After the JP Morgan Conference in January, how do you assess the health of the life sciences industry headed into 2024?

I had an initial feeling of “cautious optimism” heading into the JPMorgan Healthcare  Conference that was reinforced by the deal flow and conversations that took place there. However, the industry still grapples with significant challenges, particularly the patent expirations of large biologic assets that could result in a potential loss exceeding US$350 billion in total aggregate revenue between 2023 and 2028. The industry showcased resilience and adaptability, addressing these issues through both organic and inorganic growth. Our annual “Firepower” report, which analyzes growth strategies, indicates that the industry crossed the US$200 billion value mark in acquisitions in 2023, despite a slower pace earlier in the year. 

The industry is poised for further growth, with approximately $1.4 trillion in available capital tracked by our “Firepower” report, matching last year’s record. This substantial amount enables pharmaceutical companies to pursue acquisitions, particularly of late-stage assets. Asset valuations, which experienced an artificial surge due to unconventional capital inflow during the peak of COVID-19-related activities, have now stabilized. However, the biotech sector faces a tale of two cities, with companies in late-stage development or already marketed products thriving, while a significant portion of earlier-stage biotech companies, around 27%, find themselves without sufficient cash reserves to last a year.

Can you provide insights into the challenges faced by the biotech sector in 2023 and how to solve those?

Last year presented significant challenges for the biotech sector, with drops in valuations and limited IPOs. The "sugar high" from the COVID-19 era is over, affecting companies that entered clinical trials at phase one. The key issue lies in companies going public too soon, resulting in decreased valuations. Despite this, there is a positive aspect with substantial deal-making in 2024. 

The biotech sector has room to grow. The next few months are pivotal for venture capital to regain confidence in deploying funds. While the IPO market is not expected to open soon, biotechs must secure funding for innovation. The FDA’s CDER approved 55 products last year, above the ten-year average of 43, emphasizing the importance of consistent funding for sustained innovation. There is concern about disrupting this flow with artificial regulations or market conditions. Oncology, blood disorders, immunology, inflammation, rare diseases, and neurology are key therapeutic areas attracting capital and fostering innovation.

With Pfizer’s acquisition of Seagen, how will the oncology space shape in the coming months? What about other “hot” therapeutic areas? 

We have been closely monitoring developments in therapeutic areas, including the dynamic landscape of cell and gene therapies. Last year, there was considerable discussion about cell therapies, particularly mRNA. While the focus on mRNA has somewhat subsided, the field continues to evolve.

We distinguish between autologous and allogeneic gene therapies. Autologous therapies involve using a patient's own genes or gene material to re-engineer the immune system. However, the challenges in the supply chain and the critical nature of timely delivery make this approach difficult, especially in terminal stages. Allogeneic therapies, on the other hand, offer off-the-shelf treatments, enhancing procurement and the overall supply chain cycle.

In gene therapy delivery, adeno-associated viruses have traditionally been the primary model, but they come with a high risk of immunogenicity. Innovations are underway to explore alternative viruses, larger in size, and capable of carrying more significant loads. These "gutless" viruses, devoid of generating DNA or RNA material, are being investigated for their potential in advancing gene replacement, allowing for more efficient and effective treatment. The industry is actively exploring these avenues to address challenges and drive further innovation in the field.

Have you noticed larger companies willing to invest in Generative AI for their lead candidate programs?

The challenge for biotechs in deploying generative AI lies in limited resources. However, larger pharmaceutical and established companies, with greater scale, are actively exploring and investing in various use cases of AI. We recently analyzed how these companies aim to lower costs, automate tasks, and accelerate R&D exercises through AI, showcasing the potential impact on different aspects of their operations. While biotechs may not prioritize AI in their current capital deployment, they can tap into third-party vendors for AI-enabled capabilities to navigate their journey toward the next inflection point.

What key catalysts are you monitoring in 2024, especially in terms of regulatory, investment, and operational aspects?

In 2024, the focus on the regulatory front includes three key areas. Firstly, the Inflation Reduction Act will have a longer-term impact when negotiated prices for Medicare are disclosed in September. This could potentially shift the treatment modality from small molecules to biologics, impacting industry dynamics. Secondly, the increased scrutiny by the Federal Trade Commission on deals will pose challenges for companies looking to sell assets, adding another layer of complexity to the landscape. Lastly, the Bayh-Dole Act, although not showing an immediate impact, raises concerns about heightened regulatory scrutiny affecting innovation. As for EY's priorities, we are also concentrating on Generative AIs for innovative problem-solving and exploring managed services as strategic avenues to address industry challenges.