Biotech's Record Run
Transcript of BioCentury This Week TV Episode 173
Jonathan Leff, Partner, Deerfield Management
Dennis J. Purcell, Senior Managing Partner, Aisling Capital
Ipsita Smolinski, Managing Director, Capitol Street
PRODUCTS, COMPANIES, INSTITUTIONS AND PEOPLE MENTIONED
JP Morgan healthcare conference
Food & Drug Administration
Vioxx, rofecoxib, Merck & Co. Inc.
Eli Lilly and Company
Memorial Sloan Kettering
Eric Pierce, Publisher
ERIC PIERCE: The biotech market has been sizzling. Does it have the ingredients to continue its record run? And can Washington do anything more to help out? I'm Eric Pierce, welcome to BioCentury This Week.
NARRATOR: Your trusted source for biotechnology information and analysis, BioCentury This Week.
ERIC PIERCE: Biotech has been great for investors. The BioCentury 100 index is up nearly 270% since the market nadir in 2009, including a spectacular 59% gain in 2013. The sheer length of the run could prompt skeptics to argue for a slowdown in 2014. But optimists say there's more room to run. Key regulatory catalysts for big drugs and product launches from key names like Biogen Idec and Gilead could keep biotech growing faster than its pharma cousins and the overall market.
Plus, this week thousands of investors and executives descend on San Francisco for the 32nd annual JP Morgan health care conference. It's the largest health care investment conference. And it sets the expectations for the coming year.
As a preview, BioCentury This Week looks ahead at what's in store for 2014 and asks if Washington can do anything more to continue this feel-good story. The JOBS Act has helped fuel a surge of biotech IPOs. While regulatory innovations such as FDA's breakthrough therapy initiative has attracted new money to the sector.
With us today for our quarterly market report is Dennis Purcell of Aisling Capital, Ipsita Smolinski of Capitol Street, and Jonathan Leff of Deerfield Management. Dennis, I'd like to start with you. This seems to be the bull market that will never run out of steam. Let's talk about some of the underpinnings that is keeping this market open.
DENNIS PURCELL: I think a couple things happened. Obviously, the generalist investor jumped back into the biotech market. But more importantly, we saw some great launches in the past who were supposed to short the launch. And instead, this year we saw companies like Biogen and Celgene exceed expectations. And so that really drove the market. And most companies were much better funded as they went into the market. We're now used to seeing $100 million Series A rounds, whether it's at Clovis or Durata. And obviously, the aftermarket performance gave us great momentum during the year.
ERIC PIERCE: What's interesting is, a couple years ago, it was the opposite. It was more of investors taking a short-the-launch opportunity. So biotechs have maybe gotten a little bit more funding and figured out commercially how to execute on the commercial side.
DENNIS PURCELL: And they've done it right out of the box. And that's really been impressive for a number of these companies. And it's created great market caps for some of the bigger companies.
ERIC PIERCE: Jonathan and Ipsita, it's not only been fundamentals that have been driving biotech. There's also been regulatory matters in Washington has helped. Jonathan, I'll start with you. Let's talk about some of the things that you've kept your eye on.
JONATHAN LEFF: Sure, I would say regulatory change has been an important part of what's been driving the market. That is part of the fundamentals. In 2012, with the FDA Safety and Innovation Act, there was a watershed moment and a fundamental change in the way industry, FDA, and patient groups came together to recognize a new way of thinking about the benefit and risk balance of drugs, particularly to treat serious diseases, and new programs like the breakthrough therapies program that has put a focus on accelerating the most important new drugs to the marketplace. I think that's had a significant role in driving this bull market
ERIC PIERCE: Ipsita?
IPSITA SMOLINSKI: I would echo what Jonathan said. The breakthrough pathway was really, really a watershed moment. I think you could see something additional in 2014 with the LPAD. This is the limited use pathway largely for antibiotics and antifungals.
But the FDA, let's face it, they've been approving drugs, 27 approved last year. That's about on par with the last five years. They've got their funding back that was sequestered. So we've got some budget certainty. So I think 2014 will be a good year.
ERIC PIERCE: And you also mentioned LPAD and also tied into that antifungals and anti-infectives. The GAIN Act is also another area that has been, to borrow a word from Jonathan, a watershed event from a standpoint, if you look back five years ago the FDA moving the goal posts on some of the companies that were developing drugs for serious infections, now there's more clarity around that. And Jonathan, you actually feel that that type of regulatory innovation has given biotech investors a different look and a different approach to investing in biotech.
JONATHAN LEFF: I think that's right. If you look back several years, many investors would have pointed to the regulatory environment as an aspect that was holding back capital flowing into the sector. And this was in the wake of Vioxx and the very high level of focus on drug safety where it seemed that requirements were increasing burdens were increasing and there was some lack of predictability. That really drives capital away from the sector.
What we've seen over the last couple of years is a very significant shift back in the direction of FDA really trying to work with sponsors to find the best way to responsibly get important new therapies to market. And I would add one other element that I think is really important in all of this and facilitates this new regulatory mindset is better drugs. What we've seen over the past couple of years is the coming to fruition of some of the tremendous sciences gone on over the past couple of decades -- but drugs that are really first in their class, treating diseases that have had no treatment, and making a very significant and measurable difference. And that makes all the difference in terms of allowing regulators to move faster with more conviction, allowing the market to appreciate the potential, and allowing, as Dennis said, the launches to be better.
DENNIS PURCELL: And in the recent history, it's been oncology drugs. I think as Jonathan said, we're going to move to anti-infectives to the forefront coming soon, because it's such an unmet need. And over the next couple years, I would expect to see those.
IPSITA SMOLINSKI: And don't forget the orphans.
ERIC PIERCE: Yeah, it's interesting. We've got about 30 seconds. We're going to need to wrap on this soon. But what I'd like to raise is the pricing issue.
So you have new therapies coming to market, innovative, as Johnson pointed out. Companies need to recoup the cost of R and D also their failures. At the same time, we are running into the ACA, the formularies. And I think that that will be interesting to see how pricing fits in.
And I know that's a topic also of your report that you just recently published, Ipsita. So we'll come back to that. And when we come back, we'll look into the funding outlook for 2014. First, investors poured 10 times more money into healthcare and biotech funds in 2013 than in 2012. Here's a look.
NARRATOR: You're watching BioCentury This Week.
ERIC PIERCE: We're talking about Wall Street with Dennis Purcell, Ipsita Smolinski, and Jonathan Leff. Ipsita, I'd like to start with you. We ended the last segment talking about drug pricing. And price transparency you see front and center in 2014 for biotech and pharma. What's your take?
IPSITA SMOLINSKI: 2014 is going to be all about the implementation of the Affordable Care Act. So we're going to have 9 million hopefully insured through Medicaid, 7 million through the exchanges. I think it's only natural that consumers are going to say, hey, what am I paying for? Why am I spending $5,000 as a deductible before I get any services? Why does an MRI cost $1,000?
So I think transparency across the board will be a headline. I'm not sure that any legislation would actually follow. When it comes to pharma, I think the trend will be there, too. I don't think the government can do anything to curb pricing increases or high orphan prices. But I think that'll be a trend.
ERIC PIERCE: Well, you mentioned orphan. And that's an area that was extremely hot last year. You look at some of the top performers in the orphan space, BioMarin, Alexion, big cap companies growing at 40% plus last year largely on their orphan programs. And it seems like any large company today now has an orphan disease program. Is there any type of blowback, where we could be at a risk, where maybe some of the pricing around orphans could be at risk?
JONATHAN LEFF: Sure, I think this is a very significant issue. And I agree with Ipsita that this is a major theme going forward now that the regulatory environment appears to have gotten much better. We have great drugs coming. But the question about how much the market will continue to pay for these drugs-- we've seen the age of the $100,000 per course oncology drug to the point where that's become almost a norm for new cancer drugs introduced and orphan drugs that may cost $400,000 a year or more.
That has driven some of the tremendous success of these launches and commercial value and driven investment into these categories. How long will it continue? I think the Affordable Care Act shines a light on it. It's also a problem that's been going on longer than that and will continue to go on. If you look at Europe, for example, where there have been a number of mechanisms and efforts in places like Germany and the UK for governments to get a handle on these prices, to the extent we start to see activities like that, putting pressure on price in the United States as well, that could cast a real cloud over this market.
DENNIS PURCELL: I'm a little more worried about the oncology drugs than I am about the orphan drugs. 10 out of the last 12 approvals in oncology have drug prices attached to them that are greater than $100,000 like Jonathan said. So the question is, how long can that last?
ERIC PIERCE: And also one of things on the orphan space is you're de facto dealing with a very small population. So if you were to look at it from an overall cost perspective, a $400,000 drug may not be that much off of formulary expense because of the small patient.
DENNIS PURCELL: But it's not the same in oncology where you're dealing with many more patients.
ERIC PIERCE: Right, where you're dealing with a lot more patients, exactly. I want to cycle back, Dennis, you mentioned earlier about some of the market cap growth of the larger companies. We saw a data slide earlier talking about the flow of funds into biotech still really robust. How much longer can that continue? And where is that money going to get put to work?
DENNIS PURCELL: Well, it's interesting. It can't continue forever. But there are roughly $70 trillion around the world that's earning less than 2% a year. So we're starting to see some of that recycle back into the biotech world. And the biotech world, we're seeing a real mix and match with the pharmaceutical industry.
So for example, today Gilead's market cap is greater than Bristol-Myers. It's greater than Eli Lilly's. And some of the big caps are priced to perfection right now. So they've had a great run. The question will be what happens to the mid-caps and the smaller caps going forward.
ERIC PIERCE: Which is astounding, that data point, because it wasn't too long ago that people were talking about the Merck index where would you rather own all of biotech or Merck? And all the entire biotech sector was about the size of Merck. And now you have, as you point out, biotech companies that are now bigger than pharma companies.
Jonathan, from a private side, it was a record level of IPOs that got done in 2013. Obviously, that can't continue apace. But what are you looking at from an exit side and from a private company financing side in 2014?
JONATHAN LEFF: Well, I think the IPO market is the big story in 2013 for the private side as well, because it's been a decade or more since we've seen an IPO market anything like that. So venture investors who've been funding these private companies over the last 10 years have simply not seen those exits until the past year. There have been some very successful strategic exits, but certainly not enough to provide the returns that investors need on the private side.
The opening up of the IPO market puts a real energy potentially back into the private side. We're starting to see that a bit. But I think if this public market environment continues, it will certainly trickle down into greater capital available to private companies as well. The question is, will it continue?
ERIC PIERCE: And how long will that recycling take as well? We're going to have to come back on that. We've got to do a quick wrap. But when we come back, we're going to take a look at how Washington can help the biotech bull market going. But first, here's a look at the big rebound of biotech IPOs in 2013.
NARRATOR: Now, back to BioCentury This Week.
ERIC PIERCE: We're talking about what Washington can do to help the biotech bull market with Dennis Purcell, Ipsita Smolinksi, and Jonathan Leff. Dennis, I'd like to follow up with you. We left the last segment with Jonathan talking about the IPOs and the strength of that marketplace. The venture capitalists played a big role in those IPOs. Talk a little bit about that involvement and how the VCs really did support their portfolio companies.
DENNIS PURCELL: As Jonathan mentioned, the IPOs were the story of 2013. And for the first time since I've been in the business, the venture capital community has really played a big role in terms of investing in the IPOs. And along with that, what happened was that most of the companies that went public were pretty well capitalized and had other options than simply going public. So the notion of being well-capitalized, having venture capitalists that are willing to put money into the IPO, and having the option to sell themselves to middle-tier biotechs really drove the market.
ERIC PIERCE: So the M and A market was robust. Private companies were adequately funded. So they had other options than the IPO route.
DENNIS PURCELL: And the VCs invested on the IPO.
ERIC PIERCE: And the VCs helped get the IPO done by putting some extra money in. To the point on the IPOs and capitalization, let's take a quick look at some of the biggest IPOs of last year. Ophthotech raised $192 million. They're developing drugs for macular degeneration.
Intrexon, a synthetic biology play founded by Randall Kirk, raised $184 million. And PTC Therapeutics, which is developing drugs for muscular dystrophy and DMD, raised $144 million. So lots of capital going into these companies that are hopefully well-capitalized as we come into 2014.
And I want to tie that into what's going on in Washington. So the JOBS Act has been a progenitor, if you will, to get access to capital on Wall Street. The folks we are talking to are saying the JOBS Act is not only allowing people to get feedback from buy-siders as to whether they're an IPOable company. But it's also keeping the riffraff maybe on the sidelines. Do you guys have a take on that?
DENNIS PURCELL: Well, thing I think it's very important, in a sense, that we can get to see these companies before they actually announce that they're going public. And it gives us time to do some more work. And it does give the companies the opportunity to figure out whether there is a doable IPO or not. And we've seen a lot of companies come through under the JOBS Act that have opted not to try to go public, because that's the feedback they got. And we've seen lots of companies that have come and completed IPOs.
ERIC PIERCE: And Ipsita, from your Washington standpoint, what are some other key drivers that you see Washington facilitating positive news coming out of Washington for biotech and pharma?
IPSITA SMOLINSKI: Well, to react to the JOBS Act, I think that was fabulous, test-the-waters meetings, et cetera. I don't see anything that watershed-y happening in 2014. It is an election year, remember. So members of Congress are going to be a little bit cautious as far as taking difficult votes ahead of the November election.
So what that means is no comprehensive tax reform. I think the R&D tax credit could be extended. This was actually a provision that expired Jan 1. But along with 55 other provisions that expired, I think of those could be temporarily extended.
And then you have a deficit reduction and Medicare bill where there could be some cats and dogs. Pharmaceutical rebates is something that comes up every single year every time we talk about debt ceiling. So expect that headline as well.
ERIC PIERCE: And Jonathan, what are some of your thoughts on the regulatory and policy areas and how that could help support biotech in 2014?
JONATHAN LEFF: I think I would really echo the point that what happens here in Washington can have a very significant impact on the financial markets and in biotech in particular. And we talked about the JOBS Act, which took some of the rigidities out of the marketplace for companies going public that were put in place at one period of time to protect consumers and were really no longer serving a great function. By reforming that and modernizing it, we've opened up a significant amount of IPO activity.
Similarly, for the regulatory reform, as I mentioned earlier, that took place in 2012, I think there's some opportunities now and subjects on the agenda for Washington policymakers to continue looking at modernizing systems that no longer work as well as they could for us. One good example of that is tax policy and tax reform. Biotech companies systematically are unable to use their net operating losses because of a variety of technical aspects of the tax code.
As a result, a biotech company over its life typically pays a higher tax rate than a big pharma company or many other industries. That can be addressed. And there are some proposals in front of Congress right now to try and implement reforms to the tax code that would level the playing field and I think help bring capital back into biotech.
ERIC PIERCE: We did a show on the tax reform earlier in 2013. And it seemed like a lot of those reforms were not watershed changes to the law, but there were little tweaks that seemed like they were not wholesale changes but smaller little measures that could be done to really get those NOLs, net operating losses, carried forward back in play for biotech.
JONATHAN LEFF: I think that's right. Some technical wonkish-sounding changes to the tax code could affect the way biotech companies look at NOLs and bring more investment into the sector. Another example of this kind of theme that I would mention, as Ipsita mentioned earlier, the LPAD, which is also being called special medical use pathway SMU, is an opportunity for further modernization of the regulatory process to think about as the world has changed and as the kinds of drugs and development strategies have evolved over time to give FDA new tools to accelerate development of drugs for the right patients with manageable clinical development requirements.
That's something that has been controversial, I think. A lot of people don't understand the opportunity there. But another great way for policy makers to make a difference.
ERIC PIERCE: Great, excellent. Well, next we'll get some final thoughts and predictions on what's ahead in 2014. In particular, we'll ask if venture capital can keep supplying Wall Street with hot new investment opportunities. First, here's a look at how much private biotechs raised in 2013.
ERIC PIERCE: We're back for our prediction round with Dennis Purcell, Ipsita Smolinksi, and Jonathan Leff. Jonathan, we're in a biotech bull market. Everything looks wonderful. But there are some signs of desperation, if you will, particularly on the early stage venture round. What's your take?
JONATHAN LEFF: Well, that's a great point. If you look at the number of first time venture financings of new companies receiving venture capital for the first time, the last two years have actually been at a two-decade low in terms of the level. So the big question for the future is, when will money start flowing back into venture capital funds to allow venture capitalists to start the new companies that will fuel the next generation of innovation?
My prediction is that that will start to happen. The limited partners, the investors in these funds who may have put a red x over the life sciences venture sector over the past decade are going to see the opportunity come back into it. And we'll see what may be one of the best decades for life sciences venture going forward.
ERIC PIERCE: Dennis?
DENNIS PURCELL: I think I agree with Jonathan. One of the things the last couple years is we've had to support existing companies. So I think we're now in a position, given that some of them are public, to recycle our capital into new companies.
As far as my predictions for '14, I think we're going to see a blurring of the line to pharma and biotech. I think we're going to start to call Bristol-Myers a biotech company. We're calling Amgen a drug company instead of a biotech company.
And last time I was here, I said short launches. I would go long launches. We have a lot of data next year in terms of new approvals and new launches.
ERIC PIERCE: Yeah, lots of new launches ahead, Gilead with their quad drug, Biogen Idec with their oral MS drug -- people keeping a close eye on that. Ipsita, what's your take? Predictions for 2014.
IPSITA SMOLINSKI: I would say -- biotech was up 60% in 2013, I continue to be bullish going into '14. And on the DC front, I would point to three things; number one, price, transparency, a focus on costs largely driven by the Affordable Care Act, number two, the FDA, continued breakthrough designations potentially going into LPAD for antibiotics and antifungals, and then number three, nothing heroic from Congress, no comprehensive tax reform. But we could see an extension of the R&D tax credit.
ERIC PIERCE: And how could the sticker shock play out that you mentioned earlier in the show? Is that something where it could really throw a wrench into things in terms of there a disconnect between what the consumer is paying for and what biotech drugs are charging?
IPSITA SMOLINSKI: I think that the government is going to have a limited toolkit to do anything about these prices. It's all about the companies. And it's about the payers.
What I would do is watch to see what the payers are doing. And remember Zaltrap back in 2012 with Memorial Sloan Kettering? They said no. They said, look, it's not much better than what's out there in colorectal. So I'd keep my eyes on that.
ERIC PIERCE: And you know, what's interesting is the market loves certainty. It hates uncertainty. And biotech has just performed extremely well through this sort of uncertain time with Obamacare, ACA, and whatnot. Jonathan, is there anything fundamentally that you're looking from the sector in terms of key drug launches or regulatory approvals that you think could help keep the window open? We've got about 30 seconds.
JONATHAN LEFF: Sure, well, you started off the day here by saying this is a bull market that looks like it will never end. So another bold prediction I'll make is that it will end. I don't know when, but it will end. And some of things to look for that could cause that to happen will be failures of drugs that have attracted a lot of investment, a lot of excitement, whether it's a phase three failure, or regulatory setback, or launches that severely disappointment. Those are the kinds of things that may bring some of the enthusiasm back down a notch.
DENNIS PURCELL: Stocks don't go up forever. And a little consolidation might be a good thing for the sector.
ERIC PIERCE: Maybe a short term correction in the near term. Well, that's this week's show. I'd like to thank my guests Dennis Purcell, Ipsita Smolinski, and Jonathan Leff.
Want more picks and predictions? Visit biocenturytv.com to download our 22nd Annual Buy-Side Report. And remember, you can tweet about this week's show using our hashtag #BioCenturyTV. For Steve Usdin, I'm Eric Pierce, thanks for watching.