Investing in R&D stage biotech is attractive

1

HEALTHCARE FUNDAMENTALS REMAIN POSITIVE

  • Drivers and demand for new drugs
  • Scientific and clinical progress
  • Translation to disease modifying therapies

2

BIG PHARMA INTENSIFIES SEARCH FOR INNOVATION

  • Increasing pricing pressure
  • Continuing threat from generics
  • Decreasing R&D productivity

3

OPPORTUNITY IN EARLY STAGE BIOTECH

  • Innovative drug development approaches
  • Outsourcing of innovation
  • M&A and ECM trends

The biotech sector is seeing growing demand for increasingly effective therapies supported by new and innovative scientific advances that are improving the understanding of diseases and generating transformative therapies for patients. However, the biopharma industry continues to face pressure from governments and healthcare payers, in particular around drug pricing, while branded drugs, which have traditionally funded R&D at large biopharmaceutical companies, face threats from generics as patents expire. This has resulted in an increase in the number of smaller biotech companies driving innovation and having the skills and capability to source, diligence and invest in these opportunities remains an attractive and rewarding proposition.

1

HEALTHCARE FUNDAMENTALS REMAIN POSITIVE

As life expectancy improves, an ageing population's expectations of what a successful therapy can achieve continues to grow. While scientific progress has reduced mortality for a wide range of communicable diseases, this has unveiled a greater prevalence of genetically-driven and lifestyle-related diseases such as cancer, diabetes and neurodegenerative diseases and there is huge demand for new therapies to treat these diseases.

Scientific advances in recent years have both improved the diagnosis and classification of patients as well as providing new targets for drug development. The pace of progression has increased rapidly, driven in large part by technological advances supporting biological data generation (e.g. genomics, proteomics, metabolomics etc.) as well as the ability to process this data (e.g. machine learning etc.). Leading academic institutions and researchers, which themselves receive significant internal, grant and government funding, have increasingly been the source of tractable leads for drug development and improved patient management.

These new opportunities have translated into a substantial number of novel, and often transformational, therapies approved in recent years. There has also been substantial innovation around drug modalities, with completely new classes of drugs being approved over the past ten years such as gene therapy, cell therapy, RNA-based therapies, oncolytic viruses, and others.

Innovation driving increasing FDA approvals

Innovation driving increasing FDA approvals

 

FDA drug approvals 2013-2018. Source: FDA

2

BIG PHARMA INTENSIFIES SEARCH FOR INNOVATION

The traditional business of big pharmaceutical companies faces increasing commercial pressure. As a result, they are turning to new technologies and searching for external sources of medical innovation and this creates additional opportunities for Arix. There are many challenges to big pharma in the market today. The most widely covered threat is the continuing debate around drug pricing in the developed world. In addition, patent expiry on blockbuster drugs results in increased competition from generic drug manufacturers. Such challenges constrain levels of investment by big pharma into drug discovery and medical innovation. A strong trend has developed in the industry where big pharma seeks to externalise the sourcing of medical innovation to companies like Arix Bioscience who offer a strong pipeline of emerging biotech technology. Arix is towards the front of this market trend, having deliberately positioned itself to work closely with young companies featuring high levels of medical innovation and new and market disruptive technology, while also developing strategic relationships with big pharma.

3

Opportunity

As well as opportunities for licensing deals, partnerships and M&A, improvements in the understanding of disease biology and the accompanying rise in 'precision medicine' and focus on rare diseases has created an environment in which smaller biotech companies are increasingly able to take products all the way through development and commercialise them without large biopharma support. Disruptive innovation is frequently originated in smaller biotech companies set up either by leading academics or industry veterans that have successfully developed novel technologies and drugs in the past. In 2018, 69% of drug approvals were discovered and developed by smaller biopharma companies and academic institutions (see graph below). Excitement continues to grow about this productive segment of the market, and senior executives from large biopharma are increasingly being drawn into smaller biotechs in recent years.

Smaller biopharma companies are playing an increasing role not only as originators, but also as developers and owners of drugs all the way to approval. Overall, the proportion of FDA approved drugs developed by large biopharma (at time of approval) has dropped from over 60% in 2013 to just 35% in 2018, reflecting the increased success that smaller biotechs are having. Overall, the proportion of FDA approved drugs developed by large biopharma (at time of approval) has dropped from over 60% in 2013 to just 35% in 2018, reflecting the increased success that smaller biotechs are having.

Innovation Continues to be Driven by Small Biopharma

Innovation continues to be driven by small biopharma

Big Biopharma

Mid Biopharma

Small Biopharma and academic institutions

Drug approvals by size of drug originator. Source: FDA, HBM Analysis

Returns

In recent years, we have seen smaller biotech companies pursue multiple options to fund drug development through value inflection points, to exit or partner. From 2013 to 2015 there was a surge in biopharma M&A that supported exits in the sector. More recently there has been significant growth in IPOs in the sector providing an alternative route to liquidity for investors. Both routes offer smaller biotech companies potential to capture more value from their assets.