Will tough biotech IPO market catalyze pharma deals?

[This post originally appeared on Forbes.com on October 19, 2016.]

In today’s challenging biotech IPO environment, are we in a buyer’s market for pharma acquisition and licensing deals?

In principle, yes – especially for private biotechs in Phase 2. If they get positive data, they’ll need much more capital to fund their final studies. And although venture capitalist Bruce Booth has pointed out that many quality biotechs can still access the public markets (here and here), others may be ripe for deals if the current market conditions persist.

But that’s only if big firms are buying what these biotechs are selling – which is far from certain. Although pharmas have historically sought “de-risked” drug candidates, more recently deal-making has shifted to earlier stages of development. So, are today’s Phase 2 drugs actually attractive, or are they what’s left over after the most desirable private biotechs already went public or got snapped up?

To bring some data to this question, we looked at exactly which Phase 2 drugs in private biotechs could be on the block in the coming year. Based on our analysis, we think the tight IPO market could drive some deals – but only if the acquirers can get comfortable with shouldering a bit more technical and strategic risk.

We did an industry database scan for private biotechs that should have interim or final Phase 2 readouts soon from their unpartnered lead programs – see the end of this post for details on our methods. In the end, we found 31 assets that we think could be near-term acquisition candidates:

Before making some observations, two quick caveats: First, we didn’t evaluate the data, markets or unmet needs underlying these drugs – this is a “pre-diligence” list. And second, because we didn’t factor the companies’ funding status into our filtering, some of these private firms (like Sanumed, for example) may not actually need resources from a strategic partner to advance their drugs into Phase 3.

Those provisos notwithstanding, one reason these drugs are still available may be that many are for diseases that fall outside of larger firms' typical hunting grounds. Sure, a few are in “core pharma” indications like asthma and diabetes, and several others could fit well with an acquirer’s “rare disease” strategy (like congenital adrenal hyperplasia and XLHED). But many of the indications on the list are unlikely to hit the radar of large companies focused on acquiring drugs that directly complement their existing portfolios or fall within “hot” deal-making areas like immuno-oncology.

Another possible challenge for these assets is that many reflect brand-new, and often less well-described, molecular targets and mechanisms. Innovative R&D is always always risky – one new study found 60 percent of drugs in “novel pathways” fail in Phase 3, compared with 46 percent of non-novel agents – and although novelty is great for competitive positioning and intellectual property, if potential acquirers (and the scientific community at large) are unfamiliar with the underlying biology and pharmacology, it can add to the perceived hazard.

So even though many of these Phase 2 private biotechs may be highly incentivized to sign deals if the IPO market remains challenging, some pharmas may see their drugs as insufficiently “strategic” and too risky. But the ones that can see past those issues may have deal-making opportunities, especially if they are open to more creative options. One we’ve written about before (here and here) is “financially adaptive trials,” in which investors pledge more funding based on the results of interim analyses. Approaches like this could be well-suited to late-stage drugs with great clinical promise but substantial technical and market risk – and in the current financial environment, both private biotechs and their prospective partners may be much more open to exploring them.

METHODS: We screened Informa’s BioMedTracker database for unpartnered drugs in Phase 2 or 2b (as of June 4, 2016) in private biotechs that did not have any Phase 3 or commercial drugs in their portfolios. We identified relevant trial(s) in clinicaltrials.gov, and highlighted those with estimated "primary completion” dates between January 1, 2015, and December 31, 2017, that had not yet disclosed full results. We eliminated a handful of assets due to poor fits with this analysis (e.g., natural products, dental applications, etc.). Table reflects data available from BioMedTracker, company websites and other public sources as of October 6, 2016.