“In 2019, we expect more M&A,” Biotechnology Analyst Difei Yang says bluntly and right off the bat in her 2019 SMID Biotechnology Outlook. Indeed, Bristol Myers’ whopping $74 billion proposed acquisition of Celgene started the year off with a bang and underscored key themes for the sector, namely large pharma’s interest in the oncology space and its persistent need to fuel continued growth and replenish R&D pipelines. 

So, after a year of surprisingly little M&A, will 2019 be the year? Yang helps us understand the factors involved and the groundbreaking therapies that are set to make waves in biotech in the year ahead.

A Biotech Bounce-back?

Analysts had high expectations for biotech M&A in 2018, particularly in the rare disease space. When the sector saw its first big transaction in gene therapy with Novartis’ $8.7 billion acquisition of AveXis in April of that year, Yang saw it as a potential catalyst for other major transactions in gene therapy. Yet the appetite for deals fell below expectations as the year carried on. 

So far in 2019, we’ve seen the aforementioned Celgene deal and the $8 billion acquisition of Loxo Oncology by Eli Lilly. In gene therapy, Spark Therapeutics is being acquired by Roche in a $4.8 billion deal while Nightstar Therapeutics is being acquired by Biogen for $877 million. According to Yang, the deal-making isn’t done: M&A activity will continue to grow this year partly as a result of a 4Q2018 market selloff, which has made valuations more attractive for buyers. Still, strong clinical data and promising drug pipelines are crucial for any takeout candidate to remain attractive.  

Large cap pharma and biotech companies boast strong cash balances and financing capabilities, and making the circumstances even sweeter is President Trump’s “Tax Cuts and Jobs Act,” enacted in December 2017, which could allow offshore cash balances to be used for M&A. 

Opportunities Ahead 

Beyond M&A, growth and capital investment in 2019 will be spurred by first-in-class innovation and ground-breaking therapies. Therapeutic areas that haven’t seen innovation in recent years, as well as areas of high unmet medical need – namely gene and cell therapies – are ripe for such cutting-edge advancement. 

Take, for example, gene therapy for rare diseases: a favorable regulatory environment, strong patient advocacy groups, and the absence of treatment options can make for quick access to the market and lower overall developmental costs, along with premium valuations if data is positive. 

Another area Yang is keeping her eye on is orphan indications – diseases that are so rare, with small patient pools and sometimes no available treatment. A favorable regulatory environment and a potentially quicker path to market make this an attractive area for drug developers. The increasing number of orphan indication approvals - 80 in 2017 and 57 in the first eight months of 2018 - is a positive sign for this segment of the market and signals a continued flow of capital investment into the niche area.

Overcoming Therapy Challenges 

While it stands to be an exciting year for biotech, there are certainly challenges that can’t be overlooked. Factors that could negatively impact stock performance include general market weakness, delays in clinical trials and data readouts, as well as disappointment from late-stage trials. Plus, the field can be quite crowded, with multiple players pursuing similar indications. 

Yang also points out that, somewhat counter-intuitively, treatments that have the potential to be curative also create a challenge. A ‘one-and-done treatment’ means that there’s no continued need on behalf of the patient to purchase the drug, and companies will need to rely on other treatments in development.    

These challenges underscore the importance of a strong R&D pipeline. And while continued progress in clinical development is likely to drive stock returns, being best-in-class and first-to-market are going to be crucial advantages.