Companies in the cell and gene therapy space are struggling to raise investments amid adverse market conditions. However, this could be an opportunity for the strongest companies and investors to shine.
After several years of record-breaking investments, funding is hard to come by in the gene and cell therapy space. Part of this trend relates to ongoing fears with inflation and geopolitical instability, and another part is due to a lack of exciting news from cell and gene therapy developers.
“On average, the news that comes out of our sector is generally positive,” said Albert Hwang, managing director of the investment bank Morgan Stanley, in a session at the 2022 Cell & Gene Meeting on the Mesa in October 2022. “In the fourth quarter of last year and the first and second quarters of this year, it went markedly negative.”
Hwang and other cell and gene therapy investment experts gathered in the session to discuss the direction of the field, and how biotech companies can pull through the challenging period.
As cell and gene therapy companies face plummeting valuations, M&A deals and initial public offerings are falling in the space. Potential acquirers such as big pharma companies are preferring to wait and see what happens with clinical trials rather than take a risk with a company acquisition.
Even with the companies that have been acquired in recent years, the value of the M&A deals have dropped from $8.7 billion in the case of AveXis in 2018 to Prevail Therapeutics’ acquisition for $1.5 billion in 2020.
“If you look at the news over just the past couple of years, there have been a lot of clinical holds where patients have died or trials have not read out after the acquisition,” said Hwang. “So the acquisitions did not pay off.”
The cell and gene therapy bubble burst
When cell and gene therapy entered a funding bubble, there was lot of money sloshing around the system, which was great for biotech companies. However, it also meant there were many companies gaining cash without a sustainable business model.
“The sector suffered from the reality that very few companies actually had a business model,” commented Josh Schimmer, senior managing director at the investment banking advisory firm Evercore.
Many biotech firms aimed to produce platform technology that could be applied to dozens of diseases, with Alnylam being one example. But if too many companies try this broad business model, it causes issues in the long term.
“When you create hundreds of companies all planting their flags in different parts of the ground, very few companies have that ability to move beyond their lead assets because some other company has placed their flags across the therapeutic landscape,” said Schimmer. He added that the industry has been in need of a natural period of recovery and consolidation from this feeding frenzy.
As a consequence, the current cell and gene therapy investment situation is still healthy; companies with good data such as Rocket Pharma are capable of raising cash. On the other hand, companies that have promising technology but lack data are caught in a valuation black hole that is hard to escape.
Challenges on the horizon for cell and gene therapy investment
The cell and gene therapy space is still very much in its infancy compared to the more traditional pharmaceutical industry. Clinical trial failures and clinical holds are therefore part of the ups and downs to be expected for investors and biotech leaders.
“We’ve learned a lot of hard lessons along the way, and hopefully every difficult lesson comes with a new iteration and a new approach to bring to patients,” said Schimmer.
In addition to drug development, the cell and gene therapy market still carries many unknowns. The costs of running a cell and gene therapy company are high due to the challenges of patient recruitment, and reimbursement strategies are still in development.
“We haven’t made enough progress and we haven’t learned from our mistakes yet,” said Amy DuRoss, president of cell and gene therapies at cold chain company CSafe Global and senior advisor at the investment firm Frazier Healthcare Partners.
However, in spite of the shortage of cell and gene therapy investments at the moment, DuRoss said that more capital is required to navigate many of the big commercial obstacles for the field.
“If we don’t invest on the other side, how are these drugs actually produced? How are they distributed? How are they paid for?” she asked.
Challenging platform technology development
To maintain their cash runway, biotech companies are being forced to make decisions about their projects and platform technologies such as mRNA and viral vectors much more carefully than before.
“When the cloud comes over, people run out money,” noted Matthew Durdy, chief executive at the U.K. advanced therapy manufacturing organization, the Cell and Gene Therapy Catapult. “That’s shifted the whole curve to the right and there’s much more conservatism.”
Some investors are shifting their focus away from platform technology-focused companies in favor of companies focusing their efforts on developing a limited pipeline of treatments.
Meanwhile, VCs still backing platform technologies are also noting that many platform technologies have a high upkeep cost when manufacturing. This means they are seeking ways to craft combined platforms that can allow companies to share intellectual property to cut the costs of production.
“I think that’s a really positive development that we’re seeing coming through, driven by the investors themselves,” said Durdy.
Europe’s cheaper cell and gene therapy scene
Much of the financial outlook for cell and gene therapy is centered on the U.S., but the European scene also has well established expertise in the field, with examples including Orchard Therapeutics and Nightstar Therapeutics.
However, Europe’s life sciences VCs have much less capital available for biotech companies than their U.S. counterparts, and often must attract U.S. investors to participate in funding rounds. Meanwhile, some of Europe’s big VC players have been bought out in the last year, including the takeover of LSP by EQT and Abingworth by Carlyle.
“That definitely changes the landscape,” said Dmitry Kuzmin, managing partner at 4BIO Capital. “As the larger groups take out those smaller groups, the resulting large organization pulls out of the early stage in venture creation. Does a $3 million creation deal move the needle for Carlyle?”
The changes in Europe’s biotech investment landscape could be attractive opportunities for the U.S.’s life sciences scene. European currencies like the euro and pound are weak against the dollar, making it cheaper to hire R&D talent and run a company.
In addition, Europe is beginning to develop serial entrepreneurs in the cell and gene therapy field that are able to provide a reliable source of cell and gene therapy investment opportunities.
“This might sound ridiculous in the U.S. where you’ve had people circulating in California and then Massachusetts ecosystem for dozens of years,” said Kuzmin. “But it’s now the first time in Europe that we have people with successful access come in and start building companies again.”
“From that perspective, I have a lot of optimism regarding the European ecosystem, despite the fact that the funding conditions are very hard.”
Biotech will progress
Amid the gloomy funding situation for biotech companies, there are glimmers of hope that could turn the field around.
One example is Sarepta, which recently applied to the U.S. Food and Drug Administration for the approval of a gene therapy for the rare condition Duchenne muscular dystrophy. Another is gene therapies for the blood disorders beta thalassemia and sickle cell disease, with players like bluebird bio, CRISPR Therapeutics and Vertex vying for the market.
No matter how successful the latest cell and gene therapy approvals turn out, Schimmer sees biotech as a whole progressing and learning from the events. Investors can also take advantage of the situation to separate the strongest companies from the weakest.
“The reality is that most products don’t succeed commercially,” said Schimmer. “If we use that as the litmus for the entire sector, biotech would have gone away 25 years ago.”
“We’re smart enough to be able to ring fences around failures, to learn from the failures and to figure out where the successes are likely to be.”
The next “shiny object” in cell and gene therapy investments
The investment experts at the session highlighted a wide range of exciting technologies on the horizon for the advanced therapies field.
Gene editing and its next-generation varieties are very high on the list, as are delivery technologies that can take a cell or gene therapy to tissues outside of the liver in the patient. With more precise control and delivery of these complex therapies, the patient could need lower doses and experience fewer side effects than with current tools.
Other panelists pointed to mRNA vaccines as paving the way for new funding into RNA research. Cell therapies for solid tumors and in vivo cell reprogramming is also gaining a lot of attention, as is the use of data in drug discovery and manufacturing.
Amid the list of future technologies to watch, Schimmer reminded the group about the value of old-school technology in genetic diseases.
“The most successful genetic disease company by an order of magnitude is Vertex with their small molecule drugs, which have transformed the treatment of cystic fibrosis in a way that gene therapy has not been able to do” added Schimmer. “There are really interesting emerging programs that are small molecule-based that can get into the cells easier and really transform the disease.”
Deliver on the potential
While the focus on the shiny objects is great for the future of the biotech industry, Durdy cautioned that companies and investors must also focus on how to help patients now. This means they shouldn’t abandon what is being done today. This particularly applies in the case of gene editing versus traditional gene therapies.
“What people don’t realize is that [gene editing therapies are] in preclinical stages relative to gene therapy,” said Hwang. In contrast, many traditional gene therapies are well on their way to market.
If gene therapies manage to cure rare diseases, then it could leave gene editing approaches with fewer patients to benefit. However, this outcome is far from assured, as clinical holds and regulatory limbo can create many unexpected problems.
“You have the unpredictability of what’s going to happen when you actually have to market these things,” added Hwang. “That’s why we’re in this lull right now.”
Disclosure: Carlyle is the largest shareholder in Inova, Labiotech’s parent company.