Editor’s Note: Welcome back to Jeff Brown’s prediction series. Over the next several days, Jeff will share his biggest predictions for the new year. Today, Jeff discusses the precision medicine trend, CRISPR, and the recent string of biotech acquisitions.

Van Bryan (VB): Jeff, let’s talk biotechnology. And to start, I wanted to ask you about the state of the broader biotech market. You’ve said previously that we’ve been going through a “biotech winter.”

Jeff Brown (JB): That’s right. The unfortunate catalyst was what we now know to be the failed pandemic policies that began about two years ago.

One of the consequences of the ineffective pandemic policies is that it made it very difficult to conduct clinical trials. These clinical trials are the lifeblood of biotech companies, especially small companies. 

Not only are they necessary to keep the therapeutic pipeline moving in the right direction, but progress in clinical trials also directly impacts the share price, and the ability for promising early stage biotech companies to get additional funding.

And with everybody locked in their homes and anxious about entering medical facilities, it was very difficult to conduct these trials. Recruiting patients was hard, retaining patients during trials was hard, and that meant that generating meaningful clinical results was nearly impossible for so many companies.

The result was that the wider industry suffered. And smaller biotechnology companies found it particularly hard.

And of course, the aggressive rate hikes from the Federal Reserve this year have been damaging to the entire public and private markets. 

They have hurt the housing market, the auto market, and have been painful for consumers as well. So, that didn’t help things either. All in all, it has been the worst period for the biotech industry that I’ve seen in the last 30 years. And unfortunately, much of our biotech portfolios have been caught up in this. 

But one of the more interesting dynamics was that the iShares Biotechnology ETF (IBB)—which we can use as a proxy for the industry—proved to be more resilient compared to the Nasdaq index.

It still declined on the year, but IBB put in a bottom in early summer and is up significantly from those levels. The Nasdaq, meanwhile, put in a bottom in early November. And it’s struggled to gain much ground from there.

VB: What does that signal to you?

JB: The biotech industry had already been hit early as a result of the pandemic policies. Institutional capital was almost entirely focused on the large biopharma plays that had approved COVID-19 “vaccines.” In reality, they were experimental drugs. But this dynamic meant institutional capital looked at companies like Pfizer and Moderna. 

The rest of the market was largely ignored by institutional capital. There was a flight to safety.

The point is that the biotechnology market had already been punished in 2021. So, most companies were trading at depressed valuations, and in many cases, negative enterprise values. That wasn’t the case in the broad tech market which, in many cases, had more room to fall.

At a certain point, the valuations for some of these companies become too attractive to ignore, regardless of the state of the economy or the current monetary policy regime. That’s why biotech fared better than the NASDAQ this year.

And even though institutional capital is largely sitting on the sidelines waiting for the year to close out, one of the more interesting dynamics is that larger biopharma companies are going on something of a buying spree.

They realize that some of these smaller companies are trading at deeply discounted levels. And they’re stepping up to acquire them. I checked the numbers, and they’re revealing.

In the twenty-four months of 2018 and 2019, there were a total of fifty-three biotech acquisitions. So, this was a larger biopharma firm buying a smaller company.

In 2021 and through 2022 so far, there have been seventy-six biotech acquisitions. It’s about fifty percent higher.

I picked those two time periods because in the 2018 to 2019 timeframe, biotech was much stronger. And the industry has really struggled in 2021 and 2022. We might assume that acquisitions would decline during this weaker period. But the exact opposite happened.

VB: Why do you think that is?

JB: It was all about valuation. Industry players know that most companies are trading well below a reasonable valuation. In fact, in many cases, the valuations are so low that they don’t represent what a company can be bought for. It is not a reflection of what the company is worth.

And so, they’re taking advantage and going “bargain shopping,” so to speak. Larger companies know that they won’t be able to acquire best-in-class biotech companies for where they are trading; but they know there is probably a deal to be done. It’s just a matter of finding the right premium to today’s valuations. There is always a price that works.

Every acquisition will happen at a premium to the current valuation of the company. And normally, we’d see buyout premiums in the range of 30 – 60% above where a stock is trading.

But that’s not what we’ve seen recently. Acquisitions are happening regularly at levels that are 100% over where a company is currently trading.

Neurocrine acquired Diurnal in August for a 144% premium. Regeneron acquired Checkmate Pharmaceutical for a 335% premium in April. But the most remarkable one was the AstraZeneca deal. They acquired LogicBio for a 667% premium in October – this was an Early Stage Trader portfolio company that I predicted would be acquired.

That last one was a great example. It means that AstraZeneca had to pay nearly eight times the market value of the company to get the deal done. And what’s crazy is that—even at that acquisition price—I’d argue that LogicBio was still undervalued.

VB: And do you expect these buyouts to continue next year?

JB: These will continue into 2023. Biopharma executives understand they have a limited window to act. It is only a matter of time before valuations and growth return back to normal in the industry. 

If it were me, I’d be looking to acquire promising biotech companies in the first four or five months of next year.

As we discussed last time, I predict the Federal Reserve will pause its interest rate hikes in the March/April time frame, and be forced to ease/stimulate in order to avoid an outright collapse. 

When this shift happens, it will be good for the public markets. The valuations on all these small biotechs will return to more normal levels and the industry will return to growth.

If these larger biotech companies want to acquire at a discount, they’ll have to act before that window closes.

VB: Let’s shift gears a bit. I’d like to ask you about a prediction you made for the biotech space last year. It involved CRISPR genetic editing technology. You predicted there would be two major therapeutic announcements around this technology.

JB: There were several.

Two that stood out to me were from CRISPR Therapeutics, the company. The company demonstrated not only safety, but efficacy for two blood diseases: beta thalassemia and sickle cell anemia.

And perhaps more importantly, the therapies demonstrated durability. In other words, the treatments have lasted—in some cases—well beyond a year. That means that the genetic modifications to treat the disease “stuck”. Patients have not needed additional dosing of the genetic therapy.

It really was a remarkable year for CRISPR.

VB: What other developments stand out to you?

JB: One really important development was the resolution of a long-running, and pretty ugly, patent dispute between the Broad Institute of MIT and Harvard, and U.C. Berkeley.

In essence, the dispute was over who had patent priority for the foundational technology of CRISPR. It was a greedy money grab levied by U.C. Berkeley. 

The school knew that there were potentially billions of dollars of patent royalty at stake. The patent case had been going on for years. I remember first covering it all the way back in 2016.

There were three appeals levied from the Berkeley team. And the Broad Institute won all three in a row. So, now, the ownership of the patent has been won definitively.

This was a great development. The legal battle was always a distraction. And now that Broad has clearly won, it means that Editas— which has the exclusive license to those patents—is in a primary position to license patents to other industry players.

VB: Some readers have worried that this would be bad for other companies in the industry like CRISPR Therapeutics or Intellia.

JB: Yes, I know readers have been a little concerned about what this means for the other players. And it’s a logical conclusion to come to. 

But this situation is not unusual at all. It happens in the electronics industry, the semiconductor industry, the wireless technology industry, and also the biotech industry.

While one company may have the foundational intellectual property – like Qualcomm in the wireless industry, for example – there are still other patents from other companies that are also supplementary to the key patents from one company.

What I predict will happen next year is that all the industry players will come together and form what’s called a “patent pool.” They’ll collectively group their intellectual property together.

From there, the pool will collect all the royalties from any licensing agreements, and it will be paid out proportionally.

So, Editas would almost certainly have the largest proportional share. Editas can, and also will, license its patents directly to industry players.

The reason there hasn’t been any movement on this so far is because we currently don’t have an FDA-approved CRISPR therapy on the market. Patent royalties aren’t really relevant until something is commercialized.

But the establishment of a patent pool will be a precursor to that, in anticipation of FDA approvals for CRISPR therapies which is something that we’re getting close to.

So, I predict the establishment of this patent pool next year. At a minimum, there will be advanced industry negotiations. Then, we’ll likely see the first FDA-approved CRISPR therapy sometime in 2024.

VB: When we spoke last year, you also said that there was a “new crop” of CRISPR companies developing. Did that continue in 2022?

JB: Absolutely. What we had in the early days—think 2016 and 2017—was what we could think of as the “big three.” That was CRISPR Therapeutics, Editas Medicine, and Intellia Therapeutics. And what they did is lay the foundation for this industry.

But what’s happened since is this flourishing of second and third generation companies leveraging this technology. These newer companies are essentially iterating on the technology and finding new approaches and developing new enzymes to tackle different diseases.

And when I look back on this year, one of the more exciting events was the IPO of Prime Medicine, arguably the most exciting and important biotech IPO of the year. The company went public in October.

The company has developed its own approach called “prime editing.” It uses what we can think of as a “search and replace” model for curing disease.

It’s been exciting to watch this industry grow. I remember back in 2016, I was probably one of the few, outside of academia, covering CRISPR technology. And I was the only analyst in the financial markets covering this technology and the major players. Readers and I were following these developments even before there were any publicly traded CRISPR companies.

And now we have second and third generation companies reaching public markets. And we should absolutely expect this trend to continue.

VB: I wanted to ask you about one more prediction you had for 2022. You said we would see a breakthrough in artificial intelligence. Specifically, you said we’d see an artificial intelligence accurately predict the structure of a protein folding.

JB: That was another big development this year. Actually, I’d say it was a transformational breakthrough in the industry. 

It was a grand challenge in life sciences that has now been largely solved – it’s that big of a deal.

And it came thanks to Google’s artificial intelligence division, DeepMind. Back in August, DeepMind published a catalogue of more than 200 million protein structures.

VB: Why is that important?

JB: It’s important because a protein structure will determine which compound—like pharmaceuticals—a protein can bind to. It can be the difference between an effective therapy and an ineffective one.

This is arguably the biggest breakthrough for biotechnology and life sciences in recent memory. I’d put it right up there with the creation of antibiotics. It’s that significant.

And it gets even more incredible…

Just the other week, a company called Generate Biomedicines built off of DeepMind and used artificial intelligence to design new proteins. The company does this by creating amino acids that fold in a very specific way.

It’s a perfect example of the “intersection” between advanced technologies like artificial intelligence and biotechnology/life sciences.

It’s been a difficult couple of years for biotech. There’s no doubt about that. But while clinical trials suffered, the advancements in computational biology, genetic editing, and proteins are absolutely remarkable. 

These are foundational for the industry, and they are going to set us up for the largest bull market in biotech in history.

That’s why I remain so bullish on biotech. I’d feel very differently if I hadn’t seen the kind of advancements that we’ve seen over the last couple of years. But what has happened is just incredible. And once the institutional capital comes back into the market, I believe biotech will lead the recovery.

VB: Thanks as always, Jeff.

JB: Of course.

Editor’s Note: Check back on Monday—after Christmas—when we’ll continue our conversation with Jeff. We’ll discuss the state of private markets and why next year could be an “amazing time to build” for early stage companies.