This summer has been chock full of biotechs and pharmas laying off staff and slashing drug development programs. If more deals are made, though, that could slow down.
In August, Vir Biotechnology, UniQure and Arbutus joined the ranks of those tightening their belts. But while cuts will likely still happen in the short term, some industry watchers believe layoffs will ebb by the end of the year as M&A activity increases with companies looking to replenish the pipelines they pruned.
Blockbuster GLP-1 obesity drugs are fueling the momentum, but companies need to rethink out-of-date business models that are holding them back, said Michael Abrams, a managing partner at the healthcare consultancy Numerof & Associates.
A turbulent market
Pharmas are making cuts to stay ahead of revenue losses as the industry approaches a steep patent cliff. Some are taking a big hit as blockbusters like AbbVie’s Humira, Merck & Co.'s Keytruda and Bristol Myers Squibb’s Opdivo have either lost exclusivity or will soon, facing challenges from a crop of biosimilars.
The industry is trying to woo skittish investors, Abrams said. A pull-back in investments since the pandemic has left 31% of biotech on the verge of running out of cash in less than a year, according to an EY industry report. Many investors have opted against high-risk drug development opportunities, putting money into safer bets such as physician group practices, he said.
“The drug companies need to provide dividends and hopefully some level of appreciation that'll keep them from taking their capital elsewhere,” Abrams said.
Pressure from the Inflation Reduction Act to rein in high drug prices through Medicare weighs against the industry. An increasingly aggressive Federal Trade Commission has also put some company leaders on edge, Abrams said.
While trepidation about the impact of the IRA still permeates, some executives have said the price reductions for the IRA’s negotiations aren’t as steep as initially feared. Even so, some industry leaders remain concerned about the regulation’s potential chilling effect on drug innovation as they cast a wary eye toward the FTC.
"If the FTC takes issue with an acquisition, that can drag out the whole process to the point where investors are likely to go elsewhere," Abrams said.
Favorable signs
Provided the Federal Reserve follows through with long-awaited interest rate cuts this fall, smaller biotechs may see bright skies ahead as they drive drug development, Abrams said.
“You would expect that with all the resources at their disposal, it would be Big Pharma responsible for the lion's share of drug approvals,” Abrams said. “But that's not the case.”
"If the FTC takes issue with an acquisition, that can drag out the whole process to the point where investors are likely to go elsewhere."
Michael Abrams
managing partner, Numerof & Associates
Smaller organizations account for more than half of all new prescription drug approvals, he said. However, the road for these companies has been rocky recently due to high interest rates, though their outlook will likely improve if the Fed brings down rates.
“I think if rates begin to go down, it would be a plus for smaller organizations who still need funding. They will likely find it easier to get because they're no longer competing with other lower-risk investment options with equally high potential for payback,” he said. “So, there will be other players in the acquisition game and other funders.”
Oncology, rare diseases, and immunology will likely continue to be hot targets for investors, and snapping up drugs from smaller startups has some advantages over in-house development.
“What we're seeing is the elimination of riskier and longer-shot products in the R&D portfolio for the big pharma companies, basically swapping those out for acquisitions with more potential than the products they're cutting,” Abrams said.
M&A can also give companies a foothold in up-and-coming markets. For example, AbbVie’s recent acquisition of Cerevel Therapeutics included a next-generation schizophrenia drug, Emraclidine, a challenger for BMS’s potential blockbuster KarXT, which could gain approval this fall.
And in terms of cash to make these deals, Big Pharma has it. Many companies are sitting on substantial war chests from the successful products that they've had over the last decade, Abrams said. In 2023, companies had about $1.37 trillion available to deploy.
“It's going to be a very active M&A story over the balance of the year and into next year,” Abrams said.
Variables to consider
Also a factor in the ongoing pharma story is the upcoming election and how it might affect Medicare drug price negotiations mandated by the IRA. While the industry is still fighting legal challenges to the IRA in court, public support for reducing high drug costs makes it unlikely that any electoral outcome will lead to a repeal of the legislation, according to a recent Evaluate report.
As companies make changes to adapt to new realities, they will also need to rethink old marketing strategies in a changing marketplace, Abrams said. Increasingly, drug-purchasing decisions aren’t just made by individual physicians but by health system representatives intent on choosing options that offer value and strong clinical outcomes.
“Most manufacturers are looking to restructure their commercial approach [and] their commercial organizations to account for these changes, which are increasingly cutting into their effectiveness on the sales side. They have to find a new way to gain access to these customers,” Abrams said. “The old way is just no longer effective.”
While pharma is experiencing setbacks and adapting to change, the sector seems poised for a leap forward, Abrams said.
“It’s ripe for a lot of M&A,” he said, “and that's going to keep the whole business development space bubbling.”
