emerging markets will also continue to drive activity.

Partnering
Pharmaceutical companies continued to externalize their research operations in 2013, increasing early-stage partnering activity with biotech companies and academic institutions. Of the $35.4 billion in potential value of partnering deals with disclosed values, $14.2 billion were discovery or pre-clinical collaborations, often with an option to license when the compound achieved proof-of-concept. Global disclosed partnering values were up just 3 percent and the total potential value of deals is increasingly tied to commercial success. This trend will continue into 2014 as Big Pharma and Big Biotech look for platform technologies that can be utilized to generate innovative molecules and targets for further drug development.

Global Dealmaking
Although emerging markets remain important for pharmaceutical companies, events in 2013 put a damper on moving too quickly into them. Corruption charges in China, patent issues in India, and increased drug price controls are some of the issues that have slowed activity in these markets. Still, with their growing middle classes and increasing access to healthcare, these markets remain big opportunities for increasing sales for drugmakers. In 2014, expect to see increased dealmaking activity in emerging markets as drugmakers revise their strategies for doing business there.

Innovation
Gene therapy, stem cells, and RNAi technologies gained renewed interest from investors as their medical utility became clearer in 2013. New companies launched to deploy rapid advances in sequencing and genomic analytics with big ideas such as gene editing and harnessing the microbiome to develop new therapies for intractable diseases. The year also saw the first drugs with the U.S. Food and Drug Administration’s Breakthrough Therapies designation win approval. Although rare disease therapies and cancer have captured the spotlight, in 2014 expect to see several breakthrough designations for drugs meant to treat global chronic conditions that are the major cause of death and disability—diabetes, heart disease, and dementia.

National Institutes of Health
Sequestration resulted in a 5 percent forced budget cut across the board for the National Institutes of Health in 2013 and the elimination of about 700 grants. Despite the cut, the nation’s premier biomedical funding agency went ahead with major initiatives such as new Alzheimer’s research on prevention and novel drug targets; the Big Data to Knowledge initiative to enable biomedical scientists to capitalize on the massive amounts of data being generated in the field; and the BRAIN Initiative focused on better understanding the human brain. Going forward, expect NIH funding to continue to be constrained, forcing researchers who relied on the grants to turn to alternative sources of funding such as philanthropic and disease advocacy groups and pharmaceutical companies hungry for new ideas.

Clinical Trials
Drugmakers and contract research organizations began slowly shifting to adaptive clinical trial design, allowing them to modify studies in ways that make use of data as it is collected without compromising the validity of the study. Questions of transparency in regard to clinical trials and results were of concern in 2013, especially in Europe where the issue came to the forefront. Expect to see regulatory decisions on clinical trial transparency in Europe set the stage for what will take place in the United States.

Regulatory
• FDA—Through the first week in December 2013, the agency approved 25 new drugs, including the first three drugs with breakthrough therapy designation: Roche’s Gazyva for chronic lymphocytic leukemia, Pharmacyclic’s and Johnson &Johnson’s Imbruvica for relapsed or refractory mantle cell lymphoma, and Gilead Sciences’ Sovaldi for chronic hepatitis C infection. Expect a total of 30 new drugs to be approved in 2014.
• Biosimilars—Although biosimilars are gaining ground globally—India’s Biocon received regulatory approval for its biosimilar herceptin in that country—no biosimilars have been approved in the United States. The Patient Protection and Affordable Care Act provides for the creation of a pathway for the approval of biosimilars. While the FDA has issued four guidance documents, no clear pathway has yet been defined. In 2013, several states tried to pass industry-backed laws that would limit their use, but they were unsuccessful. Expect biosimilars to move to the forefront of the regulatory arena in the United States in 2014 as the first wave of biologics face patent expiration and payers demand lower cost alternatives to specialty drugs.
• Supreme Court—In 2013, the Supreme Court said that genes cannot be patented but allowed the patenting of synthetic or complementary DNA. In a separate decision it ruled that pay-for-delay settlements between branded and generic drugmakers can violate antitrust laws. Going forward, the nation’s top court is scheduled to hear a corporate challenge to the Patient Protection and Affordable Care Act that requires companies to provide free birth control. This will not slow the implementation of the law.

Sequencing
Although whole genome sequencing didn’t cross the $1,000 threshold in 2013, the FDA approved the first next-generation sequencing platform for use as a diagnostic, marking its transition to clinical use. In 2014, expect to see a rapid uptake of sequencing in the clinic as doctors consider a patient’s genetic information in their diagnoses and treatment decisions.

Diagnostics
Accurate diagnostics are a cornerstone of precision medicine—selecting the right drug for the right patient in the right dose at the right time. Diagnostics will grow in value in 2014 as increased pressure from payers to pay only for those drugs that work will demand defining the patient population most likely to benefit from their use. At the same time, diagnostics companies will have to demonstrate to payers their tests’ effectiveness in reducing overall costs and/or improving outcomes in order to get them reimbursed.

Reimbursement
Reimbursement has become central concern for drug and diagnostic developers as the rising healthcare costs around the world put increased pressure on containing costs and paying only for those drugs and diagnostics that improve the quality of life or the quality of care. As drugmakers increase their focus on developing specialty drugs, payers are looking to reign in their cost and demand comparative effectiveness studies to determine their value. In 2014, expect to see insurers embrace value-based pricing in the United States, much as it has been embraced in European countries and elsewhere.

Patient Protection and Affordable Care Act
After a very bumpy start, enrollments for health insurance on the federal health insurance exchange began to rise in the United States as the full effect of the Patient Protection and Affordable Care Act kicks in at the start of 2014. Expect a lot of turmoil and new health services popping up as more people have health insurance without a concurrent increase in the supply of medical professionals. While political challenges will continue to the law, expect to see a grudging acceptance of its reality as millions of people who had previously been without health insurance gain coverage.

Digital Health
In 2013, patients, providers, and payers embraced digital health technology, but privacy issues have arisen with the proliferation of data generated by these devices, sensors, and apps. Companies have to determine if their products will need decision support tools, carry a CPT code, regulatory approval, and whether they will get reimbursed. In 2014, digital health companies will go through a difficult period as they determine how best to create value for investors and the healthcare community. Expect the issue of interoperability of these devices to become a major focus for the sector as unlocking their full value will depend on their ability to communicate with electronic health records, as well as other devices.

Healthcare
The transition of healthcare will accelerate in 2014 as all players in the system look to contain rising costs due to an aging global population and increasing access to services worldwide. Retail clinics at places like Walgreens, WalMart, and CVS, will become the first stop for mild conditions and routine testing services. The transition to pay for outcomes rather than procedures will foster more integration in health systems through groups such as Accountable Care Organizations, provider-insurer networks, and group practices where doctors will be paid based on quality of care rather than quantity of care. Hospital consolidation will continue in order to take advantage of improved efficiencies and greater leverage to reduce the cost of care.

December 19, 2013
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