All major global equity indices declined in 2018, due to fears of a global economic slowdown associated with US-China trade disputes and concern about tightening US fiscal policy.
The EU endured Brexit woes and government budget concerns practically all year long. The Dow Jones, Nasdaq Composite and S&P 500 indices all fell, while the Nasdaq Biotechnology index lost around 8.9 per cent in US dollar terms. Most of these losses came from a very weak fourth quarter, when most of these benchmarks shed double-digit percentages.
Notwithstanding the general market landscape and the very pessimistic mood as the year came to an end, there were positive developments in 2018. Fundamental progress was made on the drug development front and across the biotech industry. The US Food and Drug Administration approved 18 new drugs in the fourth quarter, bringing the total number of approvals for the year to a record 59.
Investor fund flows into the space were absorbed by multiple initial public offerings and a range of capital increases throughout the year.
While most companies in 2018 had to raise capital under valuation pressure, the wide range of deals were executed successfully because the fundamental progress with new technologies, and the underlying market needs, remain exciting and valuable. The correction in valuations for almost all biotech companies may bring new opportunities for value growth and dispositions in 2019.
The year ahead
Our belief is that this year will continue to bring important technology progress, allowing new drug modalities to address many unmet medical needs in future years. There are opportunities in established areas, such as oncology, orphan diseases and neurological indications, as well as rapidly emerging technologies that can offer novel drug modalities, which promise the best therapeutic profile and economic value.
For example, ribonucleic acid (RNA)-based medicines – currently in early adoption for rare and serious diseases – are expected to broaden into larger patient populations in the coming years.
On the other hand, one-time potentially curative genetic medicines are likely to be applied for the foreseeable future to rare, monogenetic diseases. Companies performing early-stage clinical development in these areas have merit. Over time, so will newer drug modalities based on technologies expected to provide high-value medical solutions to seriously sick patients over the coming decade.
With respect to the biotech environment, continued debate around value assessment and structural change in the US healthcare system can be expected. This debate has impacted the profit outlook for large and profitable biotech and pharmaceutical companies.
The decline in valuations last year may force smaller and mid-cap businesses requiring further financing to turn to mergers and acquisitions more readily than before. The surprise January 2019 announcement from Bristol-Myers Squibb that it will acquire Celgene for $70bn (£54bn) emphasises that even large-cap, highly profitable biotech businesses can become acquisition targets thanks to their very attractive valuation levels.
These dynamics are to be welcomed as a demonstration of the vibrancy of the investment cycle in biotechnology – and the need to remain diligent and focused on value creation for the future.