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Biopharma industry looks to M&A, oncology for 2020 growth

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Biopharma industry looks to M&A, oncology for 2020 growth

As the J.P. Morgan Healthcare Conference kicks off Jan. 13 in San Francisco, the biopharma industry is looking to innovative cancer therapies and dealmaking to propel sales in the new year while drug pricing and litigation continue to add strain.

Moody's, which said in December that its 2020 outlook for the global industry is stable, highlighted new cancer drugs as a space ripe for growth. Michael Levesque, a senior vice president at Moody's, said in an interview that the surge in oncology is based on a medical need and a bevy of innovative drugs entering the market.

SNL Image

The 38th annual J.P. Morgan Healthcare Conference to be held Jan. 13-16 in San Francisco will bring together more than 9,000 attendees and 450 public and private companies.

Source: AP Photo

"There is an unmet medical need for so many of the most common types of cancer — lung, breast, colon — and there's always room for improvement in both the portion of patients who respond and the degree of response," Levesque said. "So much of the data we expect this year relates to oncology drugs, where companies are really testing their compounds against existing standard treatments and showing improvements."

Mizuho analysts noted in their December oncology outlook that cancer drugs occupied a disproportionate number of regulatory approvals, fast-tracking and breakthrough designations in 2019. As pipeline volume remains robust, Mizuho anticipates oncology's dominance to continue.

A factor leading to improvements in patient outcomes is the growth of precision medicine in the cancer space, Levesque said. Matching a patient's genetic mutations with a particular treatment leads to stronger outcomes across the board, he said.

Levesque said that Pfizer Inc.'s acquisition of Array BioPharma in July 2019 was an example of a company betting on the success of precision medicine in oncology. The drugs Pfizer acquired are currently approved for melanoma, but the drugmaker is seeking approval for patients with colorectal cancer who have a genetic mutation.

Another player in the precision cancer space is Eli Lilly and Co., which has once again announced an M&A deal in the lead up to JP Morgan, this time a smaller buy of Dermira Inc. for $1.1 billion, compared to the 2019 acquisition of Loxo Oncology. Dermira will complement Lilly's immunology profile, where the company markets the psoriasis drug Taltz with several more prospects in clinical trials.

"Immunology will continue to be strong and that market will continue to grow, partly because you have two new drugs in the category by AbbVie Inc., which is a very successful immunology player," Levesque said. AbbVie, the maker of the best-selling immunology drug Humira, has bolstered its stake in the sector with Skyrizi and Rinvoq, both approved by the FDA in 2019.

More deals on the horizon

Levesque expects mergers and acquisitions will continue to be a major theme in 2020 due to a combination of incoming generic and biosimilar competition and an abundance of dealmaking cash on hand.

"When we look at the top 10 companies, they have about $115 billion in cash, providing a lot of dry powder," Levesque said.

Companies like Bristol-Myers Squibb Co., AbbVie and Pfizer demonstrated an appetite to increase debt to make acquisitions in 2019, and Levesque said those conditions persist. Wedbush analysts tracked the total M&A activity in 2019 to a value of about $303 billion, far exceeding average activity of about $106 billion, according to a December 2019 note.

"We do believe the most common type of deal would be the late-stage pipeline compound acquisition because there are so many of these potential targets and because they're relatively easy to digest," Levesque said. "But we also can't rule out very large acquisitions — we've seen two announced in 2019, and we don't have a view that these are fully finished — even if it's not the most typical deal we're going to see."

Pricing, litigation add weight

Slowing the industry's forward trajectory in 2020 is the continued congressional debate around drug pricing in an election year, on top of market forces that are already bringing prices down.

"The scenario without any new major legislation essentially means the status quo," Levesque said. He said that pharmacy benefit managers are able to derive higher rebates from companies in categories with more competition, which in turn compresses price growth.

January price hikes for drugs have been lower compared to a year ago, as lawmakers seek consensus on how to regulate the industry's increases.

"When we talk social risks, the number one risk is the potential for U.S. legislation or regulation," Levesque said. "Our initial take is that something that passes would be credit negative to the industry, but not catastrophic."

He said that policy changes to limit the prescription drug plan called Medicare Part D spending would have an impact on the industry, but with $250 billion in annual earnings, the losses would not be disastrous.

"It is still negative because anything that curbs or reduces internal growth will motivate companies to seek other ways to grow," Levesque said.