The story of emerging biotechs in 2016 has been varied. Biotech stocks started the year off by tanking after two years of a wide-open IPO window and record funding levels. The market eventually leveled off, but then biotech stocks took another downturn in October as election jitters set in. On Nov. 9, biotech became a whole new world with lots of prospects.
Amid that rollercoaster ride for investors, the landscape for emerging biotechs and the drivers behind success remain the same. The small companies drawing the most attention are those that are doing things once thought to be science fiction, including CAR-T immunotherapies, CRISPR-Cas9 gene editing and GLP-1 pumps.
Meanwhile, high-profile disease areas such as oncology, inflammatory diseases and neurodegenerative conditions are pulling in the most cash and getting the most attention from big pharma dealmakers. Unlike the high-tide times of 2014 and 2015 when early-stage companies were just as sought after as later-stage assets, biotechs once again need to show good data to garner support.
"It was a very quiet field to be in during the first 10 months of the year," said Paul Yook, co-Founder of LifeSci Index Partners and portfolio manager of BioShares fund. Yook explained that the market hit a peak in July 2015 after several years of major growth, but took a dramatic downturn due to events such as the pricing scandal precipitated by Valeant and Turing Pharmaceuticals, as well as the infamous pricing tweet from Hillary Clinton.
"If you just look at the five major biotech exchange traded funds, the total under management was approximately $5 billion at the end of 2012 and that went all the way to $15 billion by mid-2015," said Yook. "Right now as we stand here collectively in biotech ETFs we have about $14 billion, but the week before the U.S. Presidential Election we only had $11 billion. We grew from $11 billion to $14 billion in a week due to so many people sitting on the sideline … because so many people expected Hillary Clinton to be the president-elect."
Yook noted that a Clinton administration was expected to be the harder road for biotech and pharma because of her plans for drug pricing and other areas of healthcare. Meanwhile, a Trump presidency is widely expected to be the nearly ideal scenario for biopharma. President-elect Trump has not yet revealed many plans for the healthcare sector, but spoke less during the campaign about reigning in drug pricing than Clinton and has talked about tax reforms that could be beneficial for biopharma M&A. (He did create a stir earlier this month when he told Time magazine, "I'm going to bring down drug prices," but specifics are yet to come.)
Improving deal environment
While the market is well off its peak — the iShares NASDAQ Biotechnology Index is down 18% from even this time last year — both IPOs and M&A activity continued to trickle in throughout the year, albeit at a slow pace.
"On dealmaking in particular, I've been surprised that for over a year now we haven't seen more activity," said Glen Giovannetti, global biotechnology leader at assurance, tax, transaction and advisory services firm EY. "All of the catalysts are there.
"You might argue that there aren't as many targets that could make a meaningful impact in a larger company, but there certainly are some. The growth drivers are there for both big pharma and biotech, there's plenty of capital to do deals and there's some potential for repatriation. I've been surprised that we haven't seen a higher pace of activity," Giovannetti said.
There were only 46 biotechnology deals signed worth a total of approximately $49 billion during the first nine months of 2016, according to the quarterly reports from consulting firm PriceWaterhouseCoopers.
Meanwhile, only 25 biotech companies were able to conduct an initial public offering during the first nine months of 2016, compared with 42 in the first three quarters of 2015. More than a few companies scrapped their plans to go public, including GenSight, Bavarian Nordic and BioCardia. Others, like Merus and PhaseRx, lowered their expectations. Merus only raised $55 million, compared with its original target of $100 million.
Yet, venture funding has not faltered, with venture capitalists investing more than $1.8 billion in 87 biotech deals in just the third quarter. VC money in biotech is higher than any sector except software, according to PwC.
Last year's crop of emerging biotechs are best highlighted by companies such as Editas Medicine, Intarcia, Intellia Therapeutics and Medivation, each of which made their mark on the industry in their own way.
Editas underscores the characteristics that define successful emerging biotechs in 2016. The company has strong leadership in CEO Katrine Bosley, who previously stood at the helm of Avila Therapeutics when it was bought by Celgene, and has strong business development chops from her time at big biotechs like Biogen and Alkermes.
The biotech is also based on exciting emerging science. Editas jumped through the partially open IPO window in early February with one of the largest debuts of the year, bringing in nearly $98 million for its CRISPR technology. Underscoring the enthusiasm for the gene editing technology was the IPO of Intellia Therapeutics, which brought in $112 million in its May offering.
Intarcia has been dubbed the unicorn of biotech, filing its new drug application with the Food and Drug Administration in late-November for ITCA 650, a subcutaneous osmotic GLP-1 pump for type 2 diabetes — the first of its kind.
Medivation, on the other hand, isn't exactly emerging but made a splash when Sanofi and Pfizer began a bidding war over its niche oncology products. Pfizer ultimately winning out with its $14.1 billion bid.
Like Giovannetti noted, there's plenty of potential for dealmaking with biotechs going forward. Even now, multiple big pharmas are making a play for Europe's largest biotech Actelion. This is likely just the first seeds of M&A as science matures and more biotechs emerge.