Biotech’s 2017 bounce-back ‘set to continue next year’

Headwinds are dying down, but will tax reforms deliver for R&D?

There’s little doubt that biotech is quitting 2017 and marching into the New Year in a position of strength. But will this year’s resurgence be sustained in 2018 in the face of a more uncertain environment?

Looking back over the year, it’s clear that investor support for private and public companies is strong, with a healthy stream of private rounds biotech initial public offering (IPOs) through the year that has outstripped the pace in 2016. It’s also been a banner year for FDA approvals—looking likely to reach well above 40 this year after a disappointing 2016.

The stock markets serve as a backdrop to the 2017 biotech story. The Nasdaq Biotech Index has risen around 19% over the course of the year—though it dipped back a little at the tail end after a clutch of negative data news—and the S&P Biotech is up almost 30% since the start of the year.

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Why the uptick this year? EvaluatePharma has just published a preview to 2018 which suggests a primary factor has been a “very strong run” of clinical breakthroughs and new product launches, including this year’s debut for CAR-T therapies from Novartis and Gilead/Kite for example, which came against a backdrop of surging sales for first-generation immuno-oncology drugs and blockbuster rare disease therapies.

Evaluate cautions however that the run of good news will need to extend through 2018 if high expectations at the turn of the year are to be maintained, with one of its anticipated inflection point coming ahead of the New Year when the FDA delivered its verdict on Spark’s Luxturna—set to be the first gene therapy to arrive in the U.S. market.

It also points to a bit of a sell-off in biotech shares in the fourth quarter which could reflect a bit of investor fatigue, but on balance says it expects another big year for venture financing thanks to the reappearance of “deep-pocketed” crossover funds which abandoned the sector in 2016.

Also on the plus side, faster regulatory routes in the U.S.—which look set to be maintained and even expanded under new FDA commissioner Scott Gottlieb, as well as a somewhat less risk-averse stance on safety—have also contributed to the buoyancy behind biotech of late. The sector has benefited from initiatives to accelerate approval of important new medicines, particularly in cancer, as well as moves to speed up the process in Europe. But Gottlieb is also pledging to make it easier to bring generics to market, and if a ramp-up in biosimilar approvals occurs that could affect sentiment.

Pricing posturing

Over the course of 2017, the political rhetoric on healthcare reform and drug pricing has started to feel less urgent and more undefined, although it has certainly not gone away. It was a big feature in the 2016 election year and is considered to have pegged back the sector after a buoyant run in prior years.

Legislation is only one factor in the pricing debate however. One of the highlights of 2017 was the brace of CAR-T approvals, but as the year draws to a close there are already reports of very low take-up attributed in part to insurance barriers, although those could just be teething troubles. A similar scenario has been seen for the new cholesterol-lowering PCSK9 inhibitors, showing that payer resistance remains important even in the absence of legislative action.

“It seems likely that the focus of the debate will continue to shift away from any potential actions by central government, towards state level maneuvering and other sources of market disruption,” says Evaluate. A wild card could come in the form of retail giant Amazon, which is said to have ambitions in medicines delivery and could be a disruptive force in the healthcare sector.

While President Donald Trump failed to make headway on healthcare reforms, as the holiday season approached, he got his tax reforms passed by both houses of Congress, including a big cut in corporate taxes that the President described as “a big, beautiful Christmas present” for U.S. businesses. The bill was headed for both houses and expected to be passed and signed into law by the President before Christmas.

Other elements of the package are not positive for biotech however. For instance, the latest version of the bill includes a cut in orphan drug tax credit on qualified clinical testing expenses for drugs to treat rare diseases to 25% from 50% after the end of this year. This issue prompted a lot of wrangling as the reform legislation passes through the House and Senate, with the former seeking a total repeal and the latter pushing for a reduction to 27.5%.

A steep reduction was seen as almost inevitable, given the increasing dominance of Big Pharma companies in orphan drug development and high prices that have resulted in blockbuster sales for some products. As Evaluate put it earlier this year, “the image of the plucky small biotech striving to develop treatments for the rare diseases largely ignored by big pharma is long gone.”

Meanwhile, a higher-than-expected levy on the repatriation of overseas earnings of 15.5% on cash and 8% on less liquid assets falls short of the repatriation holiday hoped for in some quarters.

The impact of that on merger and acquisition (M&A) activity, which was much less than predicted in 2017, is hard to gauge for 2018. If access to investor capital remains free, small companies may well be less likely to seek takeovers.