Industry Report – Biotechnology Overview

Wednesday, August 7, 2019

Biotechnology YTD

Biotechnology Industry Overview

Ahu Demir, Ph.D., Biotechnology Research Analyst & Cosme Ordonez, M.D., Ph.D, Senior Life Sciences Analyst, Noble Capital Markets, Inc.

Refer to end of report for Analyst Certification & Disclosures

• Index Performances: NYSE Arca Biotechnology (BTK, +5.8%) and NASDAQ Biotechnology (NBI, +5.6%) have underperformed benchmark indices S&P 500 (SP50, +13.5%) and Russell 3000 (RUA, +13.5%) YTD (as of August 5, 2019) (Exhibit 1). In H1 2019, the stock markets recovered following a steep plunge in Q4 2018. The start of the third quarter has shown a modest slowdown in the markets, including the biotechnology sector.

• Equity Financing: Overall, biotech financing remained flat in H1 2019 compared to H1 2018. The total monies raised was $4.2 billion. The capital raised by initial public offerings (IPO) in Q1 2019 represented the highest median number since 2011 ($166mm) (Exhibit 5).

• FDA Approvals: Thus far, U.S. Food and Drug Administration (FDA) has approved 19 drugs in YTD-2019 compared to a record year in 2018 with 59 approvals (Exhibit 12 and 13). 
  

• Sector Overview. The biotechnology sector underperformed the broader capital markets in Q2 2019. The lack of major catalysts in the quarter, combined with drug pricing pressure, have had a negative impact on the sector. Going forward, we expect the sector to rebound in the second part of the year, driven by an increase in M&A activity and positive news from ongoing late-stage clinical trials.

Overview

M&A DEALS AS A KEY CATALYST FOR BIOTECHNOLOGY STOCKS

As big pharmaceutical companies continue to face patent expirations, we expect a relatively high level of M&A activity to persist in the biotechnology sector. As such, we expect big pharma to keep hunting for novel promising technologies heating up the M&A barometer in biotech. In our opinion, the primary beneficiary of an M&A wave will be small biotechnology companies, which are built upon innovation. For many years now, small biotechs have attracted the buying power of larger pharmaceutical companies. Going forward, we expect this trend to endure. Although outright acquisitions are one of the main catalysts for the biotech sector, big pharma has also consistently struck high value partnerships with small biotech companies, both private and publicly held. Through strategic collaborations, big pharma gets access to innovative technologies developed by small biotechnology companies, whereas the smaller firms get to see their coffers grow rich by receiving upfront and milestone payments from their larger competitors. All of this is to the delight of biotech investors. 

Bellwether Pfizer is Leading the Charge

In June, big pharma company Pfizer Inc. (PFE) announced its intention to acquire Array BioPharma Inc. (ARRY) for $11.4 billion in cash. Array’s share price skyrocketed 57% on the news. The deal was completed on July 31, 2019. This is the largest acquisition made by Pfizer since the giant pharma company bought Medivation for $14 billion three years ago. The acquisition of Array triggered a rally in the shares of cancer companies as investors hope for similar deals taking place in 2019. By acquiring Array BioPharma, Pfizer added BRAFTOVI (encorafenib) and MEKTOVI (binimetinib) to its product pipeline. These medicines are approved by FDA for the treatment of metastatic melanoma, a type of skin cancer, and are currently being evaluated in Phase III clinical trials for the treatment of metastatic colorectal cancer. Both drugs, encorafenib and binimetinib, target mutations in an oncogene known as BRAF, which is involved in signal transduction pathways controlling cell proliferation. In various human cancers, BRAF gene is mutated leading to tumor growth and progression.

Big Pharma Companies Showing Strong Appetite for Private Biotechnology Companies 

In Q2 2019, Merck & Co.’s management explained to investors that it is looking for small and midsize M&A transactions, especially those expanding its cancer product portfolio to complement Keytruda, the company’s top selling blockbuster drug. Last year, global sales of Keytruda reached $7 billion. In the quarter, Merck bought two privately held companies, Tilos Therapeutics Inc. and Peloton Therapeutics Inc., for $773 million and $1.1 billion, respectively, plus milestone payments. Through the acquisition of Tilos, Merck has now access to candidate medicines targeting the “latent TGF Beta complex” for the treatment of cancer, fibrosis and autoimmune diseases. The transforming growth factor beta (TGF Beta) binds to “latency-associated peptide” (LAP), which is a therapeutic target for various disease indications. TGF Beta plays an instrumental role in inflammation and immune responses. The role of the latency-associated peptide is to regulate TGF Beta functions. Tilos has developed a portfolio of anti-LAP antibodies designed to maximize the therapeutic effects of TGF Beta drugs.

By acquiring Peloton, Merck will add to its oncology drug pipeline a series of novel small molecule therapeutics targeting “HIF-2 alpha” (hypoxia-inducible factor-2 alpha). Peloton’s lead candidate medicine, PT2977, is in late-stage clinical development for the treatment of renal cell carcinoma (RCC). RCC is the most common type of kidney cancer in adults. Under the terms of the agreement, Merck will pay $1.05 billion in cash. Also, Peloton will be eligible to receive $1.15 billion in additional payments upon achieving certain regulatory and commercial milestones. The deal is expected to close in Q3 2019. 

In July, big pharma companies AbbVie (ABBV) and Boehringer Ingelheim announced the acquisitions of Mavupharma and AMAL Therapeutics SA, two privately held biotechnology companies in the cancer area. Mavupharma is focused on the development of novel candidate medicines targeting the STING (“STimulator of INterferon Genes”) pathway for the treatment of cancer. Mavupharma’s lead drug is MAVU-104, a small molecule drug designed to stimulate the STING pathway to induce an anti-cancer immune response. AMAL Therapeutics SA is developing cancer vaccines. AMAL’s lead product is ATP128, a vaccine for the treatment of advanced colorectal cancer, which is expected to enter human clinical trials this quarter. AbbVie and Boehringer did not disclose the financial terms of the deals. 

Gilead Hoping to Stay Competitive by Signing Multiple Strategic Collaborations

Large biotechnology company Gilead (GILD) is building a robust immune-oncology pipeline. In Q2 2019, the bellwether signed two global strategic collaborations with Nurix Therapeutics (private) and Carna Biosciences Inc (CBIXF). Under the terms of the deal with Nurix, Gilead is paying $45 million upfront and up to $2.3 billion in potential milestone payments to add candidate drugs in the “protein degradation area” (targeting the proteasome). Proteasomes are protein complexes located both in the cellular nucleus and cytoplasm, with its main function being getting rid of undesired proteins. The proteasome functions as a “garbage disposal” in the cell. Through the collaboration with Nurix, Gilead will have the option to develop protein degradation drugs for the treatment of cancer and four other diseases.

Under the terms of the deal with Japanese company Carna, Gilead will pay an upfront payment of $20 million. Carna will be eligible to receive up to $450 million in potential milestone payments plus a royalty on future net sales. Gilead will have access to a proprietary platform to develop novel kinase inhibitor drugs targeting cellular lipid signaling. These candidate drugs will be developed for the treatment of cancer.

Outside of cancer, Gilead is also strengthening its leadership position in HIV area. Last month, Gilead signed an agreement with DURECT (DRRX) to get exclusive access to DURECT’s technology (sustained release of long-acting injectable medicines) for the treatment of HIV and HBV (hepatitis B virus) infections. This drug delivery technology enables high drug-loading, controlled onset and sustained release of the medicine for days to months after injection. Gilead paid an upfront payment of $25 million, plus payments of $145 mm upon achieving certain regulatory and sales milestones. In addition, Gilead plans to pay $150 million for any additional products coming out of the collaboration. Since the deal was announced, DURECT’s share price has gained 87%.

Also last month, Gilead signed a 10-year global R&D transformative collaboration with Galapagos NV (GLPG). Gilead will have access to six candidate medicines in human clinical trials, more than 20 preclinical programs and a promising drug discovery platform in exchange for a $3.95 billion upfront payment and $1.1 billion equity investment at a 20% premium to Galapagos’ 30-day, volume-weighted average price. In addition, Galapagos is entitled to milestone payments and royalties. The transaction is expected to close in Q3 2019.

What is in Store for H2 2019

In our view, recent deals are manifestations of a trend, which we expect to persist as a primary catalyst for biotechnology stocks. In Q1 2019, the industry saw M&A deals to surpass the $92 billion mark. Although the deal count is relatively lower in recent months, the relative size of these deals has significantly increased in recent years, with more transactions involving private rather than publicly traded biotech companies (Exhibit 7). Prominent deals in Q1 2019 were the acquisitions of Celgene by Bristol-Myers Squibb for $74 billion, Eli Lilly acquiring Loxo for $8 billion, and Roche acquiring Spark Therapeutics for $4.8 billion. Pharma bellwether Pfizer highlighted Q2 2019 with its $11.4 billion acquisition of Array BioPharma. Investors continue to monitor the industry, eagerly anticipating new M&A developments in the second half of 2019. High value M&A deals and strategic partnerships will be welcome news for biotech investors.

Market Dynamics

Thus far this year, the biotechnology sector has underperformed compared to 2018. With a lower number of FDA drug approvals, amid recent general weakness in the capital markets, biotech investors have stayed on the sidelines. The lack of major catalysts in Q2 2019, combined with drug pricing pressure, have had a negative impact on the sector. In March, Biogen disappointed investors with negative news from its Phase III trials evaluating aducanumab for the treatment of Alzheimer’s disease. The news diminished hopes of finding a potential blockbuster drug for the treatment of Alzheimer’s any time soon. However, we believe that the fundamentals of the biotechnology sector remain healthy, with a number of promising drugs in the pipeline targeting other large commercial opportunities. We expect the sector to rebound in the second part of the year, driven by an increase in M&A activity and positive data from ongoing clinical trials. 

Exhibit 1: Biotechnology Relative Price Performance, YTD 2019 (as of August 5,2019)

Source:  Noble Life Science Research, Capital IQ

S&P 500 (SP50, +13.5%) and Russell 3000 (RUA, +13.5%) benchmark indices have outperformed the NYSE Arca Biotechnology (BTK, +5.8%) and NASDAQ Biotechnology (NBI, +5.6%) indices in YTD- 2019 (as of 8/5/2019). Notable stock price outperformance in the BTK index (in alphabetical order) include Acadia (ACAD, +87.8%), Exact Sciences (EXAS, + 115.1%), Incyte (INCY, +28.4%), Ionis Pharma (IONS, + 42.1%) and Iqvia (IQV, +23.3%).

 

Exhibit 2: Top/Bottom 5 Small Cap Stock Performance, 1 year (as of August 5/2019)

 

Source:  Noble Life Science Research, Capital IQ

Top stock performers of NBI index include Amarin Corporation (AMRN, +529.2%), Ra Pharmaceuticals (RARX, +246.9%), Adverum Biotechnologies (ADVM, + 146.8%), NovoCure Limited (NVCR, +136.0%), Veracyte Inc. (VCYT, +113.9%); bottom performers include Aclaris Therapeutics (ACRS, -94.0%), Zafgen Inc. ( ZFGN, -90.4%), Acorda Therapeutics (ACOR, -88.9%), Lexicon Pharmaceuticals (LXRX,-87.8%) and Unum Therapeutics (UMRX, -87.5%).

 

Exhibit 3: Biotechnology Short Interest % of Float, as of 8/5/19

 

Source: Noble Life Science Research, Capital IQ

Stocks with highest short interest are Opko Health Inc. (OPK), Therapeutics MD (TXMD) and Geron Corporation (GERN).

 

Market Dynamics—Financing

 Exhibit 4: Biotech Financing YTD-2019 (between $50-$200mm)

Source:  Noble Life Science Research, Capital IQ

The largest transactions include Alector Inc. (ALEC, $176mm), Zai Lab Ltd (ZLAB, $200 mm) and Intercept Pharmaceuticals (ICTP, $200 mm).

Exhibit 5: Biotech Financings—IPO and Follow-on Capital Raised by Quarter (Median)

Source:  Noble Life Science Research, Capital IQ

Biotech financings in YTD-2019 has already exceeded the full year of 2018 numbers ($535mm vs. $527mm, respectively). This was a result of large transactions, initial public offering (IPO) in Q1 2019, including Alector Inc. (ALEC, $175mm), Turning Point Pharmaceuticals Inc. (TPTX, $166mm) and Precision Biosciences (DTIL, $126mm).

Exhibit 6: Biotech Licensing Deals

Source:  Noble Life Science Research, Bloomberg

The licensing deal transactions in H1 2019 showed a modest decrease of 5% compared to H1 2018.

Exhibit 7: Biotech M&A Deals

Source:  Noble Life Science Research, Bloomberg

The size of private M&A deals showed an uptick (+19%) in 1H 2019 compared to 1H 2018.

Lock-Up Expirations

Exhibit 8: IPO and Follow-On Lock-Up Expiration Data for 2019 

Source:  Noble Life Science Research, Bloomberg

Selected Industry Conferences

Exhibit 9: Medical, Scientific and Industry Conferences for 2019

Source:  Noble Life Science Research, Biomed Tracker

FDA Approvals

Exhibit 10: Selected Pending Approvals of New Molecule Entities (NMEs) and Biologics

Source: Biomed Tracker, FDA

Exhibit 11: Upcoming Advisory Committee Meeting Dates

Source: Noble Life Science Research, FDA

Exhibit 12: Selected Recently Approved Drugs and Biologics, YTD

Drug Landscape

Exhibit 13: New FDA Drug Approvals

Source: Noble Life Science Research, Bloomberg

19 drug approvals in 2019 (YTD) demonstrated a low productive year following all-time record of 59 approvals in 2018.

 

Exhibit 14: Number of Drugs in the Pipeline

Source: Noble Life Science Research, Global Data Intelligence

Oncology continues to be the dominant development category, which we think has also been fueled of late by the 1000+ immuno-oncology clinical drug trials.

Appendix

Exhibit 15: Cash Analysis, sorted by E/P

 

Note: Market cap as of 8/5/2019, Cash value for 2Q19

Source: Noble Life Science Research, Capital IQ

Exhibit 16: Catalyst Calendar (Market Cap $10-250mm)

  

Source: Noble Life Science Research, Biomed Tracker 

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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE

Equity Research Analyst focusing on the Life Sciences sector. 5 years of industry experience. PhD in Chemistry from University of Florida.Post-Doctoral training at Columbia University and New York University. Her scientific training focused on antiviral therapy, oncology and immuno-oncology. 
FINRA licenses 7, 63, 86, 87.

Senior Equity Analyst focusing on Life Sciences. More than 16 years of experience in his field. Former President and co-founder of Ciclofilin Pharmaceuticals. Held various roles in Buy-side and Sell-Side specializing in drug development, medical device, specialty pharma and healthcare services areas. Medical Doctor with a Ph.D. in Experimental Medicine and Biochemistry from McGill University in Montreal, Canada. Completed post-doctoral training at the Karolinska Institute/Hospital in Stockholm, Sweden. 
Holds FINRA licenses 7, 79, 86, 87.

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Report ID: 11022