SAN FRANCISCO – Besides the 8,000 or so who attend the sessions at the JP Morgan Healthcare Conference, another roughly 40,000 come just for JPM week. They shuttle among the city’s many hotels to participate in various meetings, both public and private.
A gathering that took place a few blocks from JPM on Tuesday featured a premier group of these executives. They offered a 360-degree view of the challenges and opportunities facing the life sciences sector, as well as global healthcare companies’ role in the evolving innovation ecosystem. Below is a sampling of their comments:
AI as catalyst for pharma, medtech
More than 60% of the top-selling drugs in 2021 were discovered outside of big pharma’s labs, according to data cited by BCG, which hosted the breakfast panel. Back in 2003, that number was closer to 15%.
At the same time, consider the wealth of advances over the last decade – ranging from new data, AI and digital health tools, to digital therapeutics, remote monitoring and diagnostics, along with surgical robotics and medtech enabling shifts in the sites of care.
“A lot of these are not in the hands of large healthcare companies,” observed Romney Resney, managing director/senior partner for BCG. “Where innovation is happening has significantly changed. At the same time, at a macro level, we don’t necessarily see the larger companies changing the way they operate.”
Along similar lines, over 65% of R&D spend is happening beyond the top-15 biopharma companies. The data speak to the importance of sourcing as a critical need for big pharma.
Those numbers “aren’t terribly staggering to me,” said Michael Klobuchar, EVP/chief strategy officer for Merck. Nor is it a bad thing. On the contrary, he added, it’s important to maintain an “unbiased” approach.
The fact that that amount of biomedical research is happening outside of pharma’s walls is “really important to the patients we ultimately serve,” Klobuchar said. “For pharma in particular, I feel strongly that for us to be successful, we do need our own biology and understanding of the basic underlying disease pathways so that we can have a discerning POV on which innovations – wherever they occur – have their full potential.”
What is evolving, he continued, is around discovery research – how to find and validate a target and engage in a disease pathway. “There’s a continued role to use conventional approaches for that whole set of activities. However,” he observed, “AI and machine learning will make an incredible impact.”
In terms of AI/ML in drug discovery, Klobuchar added, “We don’t believe that, any time soon, it will come up with the molecule that has all the operative features. What it will do is identify what features won’t be supportable in the long term. It allows you to scrape away those opportunities you’d otherwise be pursuing and putting into later and later and more expensive phases of development…allowing us to put time and resources on those that have drug-like properties.”
AI-based innovation is happening on the medtech side, too, especially given those companies’ greater emphasis on the patient, said Laura Mauri, SVP and chief scientific, medical and regulatory officer at device giant Medtronic.
In cardiology, for instance, pacemakers and implanted cardiac monitors “have embedded artificial intelligence to be able to improve diagnosis so it’s more accurate, improves the workflow of physicians and also creates a better sense of wellbeing for patients to be able to interact with their data,” she said. “That algorithm is continuously able to be improved.”
Mauri, a former cardiologist, is also heartened to see data tools applied to diagnostics like stroke detection and screening colonoscopies. “These are all ways that the medical device ecosystem is changing to the more broad medical technology and medical data ecosystem,” she said.
The M&A landscape
The types of M&A that these companies pursue is a function of how they see their own role and the kind of ecosystem they want to build. Exits, which are one measure of a vibrant deal-making environment, as they enable innovation to occur when private companies go public, contracted more than 90% last year. Interest rates soared and the XBI, which tracks an index of U.S. biotech stocks, was off by nearly 30%. That said, 2022 did see 11 biotech IPOs.
“You can take a doom-and-gloom view of 2022, but when you parse through the data…there were plenty of companies that were able to find financing,” recalled Matthew Leskowitz, managing director, healthcare investment banking at Goldman Sachs. “There was capital available to, I would argue, higher-quality teams and assets.”
Private companies took a hit in terms of valuations. But alternate sources of capital are emerging and deal models have evolved to include more royalty based tie-ups, spin-offs as well as bolt-on acquisitions.
“At some point this year, we will see the markets reopen more broadly, [depending on] when the Fed takes its foot off the brake,” he said. “There was a tremendous amount of innovation in 2022, and there’s a lot to be optimistic about to turn the page on the year.”
The panel was also asked about the appetite for special purpose acquisition companies, or SPACs, which may represent a simpler, faster exit strategy for healthcare startups. If 2020/21 was “the year of the SPAC” in healthcare, 2022 saw far fewer of these exits due in part to new SEC rules around the practice.
“They’re very hard, and they don’t actually create value,” said Eli Casdin, chief investment officer and founder of Casdin Capital. “You’ll have fewer reverse mergers. The SPAC market is dead for many reasons. [Instead,] you’ll see consolidation, which is the natural result of oversupply and a shrinking of available capital.”
Leskowitz backed up the sentiment. “We probably talked to clients about 40 to 50 reverse mergers and ended up with one on our book [of business] over the past year,” he recalled. “They’re just very, very hard to get done.”
Fewer and fewer biopharma mergers are happening due to synergy, said Resney, and more early stage deals are getting done in this environment.
“We’re not necessarily seeing very large-scale M&A,” Leskowitz agreed, “but rather single-digit, billion-dollar-type, bolt-on deals. Many of the deals in this environment are commercial or near-commercial assets. And you can imagine there’s a scarcity of those types of companies out there.”
There’s also an emerging class of acquirers willing to take on more clinical risk. “In a world where the capital markets continue to be constrained and many of the private biotechs we work with are thinking of alternate sources of capital,” said Leskowitz, “we expect M&A to pick up, but it’s going to be bifurcated.”
A majority of Merck’s deals the last 12 months were “classic forms of collaboration” in which the drugmaker aligned with partners who brought compelling science that addresses highly unmet need, meshed with its broader portfolio and offered line-of-sight into value, said Klobuchar.
He said he expects that classic approach to continue. “We’re not opposed to being innovative [in deal structure] when it’s required,” he said, “but we start with those basic tenets.”
Mauri said collaboration is “at the core” of what drives Medtronic. What’s changing, she said, is that there’s a more diverse landscape of potential partners to advance healthcare. Many medtechs have data partnerships, the goal of which is to improve outcomes by combining the data on their devices with the data that exists around them.
In Medtronic’s case, that’s been furthered by some “novel structures” for deals, said Mauri. For one, it’s partnering with DaVita on a JV to bring dialysis more effectively into the home setting. And the company has a “co-invest” with Blackstone Life Sciences, which provided the medtech with $337 million to advance transformative diabetes tech, specifically its diabetes pump and CGM.
“So we’re always looking for how to innovate in how we partner outside of our immediate four walls,” she said.
However, Casdin said he sees relatively few VCs and strategics – like the venture arms of life science companies – coming to the deal table anymore for mezzanine-type investments where the tech is at an early stage and there’s much risk involved.
Instead, he said, “Private companies are taking on debt” as a way to bridge to the next financing. “Right now, there’s a little bit of a scary process of taking on debt,” but he expects the traditional VCs and strategics to come back to that role eventually.
And for pharma, acquisitions may not always be the answer; sometimes it’s wiser to keep the innovation with the innovator. Consider Merck’s Phase 2b trial with Moderna evaluating a mRNA-based, personalized cancer vaccine paired with I-O drug Keytruda to treat melanoma.
Then again, convergence spawns a brand of innovation all its own. That may include mature therapeutic or medtech manufacturers buying AI startups – like BioNTech’s recently announced acquisition of data science outfit InstaDeep for $440 million – or pharmacies purchasing physician practices, to name a few, as well as the entrance of more non-traditional players into healthcare, Casdin said.
