21 May 2019
Cell therapies, antibody-drug conjugates, mRNA drugs, gene therapies, CRISPR editors—new technologies are exploding in biopharma. But that has also provided a new challenge for analysts and investors: predicting how well drug launches will do.
As Evercore ISI analyst Josh Schimmer put it, "we feel smarter than ever about the biology and the amazing products making their way to patients, but more confused than ever in our ability to differentiate between competitive preclinical or clinical programs and to ascribe proper valuations to such complex fundamentals," he wrote in a Friday note to clients.
With the “cornucopia of innovation” comes the sound and the fury. Because there are so many technologies vying for a voice, Schimmer argued it’s hard to “value potentially dozens of related platform companies and guess how they’ll interact.”
Typically, investors assign the value of a platform by comparing it to others, but analysts simply don’t have much confidence in the comparator to begin with, he said. As some pipeline companies like to put several preclinical projects together, it also provides less visibility. Then what about their lead candidates?
“Companies with similar platforms tend to gravitate towards a similar set of lead indications to test and optimize their development skills,” Schimmer said. The problem with that is, a company’s value is thereby based on assets that face fierce competition, which could muddy the “bigger platform picture” even though they could take unique paths afterward. To make it worse, the new direction—and the time frame—companies will take after their proof-of-concept projects is largely unknown.
Then there are the pharma giants. Take chimeric antigen receptor T-cell therapy: Gilead Sciences bought Kite Pharma for $11.9 billion, and Celgene acquired Juno Therapeutics for $9 billion. These should provide some clues to how much a platform could be worth, but they also create “faux” value guidance, Schimmer said.
In some cases, large firms are just looking for innovations they think they must own to stay relevant, so they could be paying a hefty price that offers no benchmark value to investors. Investment will also start to flood into these hot fields, and redundancy will swell, adding more challenge to differentiating between programs. That in turn creates a new problem in assigning a drug the proper valuation.
“Now, not only are we trying to anticipate how big the market pie might be, but how many slices it will be broken into over time, what the relative proportion of each product’s slice will be, and the extent to which slicing the pie will shrink it due to price competition,” Schimmer said.
Speaking of competition, science is being pushed from academia into the industry very quickly. Just how many CRISPR candidates are out there claiming to be the best? Eventually, self-proclaimed superior versions of unproven technologies will rush to market, asking for valuations that fit the billing.
In what Schimmer called “a test tube bubble,” investors assume all the new technologies—with only biology or mice studies to back their cases—will be the best ones, “when in fact it’s entirely plausible that none of them will work, and if they all work and are generally similar, we’re headed towards price wars,” he said.
One area that might see those wars is orphan diseases. It's an arena where premium pricing is currently still acceptable because of the relatively small individual impact on the overall health budget each drug brings, Schimmer observed, even though the price itself doesn’t necessarily reflect the value of the product.
However, as expensive gene therapies move forward, “the world is about to be inundated with extremely valuable orphan drugs,” he said. Of course, each drug treats a unique disease, but when looking under the broader orphan label, “it’s clear that at some point society will not be able to afford to pay for them.”
As Schimmer sees it, that day may not be far ahead. As more orphan populations are unlocked by new platforms, it could be soon that the biotech industry will be too prolific for its own good and there will come the “launch that breaks the orphan camel’s back.” At that point, Schimmer said, regulatory changes could happen.Print
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