Expect pharma to take more upstream risk, says Jefferies’ Bar-Nahum

M&A in the face of the looming patent cliff, U.K. biotech’s next act, and more

With a collective hole to fill of $90 billion from upcoming patent cliffs, and only about $70 billion worth of assets that even in the best scenario could replace that revenue, pharmas will have no choice but to take more “upstream risk” and seek assets earlier in development, says Gil Bar-Nahum, managing director at Jefferies International. But it won’t be straightforward. 

On The BioCentury Show, Bar-Nahum said he expects to see more deals for assets in Phase IIb or proof-of-concept trials, as pharmas exhaust the available assets via deals that are now in Phase III or later. The timeline for the biggest crunch is 2028-31, he said.

“Even if big pharma went out and bought everything that had a commercial or almost-commercial asset in the big blockbuster world, they still would not be replacing all the revenues that would be missed,” he said. 

While pharmas will go all-out in the near term to find assets that can bring revenues by the end of the decade, they will need to pivot soon. 

“I anticipate that they’ll start to take a look at a little bit more of upstream risk in order to feed that pipeline into the future,” said Bar-Nahum. That creates tensions for their existing programs, as well as being a hard sell for some biotechs, in particular for single-asset companies.

“They don’t love to push out another program that may already exist in order to now have another $200 million of burn from a new program they just acquired,” he said. Pharmas’ preference will be to partner, give a “big upfront” and have the biotech run the late stage or registrational study. “But a lot of companies that are single-asset companies see that as effectively selling themselves without selling themselves.” That leaves such biotechs effectively as royalty collectors, which Wall Street “doesn’t love.”

The result will be a lot of competition around innovation, and it will focus on very large total addressable markets (TAMs), according to Bar-Nahum. He believes pharmas will continue to draw back from rare diseases — though some, such as Novartis AG (SIX:NOVN; NYSE:NVS), have said they will remain — and that biotechs such as BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) and Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE) will be the ones bringing those products to market, in particular for ultra-rare diseases.

Bar-Nahum said he is not yet seeing the Inflation Reduction Act (IRA) create downward pressure on valuations in deal flow with pharmas.

Bar-Nahum is also one of the main architects of the Jefferies London Healthcare conference in November. That event has grown in attendance and popularity in recent years, which he puts down both to the need for an alternative and supplement to the January conference in San Francisco — the J.P. Morgan Healthcare Conference — and the growing momentum of U.K. biotech.

Despite the expansion of the sector, fueled by the “superbrain that exists between Oxford, Cambridge and UCL in terms of the number of companies and technologies that I see on an almost monthly basis being spun out,” there will remain a need for those companies to go to NASDAQ to access real growth capital, given the restrictions of some European exchanges, said Bar-Nahum. In some jurisdictions, where companies are restricted from raising more than 10% of their market cap, that limits their ability to find the funding they need for late-stage trials.

“So if you’re a $300 million market cap company — $30 million, where does that get you for a Phase III clinical study? No investor is going to give you $30 million, another $30 million, and then another. They want to give you the entire piece of capital that you need to take it to the goal line, plus another 12 months,” he said. 

Still, there are other signs of progress. While he thinks that the move to unlock capital from pension funds and allow them to invest is a positive step, there remain many questions about how that will work. “At the same time, it would be fantastic if the U.K. had a kind of BPI-like fund that exists in France, that has a highly skilled, extremely intelligent group of professionals that sit around a committee and make a decision of which French company do they want to be an investor, and an evergreen investor at that,” he said.

“So I think it would be fantastic if the U.K. could pull something like that together, but it doesn’t happen overnight.”