The BioPharma Dive Outlook on 2023

The year ahead could be challenging for the pharmaceutical industry. 2023 will mark the rollout of significant drug pricing reforms in the U.S., put in motion by last year’s passage of the Inflation Reduction Act. Not to be undone by its rare defeat, the industry’s main lobbying group has promised to push back, setting up potential skirmishes over how the law will be implemented.

Regulatory clouds could form over M&A activity, which has recently picked up as larger companies race to plug revenue holes from expected patent expirations later this decade.

Finally, scrutiny of the Food and Drug Administration’s accelerated approval process could bring some regulatory tightening

But there are opportunities, too, starting with closely watched drugs in Alzheimer’s and obesity. Last year’s stock market downturn has made many biotechs cheaper than they once were, potentially opening up dealmaking.

Here are five questions facing the industry in 2023:

What can drugmakers expect from the IRA?

When President Biden signed the IRA into law in August, it set in motion a set of drug pricing reforms, including its centerpiece provision directing Medicare to negotiate prices on top-selling drugs that lack competition.

The law’s first provisions took effect this month. Medicare patients’ monthly out-of-pocket insulin costs are now capped at $35, while drugmakers’ price increases within Medicare will be limited to the rate of inflation, above which companies must pay a rebate.

The exact process for how drug prices will be negotiated — a central concern for industry — is still being worked out. The Centers for Medicare and Medicaid Services, which will implement that provision of the law, has begun talking with companies and is expected to publish details piecemeal via regulatory rulemakings. The industry is likely to challenge some of these in court.

Medicare price negotiations are limited to a total of 60 drugs through 2029, starting with 10 that will be selected for negotiation by Sept. 1, 2023. Talks are expected to take about a year, with the first set of negotiated prices taking effect in 2026. The law directs CMS to focus on single-supplier drugs that account for the highest spending in Medicare.

Some drugmakers, such as AbbVie and Eli Lilly, have already warned their drugs could be selected for negotiation. Companies have also cautioned of unintended effects from the law, including shifts in investment away from small molecule drugs and rarer cancer indications.

FTC action has been absent, but maybe not forever

The Federal Trade Commission sent a message to drugmakers last year, signaling its attorneys will scrutinize acquisitions and possibly develop new theories about how those transactions could hurt competition. However in 2022, the industry offered little opportunity for the FTC to test new oversight powers.

The bulk of last year’s biotech buyouts, some 25 of 41 in total, were valued at less than $500 million. Just three exceeded $5 billion. Two of those were of companies with a single marketed product and therefore relatively low risk of product overlap.

The biggest acquisition announced in 2022, Amgen’s $28 billion takeout of Horizon Therapeutics, likely won’t trigger additional review unless the regulator wanted to examine the breadth of the combined companies’ portfolio. (Their combined portfolio amounts to 37 products in diseases as common as high cholesterol and as rare as nephropathic cystinosis.)

A rumored acquisition of Seagen by Merck & Co., if it had come to pass, might have given the FTC some leverage for closer review and potentially precedent-setting rulings given the two companies’ overlapping focus in oncology.

Yet, with patent expirations approaching or arrived for several blockbuster medicines, drugmakers will likely be on the hunt for deals to refill their pipelines. This could lead to an acquisition that triggers the FTC’s alarms and gives the agency an opportunity to test new theories of competitive harm. And if companies believe they can wait the regulator out, they may be waiting a while — the current slate of commissioners will be in office until at least May 2025.

Accelerated review still under the microscope

Accelerated approval, a much-used FDA pathway for makers of cancer and rare disease drugs, will be tightened in coming years after Congress passed and President Joe Biden signed into law a spending bill that included notable changes.

The FDA will now have more control over the program, after years of controversy over “dangling” accelerated approvals and medicines remaining on market even after confirmatory trials fail.

The new law specifies the FDA can require confirmatory trials to begin before awarding an accelerated approval and helps it expedite withdrawals of the products unproven to work. The agency will also be tasked with convening an internal council to develop greater consistency in managing the pathway across offices.

Still, the FDA has some decisions to make on applications approved under the previous framework. A big test will be an upcoming decision on whether to pull the preterm birth drug Makena. Its owner, Covis Pharma, has fought to keep it on the market despite confirmatory trial results that showed it doesn’t prevent complications from preterm birth. An advisory panel has already recommended its withdrawal. The decision will need to be made at the agency’s top levels and, whichever way it’s made, will be a signal to other drugmakers.

Meanwhile, the FDA’s decision-making around its approval last week of Eisai and Biogen’s Alzheimer’s drug Leqembi, as well as a pending verdict on Eli Lilly’s experimental treatment donanemab, will be under scrutiny. The regulator has been shadowed by controversy over its 2021 clearance of Biogen’s similar medicine Aduhelm, and its process for granting an accelerated OK to that drug was recently faulted in a congressional report.

Biosimilars’ biggest U.S. test yet

AbbVie’s Humira has dethroned Lipitor as the highest-selling drug of all time. But on Jan. 31, Amgen will be able to sell its biosimilar competitor Amjevita in the U.S., ending a two-decade monopoly during which sales of Humira reached $20 billion a year. In July, as many as eight more will enter, making it the most competitive biosimilar market since FDA approved the first copycat biologic nearly eight years ago.

“[A]t that point, the sheer number of Humira clones will likely turn the market into a pricing war as each manufacturer tries to get a piece of the former Humira pie,” wrote analysts at Baird in a recent note to clients.

Humira biosimilars may teach drugmakers, insurers and policymakers a great deal about how the lower-cost treatments can reshape a market. How much benefit will Amgen gain from being the first entrant? What difference will interchangeability — a status allowing pharmacists to substitute a biosimilar without specific prescription for one — make for Boehringer Ingelheim’s product, and potentially others that could win that designation? And will it matter to patients whether they receive the lookalike that most closely mimics AbbVie’s most popular version, a high concentration injection that minimizes injection pain?

For AbbVie investors, the trajectory of 2023 Humira sales will help build their views of the company as they assess its future. With newer drugs like Skyrizi and Rinvoq performing well, the main question is whether AbbVie returns to overall growth in 2024 or if Humira erosion drags on the company into 2025 and beyond.

How will new Alzheimer’s drugs impact the industry?

Given the many clinical failures for amyloid-targeting drugs and the disastrous launch of Aduhelm, the next treatments that work by the same mechanism face heavy scrutiny — and could make or break the drug class.

The FDA’s approval of Eisai and Biogen’s Leqembi follows the unexpected success of the drug in a Phase 3 trial in November. While positive, the results did not end the debate surrounding the role of amyloid plaques in Alzheimer’s. In November, for example, an amyloid-targeting drug candidate from Roche failed in a Phase 3 trial.

Attention now turns to Lilly’s donanemab, which could win an accelerated approval as soon as February. Its application is based on promising mid-stage results that showed it powerfully cleared plaques and suggested a clinical benefit. But the meaningfulness of that data won’t be truly known until Lilly reports results for a larger trial of the drug, expected as soon as April.

Success could cement Lilly’s ascent to the top ranks of most valuable pharmaceutical companies, while, for Biogen, Leqembi could bring some measure of redemption after its failure with Aduhelm.

Eisai, Biogen and Lilly’s experience in navigating the FDA and insurers could be meaningful for the industry more broadly, too. Medicare set a new precedent for drug reimbursement in a policy aimed at Aduhelm; many will be watching whether the agency adjusts in response to more data and, potentially, another approval.

Analysts, meanwhile, see Alzheimer’s disease drugs, along with medicines for obesity, as the next big opportunities for the industry. “When generalist [investor]s last came into the sector, it was because biotech had discovered an [hepatitis C] cure,” wrote analysts at Mizuho Securities in a December note to clients. “Alzheimer’s and obesity therapeutics are the [hepatitis C drugs] of 2023-30 ‘decade.’”

The J.P. Morgan Healthcare Conference is arguably the most important annual event for many in the drugmaking industry, offering companies both large and small a venue to talk strategy, stoke investor interest and lay the groundwork for future deals.

Yet, the overall tone of this year’s conference, which wrapped up last week and was the first to be in-person since the start of the pandemic, was “muted,” according to a small group of biotechnology executives who were in attendance.

Compared to some recent years in which the conference kicked off with multibillion-dollar acquisitions, this latest installment had “no announcements of any consequence,” said Jeremy Levin, CEO of New York-based Ovid Therapeutics. “It was all small ball. There were no home runs,” he said Wednesday, during a panel discussion hosted Jan. 19 by BioPharma Dive that focused on the outlook for biotech in 2023.

To Greg Verdine, CEO of LifeMine Therapeutics and FogPharma, the buzzy excitement usually felt during JPM was, this time, dampened both by inclement weather and a “general feeling of malaise and uncertainty about where things are going” in biotech. Jeff Jonas, the former head of Sage Therapeutics and the current CEO of ABio-X, added that the gloom was especially noticeable “on the financing front,” as “people really just don't have a great idea about what things are going to look like a year from now.”

It’s possible that biotech and pharmaceutical companies will face even more uncertainty in the coming months, as they contend with more cautious venture capital backers, a public market that’s turned cold on the life sciences, and new legislation that gives the government unprecedented influence over drug pricing.

Levin, Verdine and Jonas each acknowledged the challenges that lay ahead. But they also argued turbulent times can bring positive changes to the industry, as they’ve done in the past.

“We’re in a really great period of innovation,” Jonas said. “So I have a lot of faith … that this is just another cycle that we have to manage through.”

An end to the down market?

The XBI, a closely followed index of biotech stocks, was in free fall over much of the last two years, taking with it tens of billions of dollars in market value for drug developers.

The decline also made going public — a key stepping stone and vital source of funding for private biotechs — much more difficult, as evidenced by the recent dearth in initial public offerings. Twenty-two biotech IPOs happened last year, a number that is less than half the totals from 2018, 2019 and 2020, and far below the record 104 seen in 2021.

The XBI settled at a low point last June, and in the months since has slowly ticked back up. But how long the overall downturn will last still isn’t clear.

“There’s probably a reasonable bottom that’s formed already,” Verdine said. “But I think any prudent company would plan that this is going to take a couple of years to work its way through the system, and the ramp back upward is going to be shallow.”

For dozens of biotechs so far, planning for the future has involved revising research priorities or laying off staff. One example is Ovid, which last March announced organizational changes meant to cut costs and equip the company with enough cash to operate into at least 2025. Among the changes was a 20% reduction in headcount.

“Biotech does this. You go through these terrible cycles,” Levin said. “I think what we’re experiencing now is the aftershock of the party that went on for the last three years, where everything went up. It didn’t matter what you did, it went up so long as you were new, exciting and great.”

A down market, while challenging, can also push companies to do their best work, according to the executives who spoke Wednesday.

“We've seen through other cycles a disinclination to develop ‘me-toos’ and instead focus on real innovation,” said Jonas, using an industry term used for drugs that are very similar to what’s already on the market.

Levin noted, too, how many of industry’s most prolific biotechs, from Genentech to Regeneron to Alnylam Pharmaceuticals, weren’t immune to broader economic struggles.

“People forget companies that look successful today were real dogs at some stage, because of the market,” he said.

Where are the deals?

Alongside IPOs, mergers and acquisition activity in biotech was more halting than it has been in previous years.

Some analysts and industry followers expect that to change in 2023, predicting deals to increase in size and quantity. Already, there have been six M&A transactions worth $50 million or more, including Sun Pharma’s planned purchase of Concert Pharmaceuticals for $576 million, which was announced Thursday.

Yet, with many biotech stocks still cheaper now than they were before, some wonder why deal levels haven’t been higher.

"The pharmaceutical industry does not appear to be taking major advantage of the depressed market,” Levin said. “I'm not sure what that's about. Either they don't see value, they haven't got a strategy, or they're just choosing to delay later into the year."

One reason for that, according to Jonas, may be the current perception of biotech among potential buyers or investors.

“There is a sense that biotech may be almost on sale in the U.S.,” he said, “because of the reluctance to deploy capital or the preference for later-stage programs and things of that nature.”

Both Jonas and Levin also argue that larger, deep-pocketed companies might not feel as much pressure to put their money toward M&A as they have previously.

The idea of cash burning a hole in their pockets “doesn't exist,” Levin said, because leaders at these firms can just as easily benefit from stock buybacks. “A very hard question of these large companies will be: Who’s buying back their stock, rather than seeking innovation? Because that tells you a lot about the company's psychology and philosophy and strategy.”

How will new legislation affect biotech?

Last summer, President Joe Biden signed into law what’s poised to be one of the most influential pieces of legislation ever related to drug pricing and development.

The wide-ranging Inflation Reduction Act, or IRA, gives Medicare, the government insurance program for people aged 65 and older, the ability to negotiate pricing for a select group of high-selling medicines that lack competition.

Notably, the parameters of those negotiations differ depending on the medicines. Medicare can target “small molecule” drugs, which, historically, have been the cornerstone of pharmaceutical businesses, nine years after market approval. Large molecule drugs, meanwhile, can go 13 years before Medicare gets to negotiate prices.

The IRA’s passing set off alarm bells throughout the biopharma industry, which claims the legislation will stifle the development of new therapies — particularly those involving small molecules. The powerful trade group PhRMA has called the IRA an “attack” on medical innovation.

“It's an irony of this field that just at the time when small molecules are really breaking out of their mold and doing amazing things, that there's this perverse incentive being created to do biologics,” Verdine said.

“Uncertainty never benefits innovation or investment,” Jonas said.

The IRA’s impact on the industry won’t be fully understood for years. Already, though, Levin says he’s noticed biopharma executives becoming more energized and engaged politically.

“I think there's momentum,” he said. “I've seen lots of CEOs who previously haven’t spent one minute talking to a political person now saying, ‘Hey, wait a second, you guys are affecting my business. I'm on you.’”

Editor’s note: BioPharma Dive hosted the panel discussion live on Jan. 18 from 2 pm to 3 pm ET. You can register to watch a replay here. 

The downturn that struck the biotechnology industry in 2022 wasn’t just about tumbling stock prices. The sector also won only 37 new drug approvals from the Food and Drug Administration’s main review office last year, its lowest total since 2016.

Yet the number of drugs the FDA clears each year can fluctuate, and industry observers see reasons for optimism. The 2022 approvals of Amylyx Pharmaceuticals’ ALS drug and Provention Bio’s Type 1 diabetes treatment show an “increasing permissiveness” for drugs with mixed or limited data, RBC Capital Markets analysts wrote in December. Drug rejections and FDA-mandated trial stoppages were down compared to 2021. The regulator also cleared three gene therapies for inherited diseases, a sign that Commissioner Robert Califf “seems open to innovation,” they wrote.

That sentiment could be put to the test early in 2023. The FDA is weighing decisions on another drug for Alzheimer’s as well as a gene therapy for hemophilia A.

Here are five decisions to watch in the first quarter:

Eli Lilly’s donanemab for Alzheimer’s disease

Eisai and Biogen’s Alzheimer’s drug Leqembi, which U.S. regulators conditionally cleared last week, could soon have company. Following closely behind it is donanemab, a similarly acting drug from Eli Lilly that could reach market sometime within the next two months.

An accelerated approval for donanemab would give Lilly something to show for the many years it’s invested in Alzheimer’s research. But the company may face an uphill battle winning market share, at least in the near-term.

Leqembi has already been shown to slow disease progression in a large Phase 3 trial, albeit modestly. Donanemab’s application, by comparison, is largely based on results from smaller mid-stage studies. Late-stage data are expected toward the middle of the year, potentially months after the drug is available.

In the meantime, doctors could have tough decisions to make about which drug to prescribe — and Lilly may have to tread carefully in choosing a price. Biogen ran into fierce resistance from insurers when it priced its earlier Alzheimer’s drug, Aduhelm, at $56,000 a year despite mixed results in clinical testing. Eisai chose a lower price of $26,500 a year for Leqembi, setting a new bar.

Until the FDA grants a full clearance, however, neither Leqembi nor donanemab, if approved, are likely to see much use under restrictive coverage rules put in place by Medicare. — Jonathan Gardner

Menarini Group’s elacestrant for breast cancer

Before being acquired last year by two private equity firms, biotech company Radius Health was primarily known for an osteoporosis drug called Tymlos that it struggled to sell. Its second act, a breast cancer medicine called elacestrant, may have a better chance at commercial success.

Elacestrant is one of a group of medicines, known as SERDs for short, that block and degrade hormone receptor proteins and are administered as pills. The hope is these drugs could replace fulvestrant, an injectable medicine that’s widely prescribed for breast cancer patients whose disease is driven by hormones. Yet their prospects are unclear. Only elacestrant has succeeded in a pivotal trial. Two similar drugs from Roche and Sanofi failed.

An approval by the FDA’s Feb. 17 deadline could give the Italian pharmaceutical company Menarini Group, which licensed elacestrant from Radius in 2020, the first crack at a potentially substantial market. Menarini is seeking approval of the drug for patients with an advanced, common form of breast cancer known as ER-positive, HER2-negative. Elacestrant would be the first branded endocrine therapy for this patient group in more than two decades.

Analysts at Stifel, citing discussions with breast cancer experts in a December research note, said adoption in the second-line setting could be strong if the drug is approved. But that could depend on the price Menarini chooses, and whether the FDA approves it for all patients, or only the subset who appear to benefit the most, they wrote.

Menarini may not have the market to itself for long, either. AstraZeneca, Lilly and Arvinas each have rival medicines in advanced testing. — Ben Fidler

BioMarin Pharmaceutical’s Roctavian for hemophilia A

2023 could be the year BioMarin finally brings Roctavian, its gene therapy for hemophilia A, to market in the U.S. But BioMarin may still have one more obstacle to overcome on its already lengthy journey to an FDA approval.

BioMarin has spent years developing Roctavian for hemophilia A, the most common form of the chronic blood disease and a condition caused by a lack of a clotting protein. Like Hemgenix, the hemophilia B gene therapy the FDA approved in November, Roctavian is meant to be a long-lasting treatment that boosts levels of clotting protein, protecting patients from spontaneous bleeds and ridding them of the need to take other drugs. It’s shown the ability to do so in clinical testing, but also signs that its benefits may wane with time.

BioMarin’s data has been enough to sway European regulators, which approved Roctavian last August. Yet the company has had a tougher time convincing the FDA. The agency rejected Roctavian in 2020, asking for more data on how the treatment’s effects held up. BioMarin subsequently collected those data and filed a new application. But the company recently signaled even that review may extend beyond its March 31 deadline as the FDA analyzes full three-year results from Roctavian’s main trial, which were released on Sunday.

Despite the lingering uncertainty, analysts are generally optimistic. The approval of Hemgenix shows the FDA “appear[s] to be more comfortable with hemophilia gene therapies,” SVB Securities analysts wrote in December. RBC analysts also noted in December that the agency had reversed an earlier decision to hold an advisory committee meeting, removing a potential hurdle.

An approval would keep BioMarin ahead of Pfizer and Roche, which are also developing hemophilia A gene therapies. — Delilah Alvarado

Acadia Pharmaceuticals’ trofinetide for Rett syndrome

Twice now, the FDA has turned back attempts by Acadia to secure an expanded approval for a Parkinson’s disease drug it sells as Nuplazid. In April 2021 and again last August, the agency rejected the company’s applications to extend use of Nuplazid to treat psychosis related to dementia.

Acadia’s regulatory difficulties have weighed on the company, as shares have sunk by nearly two-thirds since the initial signs trouble with the first application.

But the company is hoping for a different outcome with its drug trofinetide, which it has been developing for a neurodevelopmental disorder called Rett syndrome. Its application is now under review by the FDA, with a target decision date of March 12.

In clinical testing, treatment with trofinetide improved scores on two assessments of Rett syndrome symptoms compared to placebo among girls and young women with the disorder.

If approved, trofinetide would become the first treatment for Rett, giving patients a needed option. For Acadia, success would also be a boon, potentially offsetting struggles the company has had selling Nuplazid in its approved Parkinson’s disease indication. An approval could also come with a special regulatory voucher that can be resold.

Acadia acquired North American rights to trofinetide in a 2018 deal with Neuren Pharmaceuticals. If the drug is approved and the FDA issues a voucher, Neuren would be due one-third of its value. — Ned Pagliarulo

Gilead Sciences’ Trodelvy for breast cancer

Gilead is best known for its HIV and hepatitis C medicines, two highly lucrative businesses that were catalyzed by acquisitions.

The California biotech has hopes for similar success with its $21 billion purchase of Immunomedics two-plus years ago, the largest acquisition in the company’s history. The deal brought in a cancer drug called Trodelvy that Gilead views as the linchpin in its push into oncology, a field of research the company historically hasn’t taken part in.

But, so far, analysts aren’t convinced the deal was worth its high price. Trodelvy is currently approved for a tough-to-treat “triple-negative” form of breast cancer. Broadening its use into the most common form of breast cancer, known as HR-positive and HER2-negative, could help boost its prospects.

Initial results from an important clinical trial were positive, but viewed as showing only a modest benefit. Follow-up data revealed treatment led to three months longer survival.

The FDA is currently reviewing Gilead’s request to expand Todelvy’s approval to cover use in this setting, for adults with previously treated locally advanced or metastatic breast cancer that can’t be removed surgically. A decision is due in February.

Even if an approval is granted, Gilead faces tough competition from another breast cancer drug called Enhertu. Developed by AstraZeneca and Daiichi Sankyo, Enhertu has shown strong results in testing and was recently approved by the FDA for use in treating cancers that are considered to be “HER2 low.”

Analysts currently expect Trodelvy would be used after Enhertu in this kind of breast cancer. — Ned Pagliarulo

Initial stock offerings by drugmakers, for years a reliable staple, largely disappeared in 2022. Fewer than two dozen biotechnology companies priced IPOs last year, a decline of 79% from the previous year’s total and a sign of financial pain for the sector.

With public markets closed, biotechs even earlier in their corporate existence opted for extension or bridge financing from their venture backers. Some, however, simply ran out of cash. By the end of the year, the number of biotechs that had laid off staff surpassed 100 companies.

Dealmaking, such as Takeda’s $4 billion acquisition of a Nimbus Therapeutics immune disease drug, spurred some optimism. But private companies still face a challenging 2023. With economists warning of a recession, it’s possible the next 12 months will look like more of a repeat of last year than a bull market return.

Here are five top questions facing emerging biotech companies this year:

Will the IPO market open back up?

The big question facing investors is whether the biotech industry will see the kind of boom it experienced in 2020 and 2021. More than 180 companies went public over that two-year span, compared to just 22 in 2022, according to BioPharma Dive data.

There were several factors for the slowdown: companies that had already gone public struggled to hold onto their value, while clinical and regulatory setbacks combined with macroeconomic forces to sap investor confidence.

Some believed a return to the more modest IPO pace of years prior would help the industry, which now has a surfeit of cash-burning companies.

Whether companies choose to make their Wall Street debuts depends on how the market performs and what investors’ appetite for risk looks like moving forward, analysts said.

“We’re starting to see secondaries, and expect IPOs to eventually follow,” analysts at BMO Capital Markets wrote in a December report.

Lacking an easy path to IPO, young biotechs and their backers might see dealmaking as more attractive. Last year, 16 private biotechs were acquired for at least $50 million.

Dusan Perovic, a partner at Two Sigma Ventures, expects the rate of dealmaking to “speed up” in 2023.

“A lot of large pharma companies are actively looking and speaking to a lot of startups about deals and potential partnerships,” Perovic said. “There are lots of signs that the environment is much healthier than it was [in 2022].”

Are platform companies still an attractive investment?

Platform companies, which endeavor to apply a foundational technology across many drugs for different diseases, have drawn significant backing in recent years. The success of biotechs like Moderna attracted investors who saw them as having a higher chance of success.

But as last year’s market downturn endured, some investors have appeared less receptive to platform companies and their often sprawling, resource-demanding drug pipelines.

“A couple of years ago when money was so abundant, you could pick three different things that are preclinical, go after and pursue them all independently and aggressively,” said Jon Norris, a managing director at Silicon Valley Bank. “I think now what you’re seeing is investors and a management team saying you need to pick the best one.”

Venture firms that specialize in platform companies, such as sovereign wealth fund Mubadala Capital, say they’re still optimistic. But they’re doing greater due diligence before deciding which biotechs’ technology to fund.

Companies must demonstrate the ability to create a clinical-stage medicine, said Alaa Halawa, the head of U.S. ventures for Mubadala.

“When you invest in a platform company that has an agile and robust enough platform to create broad and deep pipelines, at the time of investment you have at least a line of sight of which indication or specialization you're building at the company,” Halawa said.

Will the pace of private funding continue to slow?

Venture investment in biopharmaceutical companies declined in 2022, with much of the dropoff versus 2021 occurring in oncology and neurology, according to a new report from Silicon Valley Bank. It’s likely the lower volume in deals will continue into 2023, Norris said.

Still, both the number and total value of investments last year remained above 2020 numbers, suggesting some resilience. Part of the decline may also reflect investors letting their previous bets play out before backing new companies in the same fields, the report noted.

Companies that raised Series A rounds in 2020 and 2021 would in theory need to return to their backers for Series B rounds in 2023. But a small flurry of Series A extensions at the end of 2022 indicates biotechs are still trying to collect data before attempting a fresh round of private funding.

“If you look at the valuations that those companies have raised at the peak, the majority of those are hard to justify at this time,” Halawa said.

Should the second half of 2023 bring more private financing rounds as startups that previoulsy raised two to three years ago finally hit milestones, investors will have an opportunity gauge was was signal versus noise.

“Their progress will pretty quickly show that they're better than the ones that are just thinking about the technology and how cool the technology is, but not about how it translates into it being helpful to patients,” Perovic said.

Will company restructurings continue?

Biotechs were forced to cut jobs en masse in the second half of 2022, with both large companies and young startups trimming their workforces to conserve cash.

Among those that did were a good number of formerly high-profile or richly backed private companies, including Faze Medicines, Rubius Therapeutics and Vesalius Therapeutics.

With economists still concerned a recession could emerge, analysts believe biotech companies will tighten their purse strings to start the year. Already, a half dozen publicly traded biotechs have announced job cuts, including CRISPR stalwart Editas Medicine, which is laying off 20% of its staff.

“Pharma and biotech companies will likely look to trim operating expenses and focus on assets certain to be differentiators,” according to the December report from BMO analysts.

Mubadala’s Halawa said his firm is advising its portfolio companies to trim their costs by as much as 25% if they are in the early stages of drug development, especially if they expect to run out of cash by early 2024.

How will the Inflation Reduction Act affect biotech startups?

The law, signed by President Joe Biden in August, aims to reduce the price of prescription drugs in several ways. It gives Medicare the authority to negotiate prices on certain drugs that lack competition, while penalizing drugmakers that increase prices of their products within Medicare faster than the rate of inflation.

Though it will primarily affect large pharmaceutical companies, drugmaker executives have said it could have a chilling effect on investment in new research, particularly for small molecule medicines.

Still, early-stage investors are bullish on certain types of small molecules, such as covalent drugs. With uncertainty around which drugs will be affected, it’s too early to judge what the law will mean years down the line, said Vineeta Agarwala, a general partner at Andreessen Horowitz.

“It’s very hard for me to buy that small molecule innovation is dead,” Agarwala said.

For small drugmakers, the threat of reduced revenue could push larger pharmaceutical companies to do more deals.

“If you look at big pharma, they definitely are cash rich and slightly [intellectual property] poor today,” Halawa said. “If you look at the patent expiry over the next five years, we will see a lot of blockbusters that are going to be off patent. The question is, how is pharma going to fill that pipeline?”

Still, the IRA’s incentives could shape how startups plan their drug development.

The IRA is going to push investors and startups to think more about “how they can become best-in-class as opposed to the second- or third-line of treatment,” Halawa said.

Already, the law is pushing companies to adjust their plans, such as by focusing on larger indications early, or by developing several drugs at once, investors said in a recent BioPharma Dive panel.

The biotechnology industry begins 2023 at a crossroads.

In many ways, the sector is coming off of one of its toughest years in recent memory. Initial public offerings ground to a halt. A widely followed biotech stock index plunged nearly 30%. More than 100 companies restructured and cut jobs. And the sector suffered a rare defeat in Washington with the passage of the Inflation Reduction Act, a law meant to lower drug costs.

Yet there were victories for biotech in 2022 as well. Three gene therapies for inherited diseases were approved by U.S. regulators, lifting a faltering field. A drug meant to slow Alzheimer’s disease unexpectedly succeeded in a Phase 3 trial. Small biotech companies also notched trial wins in schizophrenia, nonalcoholic steatohepatitis and ulcerative colitis, and were handsomely rewarded with big stock surges. M&A activity picked up as the year wore on, too.

Key study readouts in obesity, cancer, and Alzheimer’s could determine what’s in store for the sector in 2023. Here are 10 to watch:

Sometime before the end of March, a person with the inherited blood disease beta thalassemia will receive an infusion containing hundreds of millions of their own stem cells. These cells will have just completed a round-trip journey to a drug manufacturing facility, where they'll be equipped with a modified gene capable of fixing the patient's condition.

The expected infusion will be the first commercial use of a gene therapy approved by the Food and Drug Administration in August. Called Zynteglo, the treatment is the result of more than a decade of research by biotechnology company Bluebird bio. Its approval offered validation to Bluebird and to the broader gene therapy field, which over the past two years has struggled through safety concerns as well as clinical and regulatory setbacks.

Zynteglo's approval, as well as two other FDA OKs in September and November, has gene therapy developers looking ahead. "If you take a step back, I think that what we've gone through in the last couple years is just part of a maturation process," said Faraz Ali, the CEO of Tenaya Therapeutics and an executive at Bluebird from 2011 to 2016.

That process is still playing out, though, and this year companies in the space face a number of important questions. Here are five:

Will approvals lead to commercial successes?

The trio of recent gene therapy approvals — for Zynteglo, Bluebird’s Skysona and CSL’s Hemgenix — is one more than the FDA granted in the five years previous.

More could soon follow. The industry group Alliance for Regenerative Medicine, or ARM, predicts 2023 could bring at least five more gene therapies for rare diseases to the U.S. market, including potential new treatments for sickle cell disease, Duchenne muscular dystrophy and hemophilia A.

But regulatory clearances lead to the even harder test of marketing complex, expensive and unfamiliar treatments. While Novartis’ relative success with Zolgensma — the second gene therapy OK’d in the U.S. — shows what’s possible, the industry has had a poorer commercial track record in Europe, with several companies later withdrawing approved medicines. Bluebird, for instance, pulled from European markets both of the treatments that it is now trying to sell in the U.S.

Geoff MacKay, CEO of the gene therapy developer Avrobio, described 2023’s key theme as “commercial viability.”

“We are at a tipping point in gene therapy supported by real data, real milestones and real patients’ lives changed,” he added in an email.

Accomplishing that will be the challenge faced by Bluebird and CSL as well as any other biotech companies that secure an FDA approval this year.

They’ll face scrutiny over pricing. Both Bluebird and CSL set list prices of several million dollars for their therapies, citing the years of benefit they’re expected to deliver for patients. So far, insurers don’t appear to be pushing back strongly, but that might change when the gene therapies in question affect larger numbers of people.

They’ll also need to prove that they can reliably produce at larger scale treatments that in clinical testing were used only in scores of patients.

“Like all areas of medicine, there will be both winners and losers, but progress through 2023 will provide more clarity on the recipe for success,” MacKay said.

Can the FDA hire fast enough to stay ahead of the growing field?

Behind the gene therapies on the cusp of U.S. approval is a pipeline of experimental therapies swelled by the dozens of biotech companies that jumped into the field over the past decade.

It makes for a lot of work for the FDA, which must weigh in on clinical trial starts and provide regular counsel to companies throughout the development process. At the same time, the FDA center that oversees gene therapies has had difficulties keeping staff, stretched thin by the pandemic and its related vaccine review workload.

“They’ve clearly had some turnover,” said Timothy Hunt, head of ARM. “That has led to some challenges.”

The agency will be getting reinforcements, however, with a planned uptick in hiring following new user fee agreements with drugmakers. The Center for Biologics Evaluation and Research, or CBER, stands to gain nearly 200 new staff over the next two fiscal years.

“This is going to be a big area of emphasis at the FDA,” Commissioner Robert Califf told investors and industry professionals attending the J.P. Morgan Healthcare Conference in San Francisco this week. “There’s a very nice increase in budget for CBER to hire a bunch of people.”

“So we do have jobs, those of you who are tired of investing or whatever,” he quipped.

Additionally, the FDA elevated the division in charge of gene therapies specifically — the Office of Therapeutic Products — to “super office” status, giving it more autonomy and authority.

Drugmakers are watching closely. “The expansion of [OTP] paired with increased regulatory maturity and a promising stream of regulatory activity ... is a signal to the industry that the door is open for innovation,” wrote Avrobio’s MacKay.

How will gene therapy startups fare in a prolonged downturn?

Genetic medicine companies weren’t spared from last year’s biotech market reversal, with more than a dozen cell and gene therapy specialists forced to cut jobs over the course of 2022. That count included relatively large and mature companies like BioMarin Pharmaceutical and Bluebird, as well as high-profile startups like Passage Bio and Tasyha Gene Therapies.

With this year’s financial outlook uncertain, the sector may see more consolidation, particularly given the often expansive pipelines that many gene therapy biotechs touted when markets were more favorable. Taysha, for instance, once listed 18 programs in its pipeline and boasted of plans to launch a product every two to three years.

Gene therapy development is also expensive, requiring biotechs to make costly choices around manufacturing.

Already, Editas Medicine, a leading biotech in CRISPR gene editing, this week announced plans to cut back investment in several clinical-stage therapies and lay off 20% of its staff.

“Oftentimes you see that the corners of the sector that are the most cutting-edge ... get it a little bit more disproportionately than others,” said Hunt, of ARM. “But I think it’s balanced out by the realization that the FDA and the [European Medicines Agency] are rewarding innovation.”

MacKay also noted the field’s recent regulatory and clinical progress, but added that he expects investors to remain wary.

“The data will eventually pull the public markets along, but it may take a long time,” he wrote. “Until then, this tough financing environment will spur more restructuring, consolidation, pipeline reprioritization, M&A, market de-listings and, unfortunately, bankruptcies.”

What do recent clinical holds say about the FDA’s views on gene editing?

If all goes to plan, 2023 could see the first FDA approval of a CRISPR gene editing medicine. CRISPR Therapeutics and Vertex Pharmaceuticals currently expect to finish submitting an application to the agency by the end of March, potentially setting up a consequential decision from the regulator later this year.

Developed for sickle cell and beta thalassemia, CRISPR and Vertex’s medicine builds on the long history of stem cell transplantation, using the gene editing technique to modify a patient’s own stem cells in a laboratory, or ex vivo.

An approval would represent a remarkable achievement for a field catalyzed by scientific breakthroughs made just a decade ago. Already, developers have moved quickly to explore gene editing directly inside the body, or in vivo. Intellia Therapeutics, for one, has reported clinical trial results for CRISPR medicines used in vivo to treat two rare genetic diseases.

But in the U.S., there are some signs of caution from the FDA when it comes to in vivo gene editing. The agency has put on hold a study by Verve Therapeutics that uses a newer iteration of CRISPR-based gene editing inside the body, for example.

Safety is of paramount concern when editing genes, both because of the theoretical potential for off-target changes to DNA and the permanence of such modifications.

“Regulatory agencies quite rightly should be cautious,” said Editas CEO Gilmore O’Neill. “That is their job. I think it is our job to make sure that, as we advance our new technologies — and advancing in vivo is an example — we need to be very rigorous about our approach to managing risk.” (Editas is now prioritizing in vivo gene editing.)

Still, the go-slow approach contrasts somewhat with outside the U.S., where Intellia is conducting its studies and Verve has begun human testing of its medicine.

“We're the first in front of the agency with this kind of product,” said Verve CEO Sek Kathiresan, referring to a base editing medicine in an interview this week. “So we're really working it out in real time with them in terms of regulatory expectations for this product."

Kathiresan noted Verve is working through the FDA’s questions following the study hold and said “it’s a matter of when, not if” it can address the agency’s questions.

Can the business model work for ultra-rare conditions?

Many genetic disorders being targeted by gene therapy developers are uncommon, affecting several thousand or a few hundreds of people in a given country. Others are rarer still, found in only a few dozen individuals or even just one or two people — conditions sometimes referred to as “n of one” diseases.

For many of these conditions, the promise of genetic medicines can be great. Treatments for several types of severe combined immunodeficiency, for instance, could be curative. But, despite developing powerfully effective treatments, drugmakers have backed off, deprioritizing SCID gene therapies.

Even the prospect of being able to price treatments in the millions of dollars might not be enough, if companies need to spend much more to collect the needed evidence and can only treat a few patients.

“When you’re talking about dozens of patients, it is tricky to think through how you can capture the appropriate value to the patient,” said ARM’s Hunt. “That has been hard and will be tricky in the future.”

A down market in biotech makes the financial calculus even harder, potentially forcing companies to prioritize projects with greater chances of earning a return on investment.

It’s a problem that regulators are watching, too.

“We’re not going to find enough philanthropic groups to foot the bill for gene therapies for the hundreds upon hundreds of different diseases that need to be addressed,” said Peter Marks, head of the FDA’s CBER, at a conference in October.

“We’re gonna have to find a way to make this commercially viable so that industry can find a way forward towards this.”

He put forward a few proposals for how his agency could lower hurdles for developing therapies for ultra-rare diseases, such as using data from one application to speed review of others using the same technology.

Meanwhile, in the U.S., Bluebird will put the model to the test. It expects to treat only 10 patients a year with its newly approved gene therapy Skysona, for a rare childhood brain disease.

Jacob Bell and Ben Fidler contributed reporting