While life sciences investment has retreated from its all-time highs during the COVID-19 pandemic, investors surveyed by a national business law firm are still bullish about the sector based on the growth potential seen in artificial intelligence (AI), cell and gene therapy (CGT), and other new technologies.
According to the 2023 Investment Funds Outlook Report issued recently by Barnes & Thornburg, more than one-third (36%) of 125 people surveyed included the life sciences as among areas of current investment or focus.
Of those life-sci investors, 29% said they plan to invest an average of between $6 million and $10 million in a life sciences fund, while 28% said they will invest an average $1 million to $5 million. Encouragingly, 18% of investors plan to invest more than $25 million on average, and 16% between $11 million and $25 million—though the remaining 9% said they will only invest less than $1 million.
The 125 investors consisted of limited partners, sponsors, and service providers who were surveyed in February with help from market data services provider Dynata. Survey respondents hailed from 29 U.S. states and represented hedge fund, private equity, credit, and venture capital organizations across the life sciences and more than a dozen other industries.
The life sciences investors told Barnes & Thornburg they will continue to pour as much capital into their life-sci funds as they did before the financial markets turned bearish two years ago.
That bearishness is reflected in declines for most biotech stocks as well as the 37% year-to-year decline in the total value of U.S. and European VC deals reported by EY, to $16.88 billion in 2022 from $26.62 billion in 2021. PitchBook data reported by commercial real estate firm Cushman & Wakefield a 28% year-over-year decline in U.S. life-sci venture investment, to $35.8 billion from $49.2 billion.
VCs, vaccines, and value
During Q1 2023, EY reported a total $2.381 billion in venture capital was invested in biotech companies, down 72% from the $8.541 billion invested a year earlier, and lower than any quarter of 2022.
The VC decline is of particular concern since the market downturn has impeded companies from raising greater sums of capital (and investors from cashing in on or “exiting” their investments) by going public, whether by completing initial public offerings (IPOs) or by forming special purpose acquisition companies (SPACs).
According to EY data, total biotech IPO value generated in Q1 2023 was $280 million, down 18% from $342 million in the year-ago quarter.
“Even though there’s been some decline in VC investment activity, there’s still a lot of optimism. There’s still a lot of activity,” John E. Kelly, a partner in Barnes & Thornburg’s Washington, D.C., office, and chair of the firm’s Healthcare Industry Group, told GEN Edge.
The pandemic heightened interest in life sciences and vaccine and drug development, sparking a surge in life-sci investment that continued a trend of increasing investment seen in the latter part of the last decade. And while VC investment has since declined along with that interest in life-sci, the amount of venture capital invested into early-stage biotechs remains on the high side, Kelly said.
“We think that that activity and that excitement and optimism from investors really has to do with the innovation in the industry as well as just our experience through the pandemic, watching the value and importance of what different therapies can provide.”
That optimism has remained, Kelly said, despite what he termed a slight decrease in the number of investors who focus on life sciences among those surveyed since the onset of the bear market.
“Opportunity areas”
According to the report, more than half of the life-sciences investors who completed the survey were particularly interested in four specialties or “opportunity areas” that have enjoyed rapid innovation in recent years—AI, CGT, and precision medicine.
“Those pieces are really what are keeping investors excited in this particular industry as well as continuing to drive investment,” Kelly said. “What you’re seeing is, people realize that these therapies can be really life altering.”
Within CGT, gene therapy was the specialty most identified as a key opportunity, garnering support from 64% of life-sci investors. That was not apparent last year, when CGT saw a total $12.6 billion invested—down 44% from $22.7 billion in 2021 reflecting the bear market, according to the Alliance for Regenerative Medicine.
However, last month the FDA’s Cellular, Tissue and Gene Therapies Advisory Committee recommended agency approval of the first gene therapy for Duchenne muscular dystrophy (DMD), Sarepta Therapeutics’ SRP-9001 (delandistrogene moxeparvovec), indicated for ambulatory DMD patients with a confirmed mutation in the DMD gene. The FDA has set for December 8 a groundbreaking decision on whether to grant its first-ever approval for a CRISPR-Cas9 gene-edited therapy being co-developed by CRISPR Therapeutics and Vertex Pharmaceuticals, exagamglogene autotemcel (exa-cel) in severe sickle cell disease (SCD). Exa-cel also faces a March 30, 2024, target action date in transfusion-dependent beta thalassemia (TDT).
Answering a question that allowed for multiple responses, the investors next identified precision medicine and AI/machine learning (56% each), cell therapy (52%), patient care and R&D (48% each), drug distribution (32%), innovative drug delivery methods (32%), and conventional drug modalities (11%).
Within AI/Machine learning, investors most viewed as future investment opportunities data gathering and automation, followed by drug discovery or design (50% each); predictive analytics, target identification, and computer vision (43% each); signal processing (35%); data interpretation (30%); speech/image recognition (28%), process modeling and performance optimization (20%), and quality control (13%).
Deep Pharma Intelligence has tallied 800 biotech companies that apply AI in a recent report (more than half of them, 53%, based in the U.S.), with investment in the technology having grown five-fold over the past five years to $25 billion. Morgan Stanley has projected that AI-based drug development will lead to an additional 50 new treatments being approved over the next decade, resulting in a $50 billion market.
Within new therapy development, Kelly continued, investors are prioritizing indications that include obesity, psoriasis, liver disease, and Alzheimer’s diseases—areas marked by recent successes that have followed decades of R&D setbacks and frustration.
In Alzheimer’s, for example, the FDA has set a July 5 target decision date on full approval for the Eisai/Biogen drug Leqembi® (lecanemab-irmb), which received accelerated approval in January. The FDA’s Peripheral and Central Nervous System Drugs Advisory Committee on June 9 recommended agency approval of Leqembi.
But investors are watching clinical trial results and drug delivery mechanisms more closely than ever—such as the safety of adeno-associated virus (AAV) vector-based gene therapies and antibody-drug conjugates, both of which have been linked to patient deaths. Four boys died in a Phase I/II trial of Astellas Pharma’s resamirigene bilparvovec, an AAV-based gene therapy for X-linked Myotubular Myopathy (XLMTM) also known as AT132, while the FDA last week imposed partial clinical holds on two clinical trials of Mersana Therapeutics’ ovarian cancer candidate upifitamab rilsodotin (UpRi) after five fatal (Grade 5) bleeding events were seen among the approximately 560 patients dosed to date.
Companies most likely to ride out the storm of decreased life-sci investment, Kelly said, are those whose clinical data and pipelines are strong enough to attract capital from investors.
“The reality is, you need funds to be able to drive research and development and be able to develop new therapies. And if these organizations don’t have that, if these manufacturers can’t get a hold of funding, it’s putting us in a very precarious situation just generally,” Kelly said.
Smaller companies, he cautioned, will find it harder to attract investment capital.
“Some of the smaller companies are going to have to lay off, and some biotech companies are going to feel that in particular. But we still think that sound investment, innovation, and the excitement around that can help drive this back forward,” Kelly said. “Some of the biotech companies that have promising drugs are not struggling in the same way, and the investors continue to be supportive.”
Antitrust, IP headwinds
Kelly acknowledged one challenge for growing biotechs—the increasing likelihood that any large deals they enter into will be scrutinized on antitrust grounds by regulators such as the U.S. Federal Trade Commission (FTC) and European Commission. The FTC is opposing Amgen’s planned $27.8 billion acquisition of Horizon Therapeutics, while both agencies have stood firm against Illumina’s $7 billion acquisition of cancer blood test developer Grail—a key factor in activist investor Carl Icahn’s successes in changing Illumina’s direction, which led to CEO Francis deSouza’s sudden resignation earlier this month.
“The government has been so active recently and very publicly talking about their activity in antitrust enforcement in the life sciences. So, we expect antitrust activity by government to be an area of focus in 2023 and in the future,” Kelly said.
Another headwind not discussed in the investment report is the potential for new technologies to get as bogged down in intellectual property litigation as who invented CRISPR/Cas9 (the Broad Institute has prevailed in two patent interference proceedings), and can human genes be patented (the Supreme Court issued a mixed decision in 2013). Last month, the Supreme Court sided with Sanofi and Regeneron by ruling unanimously they did not infringe on two Amgen patents for its PCSK9 inhibitor Repatha® (evolocumab).
“The Supreme Court has been extremely active over the past decade in IP and it is having real world consequences for biotech,” Allen R. Baum, a patent attorney who is Partner-in-Charge of Barnes & Thornburg’s Raleigh, NC, office, told GEN Edge.
The gene patenting case, plus an earlier Supreme Court decision invalidating two Prometheus Laboratories patents covering drug dosage calibration methods, made it much harder for diagnostic companies such as those identifying new biomarkers of disease to obtain meaningful IP protection, Baum said: “This made it harder for those companies to raise money to bring products to market.
“The PCSK9 decision strikes at the issue of how much do you need to disclose in your patent application to obtain broad antibody claims,” Baum said, “Although it didn’t change the existing body of case law around written description, it is clear that this decision will make it more challenging for startup biotech firms that don’t have the resources to test vast libraries of antibodies with incremental changes in amino acid sequences to obtain meaningful protection.”
Similar fundraising challenges as already seen in the diagnostic industry may lie ahead for biotech startups as a result, he added.
