Expert speakers at this year’s JPM Healthcare Conference disagreed in their optimism for capital markets and M&A in 2019. While some predicted M&A levels will continue, especially around perennial oncology and orphan targets, others predicted a stifling effect and lower valuations caused by recent poor returns on investment, and the backlog of initial public offerings (IPOs) following the reopening of the federal government.
If 2019 turns out to be subdued for capital markets, this is not all bad news for CMOs. Outsourcing is much more embedded in the bio/pharma industry than in previous downturns, and cost-cutting among sponsor companies may well lead to more service contracts, experts said.
Speaking during the panel discussion, "The Booming Biotech Ecosystem: The Playing Field Has Evolved, and the Bases Are Loaded. How Long Will the Streak Continue?" on January 7, William Newell, the CEO of Sutro Biopharma Inc. (San Francisco, CA, US), a company that launched on the NASDAQ in September 2018, said, "in the first half of last year it was relatively easy to raise capital," but "when investors retreat it takes a long time for them to return to where they were before."
"The industry and capital markets are turbulent but great ideas will get funded," said fellow speaker Barbara Ryan, founder, Barbara Ryan Advisors, and former managing director at Deutsche Bank.
M&A levels will continue in 2019, said Eric Aguiar, partner, Aisling Capital, speaking at another JP Morgan panel, "The Financing Frenzy: Is It Truly the Best of Times?" on January 8. Similarly, speaker Philippe Lopes-Fernandes, senior VP, global head of business development and alliance management, Merck KGaA (Darmstadt, Germany), predicted more M&A based on the Celgene and Loxo mega-deals.
Aguiar predicted M&A interest will continue especially around certain popular oncology and orphan indications, comparing the market to a children’s soccer game where all players follow the ball instead of spreading throughout the pitch. On the same panel, Marian Nakada, VP, venture investments, Johnson & Johnson Innovation – JJDC Inc. echoed this view, saying that Johnson & Johnson (New Brunswick, NJ, US) is "looking in the usual places for early technology funding."
M&A skepticism
Other JP Morgan speakers were less optimistic about fundraising in 2019. Panelist Art Pappas, managing partner, Pappas Capital, stated he was not sure if the volatility in the capital markets "is real-driven, [or] is computer-driven" and he did "not know if we are going into a capital-strong environment."
Notwithstanding two "mega-mergers" in 2018—those of Celgene (Summit, NJ, US) by Bristol-Myers Squibb Co. (New York, NY, US), and Loxo Oncology (Stamford, CT, US) by Eli Lilly (Indianapolis, IN, US)—industry predictions of a greater wave of mega-mergers did not come true, noted Ryan and Gabriel Cavazos, managing director, Leerink Partners (owned by Silicon Valley Bank).
This is despite larger bio/pharma having lots of cash due to the recent US tax reform that reduced the corporate tax rate and the repatriation of overseas cash reserves. Mergers and acquisitions between companies with manufacturing capacity will allow companies to sell spare captive capacity to contract manufacturing organisations, according to the PharmSource report CMO Scorecard: Outsourcing of NDA Approvals and CMO Performance – 2018 Edition (April 2018, GDPS0020MAR).
Kimberly Ha, CEO and founder, KKH Advisors, and former editor of BioPharm Insight (now owned by GlobalData), told the "Financing Frenzy" panel she has seen investor fatigue in the CAR-T cell therapy space "in the last 12 months," ceding to interest in new types of advanced therapy medicinal products in the immunotherapy space. This promise of continued opportunity for the limited number of CDMOs in the cell therapy supports the findings of the PharmSource trend report, Cell Therapy Market Opportunity for CMOs – 2018 Edition.
Overvaluation concerns
Growth in the last couple of y...
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