Biotechnology companies had a solid year throughout 2017, but not as significant a rise as expected for a high-risk sector compared with other industries in the market. The biotech industry is projected to enter 2018 with strong momentum relative to the shaky position it held at the beginning of 2017. But what are the key drivers for the optimism going into 2018? With a lower chance of the government drastically reducing drug prices, the acceleration of drug approvals, and heated mergers and acquisitions (M&A) activity, the biotechnology industry expects an upsurge in growth throughout the first half of 2018.
The US presidential administration articulated its policy initiative through an executive order in July 2017 to reduce drug prices. However, an inflation report has shown that the prices of medical commodities such as prescription drugs rose by 0.6% from October to November 2017, an increase of 1.8% over the last twelve months. With stable growth of prescription drug prices observed, the fear of draconian pricing policies has abated, restoring confidence within the industry.
Faster FDA approval
The FDA has already affirmed its promise to speed up the drug approval process for generics and novel therapeutics. With the rise in targeted treatments, FDA commissioner Dr Scott Gottlieb has mentioned that the FDA is considering novel ways to streamline the approval of oncology drugs and associated in vitro diagnostic (IVD) devices. This innovative approach aims to shrink the drug development timeline, encouraging the development of novel targeted therapies that will benefit many companies, especially within the oncology space. If biotech companies can quickly bring innovative targeted therapies to the market, then both patients and investors will benefit.
The main tailwind for 2018 is the expected M&A activity bounce-back. Now that the FDA has restored confidence to large pharma and biotech by speeding up drug approvals, there is much less risk to deals, allowing for a rise of acquisitions next year. The biotech industry has a pool of acquisition targets, but over the course of 2017 there has been a severe dearth in acquisition activity. This is expected to rebound in 2018.
Reduced taxation benefitting the sector
The government’s tax reforms will lead to reduced taxation on cash held outside of the US. The cash located overseas is expected to be estimated at around $150 billion within the healthcare industry. A lot of this cash is expected to be recovered into the balance sheets of pharma and biotech companies. Although many of the biotech acquisition targets come with a hefty price tag, this excess liquidity can allow large pharma companies to take more risks, especially in oncology, where acquisitions are particularly attractive. These may involve potential gems such as Bluebird Bio, Clovis Oncology, and Puma Biotechnology. Additionally, with the wave of generics entering the market, confirmed by a record 763 new generic drug approvals in 2017, pharma and large biotechs require alternative revenue streams to combat generic competition. Acquisitions may be the ideal solution. The rise of generic competition has placed a huge squeeze on the earnings of many pharma and large biotech firms, as observed in third-quarter 2017 earnings reports by multiple large pharma players. This once again further supports our anticipation of increased M&A activity in the year to come.
The biotechnology sector is unique in the market considering that it has not yet reached its all-time high, in contrast with other sectors in the overall growing market. Now that more clarity in the current US administration’s policies has been established, a positive outlook is emerging for pharma and large biotech. Among these policies, the FDA has been transparent in its mission to accelerate drug approval timelines for both generic drugs and targeted therapies, which is not only a benefit for pharma but has also shifted discussions away from the implementation of stringent pricing constraints on many of the large pharmaceuticals’ expensive therapies. Most of all, with the tax repatriation on off-shore cash holdings coming into effect, large pharma will have a cash surplus and this may ultimately lead to a greater appetite for M&A deals. Therefore, it appears that the biotechnology industry is in a sturdy position going into 2018.