The HealthTech Biopharma Revolution: From Promise to Reality?

Key Takeaways

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Artificial intelligence (AI) seems to be everywhere nowadays. Large Language Models (LLMs) like ChatGPT have recently propelled AI into the mainstream, yet such breakthroughs are the culmination of decades-long research already reshaping industries across the board.

Biopharma is no exception, as the sector stands to significantly benefit from cutting-edge computational approaches that can help address escalating drug development costs, persistently low approval rates, and substantial unmet patient needs. Indeed, what was once considered unimaginable is now a reality: AI-generated drugs entering the clinic at a fraction of the time and cost.

Companies using AI/ML and other advanced computational tools in drug discovery and development, defined by Langar as HealthTech Biopharma, have not shied away from pursuing transformative science. As they make ambitious promises – drawing increased public attention, investor capital, and patient aspirations – it’s worth analyzing their pipelines to understand what the future holds.

HealthTech Biopharma Pipelines

In our previous article, Langar’s Analytics team shared the key criteria of our proprietary Universe of private HealthTech Biopharma companies[i]. Each company’s lead pipeline candidate was identified and categorized using publicly available information according to the therapeutic area, modality, and development stage. Instances where this data wasn’t available were marked as ‘undisclosed.’

Therapeutic Area

Therapeutic areas shape a company’s R&D programs and business strategy, serving as a critical dimension for investors assessing the strength of drug pipelines. Table 1 lists the therapeutic areas used to classify a Biopharma company’s lead candidate, chosen based on their scientific, operational, and regulatory nuances and their repeated occurrence within the HealthTech Biopharma sector overall.

Results of Analysis

Table 2 outlines deal activity across the top 6 therapeutic areas by VC funding from Q1 2021 to Q3 2023, representing roughly 70% of the total capital allocated to HealthTech Biopharma.

Oncology and Immuno-oncology (IO) raised record amounts in 2021 and 2022, driven by widespread enthusiasm among generalist investors impressed by Biopharma’s potential during the pandemic. However, 2023 witnessed a downturn in activity as the broader market declined. Despite this, IO maintained elevated deal sizes in 2023 but over fewer deals, as specialists concentrated on larger investments in existing portfolio companies rather than financing new start-ups. Notably, this area experienced the greatest percentage decrease in dollars and deals from 2022 to 2023.

Despite initial optimism, the costly and intricate drug development process, coupled with underwhelming results of several IO drugs, have led HealthTech and non-HealthTech companies to face shared hurdles, prompting heightened selectivity among VCs in this domain.

The Rare/Orphan therapeutic area has also historically drawn substantial capital because of its streamlined clinical trials and expedited regulatory pathways. However, activity and deal size have cooled off since 2022, likely influenced by market conditions and headwinds from the Inflation Reduction Act (IRA).

Neurology/CNS saw strong growth in 2023, with an increase in dollars and deal size over an unchanged deal volume, albeit remaining below peak 2021 levels. Despite this dip, investor recognition of this field has increased, driven by HealthTech companies leveraging powerful AI/ML models to develop brain-penetrable drugs. Immunology and Inflammation (I&I), an area attracting growing interest, experienced muted activity in 2023, although deal size has grown steadily.

Metabolic is also gaining traction. Our expanding knowledge of the metabolome through computational tools, along with the buzz surrounding GLP-1 drugs for obesity, has boosted private entities in this area, evident in the rising deal size; however, we recorded only one deal in the first three quarters of 2023.

Predictions

Amid the Biopharma winter and uncertainty surrounding the IRA, we see a pivot toward diseases affecting larger patient populations with the potential to yield more sizable and predictable revenues. HealthTech companies will continue prioritizing novel targets or binding sites discovered through their computational platforms to develop first or best-in-class products. This is especially true in competitive indications like Alzheimer’s and Inflammatory Bowel Disease, which were frequently observed in our Universe.

The upcoming IRA pricing negotiations pose a significant threat to the Rare/Orphan area, which may lose exemption status for therapies approved for multiple orphan indications, intensifying the challenges of developing drugs for small populations[ii]. Proposed bills like the ORPHAN Cures Act aim to address these issues, though their passage remains uncertain.

We expect ongoing but comparatively subdued VC activity across most therapeutic areas until Q2 2024, yet the potential for value-centric partnerships and M&A remains high, particularly in Oncology, IO, Neurology/CNS, and I&I. The success of injectable GLP-1 drugs for weight loss will fuel appreciable growth in the Metabolic space, prompting Big Pharma to heighten its focus on oral versions and complementary assets that improve weight loss quality while preserving muscle mass. The recent flurry of M&A deals announced by AbbVie and Roche is a strong indicator that relatively robust M&A activity will continue into early next year.

A notable opportunity exists in Cardiovascular, where we see limited AI/ML approaches. The field has experienced a renaissance in recent years, expanding beyond traditional small molecules to innovative modalities like base editing. Computational tools hold the potential to accelerate drug development and optimize complex clinical trials for common Cardiovascular indications.

Modality Class

The choice of drug modality is another important pipeline consideration that shapes a company’s R&D strategy and influences the risks associated with therapeutic development.

Three overarching modality classes were used to categorize a lead candidate (Table 3) based on their distinct scientific properties, regulatory pathways, manufacturing complexity, pricing, and other factors. Collectively, these elements play a critical role in determining a therapy’s likelihood of approval, patient accessibility, and financial success.

Results

Table 4 demonstrates a steady drop in total VC dollars and deals across all modality classes since 2021, highlighting the challenging time for the sector. This aligns with the data presented in Table 2.

Despite a consistent decline in funding, Chemical continues to dominate capital allocation due to its faster development, convenient administration through pills or tablets, and the relative ease in constructing predictive AI/ML models for these compounds. Compared to highly complex and dynamic Biological molecules, Chemical compounds are often orders of magnitude simpler to model, enabling expedited drug discovery in this class. The average deal size has also remained relatively unchanged, signaling sustained investor enthusiasm. Nevertheless, we see a marked decrease in deals due to the IRA and investor inclination to support existing portfolio companies over new startups in these difficult conditions.

The Biological class, which includes RNA-based therapies like the mRNA Covid vaccine, encountered a similar contraction in funding in 2023. Such modalities became one of the most sought-after investments during the pandemic, which might explain why this is the only class with relatively consistent funding levels alongside an uptick in deal volume in 2022. The dip in deal size in 2022 might be attributed to VCs writing smaller checks to maintain multiple investment opportunities in this competitive space. In contrast, fewer but larger deals this year could signal a shift among specialists away from “me-too” approaches in an increasingly saturated scientific landscape.

Interventional stands out as the sole modality class, with an increase in financing and deal volume in 2023. The annual growth in deal size since 2021 likely stems from the capital-intensive nature and intricate supply chains of Interventional cell and gene therapies. Despite continued scientific and logistical challenges, investor confidence remains high, bolstered by the expansion of existing therapies into earlier treatment stages and the promising development of CAR-T therapies for autoimmune diseases.

Predictions

In the Chemical class, small molecules are already feeling the IRA’s negative impact due to their reduced patient lifespan compared to Biological drugs. Although small molecules retain their vital role and will continue to secure more funding than other modalities in the near term, strategic realignments by industry may result in terminated programs. Moreover, we anticipate small molecule drug launches in the next few years to focus on larger indications to maximize the chance of investment recoupment.

The rise in genomic medicines – straddling both the Biological and Interventional classes – marks an evolution from managing disease symptoms to targeting their underlying causes. As the field generates larger, richer datasets and employs next-generation scientific tools, we expect a surge in AI/ML approaches that unlock unprecedented insights and tackle the holy-grail challenge of drug delivery beyond the liver to other organs of the body.

Additionally, we foresee continued licensing deals and collaborations across modality classes next year as Big Pharma and Biotech seek to leverage computational platforms to address pipeline gaps cost-effectively. HealthTech Biopharma companies struggling in the current fiscal environment can use this opportunity to raise cash and validate their typically broad, target-agnostic platforms.

Development Stage

The drug development stages presented in Table 5 were used to track the progress of a Biopharma company’s lead candidate. The end-to-end process can span 10-15 years on average, underscoring the long and arduous path of drug development.

Results

Figure 1 illustrates the development stage of lead candidates across the top 6 therapeutic areas by VC dollars and deals. Considering the recent breakthroughs in data generation, computing, and algorithms, most companies across these therapeutic areas are in the discovery to preclinical stages, with exceptions seen in Neurology/CNS and Metabolic.

It’s important to recognize that this analysis only considers private companies that have raised at least $50M since Q1 2019 and, therefore, does not capture all firms engaged in early-stage R&D. While no approved drugs were found in our Universe, there were a limited number of Phase 3 candidates, mainly Infectious Disease due to the accelerated development pathway for such therapies during the pandemic.

Predictions

Private HealthTech companies generating positive clinical data might present appealing acquisition targets for bigger players seeking differentiated, de-risked assets for their pipelines. However, the undervaluation of many public companies with late clinical or commercial therapies means M&A opportunities will continue to be pursued there as well.

As more private companies approach late-stage clinical milestones, there is speculation that the IPO window may be forced open by insiders reluctant to deploy significant capital further. We anticipate more established HealthTech Biopharma companies — often possessing longer cash runways than their non-HealthTech peers — to await better IPO conditions next year or consider reverse mergers as an alternative.

Final Thoughts

The Fed’s anticipated interest rate cuts next year have triggered a recent rally in the S&P Biotech ETF (XBI) that is expected to trickle into the private Biopharma markets and pave the way for an interesting 2024. Amid uncertainty regarding the timing, magnitude, and likelihood of the cuts, we foresee tough capital market conditions persisting through the first half of 2024.

Despite this year’s turbulence, 2023 has marked a return to a pre-pandemic market with significantly higher capital compared to the last decade. In this landscape, seasoned investors will continue to back early-stage companies exploring bold, “white-space” science that demands relatively modest financing while promising long-term value. With the ongoing AI boom, we foresee a large portion of these investments flowing into emerging HealthTech firms. However, seasoned investors will need to distinguish valuable opportunities from mere hype as more companies tout their use of advanced computation.

In 2024, the supporting ecosystem of computationally driven R&D tools, companion diagnostics, and clinical trial facilitators is poised to attract greater funding and attention, albeit to a lesser extent than drug developers. Given the specialized models, infrastructure, and expertise required to optimize each drug development stage, we anticipate these players will carve out niches in one or two segments of the journey.

Given the “garbage in, garbage out” nature of many AI/ML models, many mature HealthTech companies gained a competitive edge by generating extensive, high-quality data to feed their algorithms. This can often involve conducting up to hundreds of thousands of meticulously controlled experiments per week – a substantial upfront investment that previously erected a formidable barrier to entry. However, advancements in data generation and storage, decreasing costs, and the adoption of physics-based methods that demand less input data are quickly leveling the playing field. This shift affords nascent HealthTech companies a head start that incumbents didn’t have.

With HealthTech Biopharma companies rapidly advancing their drugs into clinical trials, focusing on clinical data will be a recurring theme next year, fueled by investors’ growing demand for concrete outcomes. While speed is crucial, the ultimate measure of success lies in the ability of these drugs to benefit patients’ lives tangibly.

As more data emerges, the sector will watch closely to see if HealthTech Biopharma can truly live up to its promise of revolutionizing drug development.

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End Notes

[i] Langar’s Private HealthTech Biopharma Universe encompasses companies that meet two key criteria: (1) their primary headquarters are in the US and (2) they have raised a minimum of $50M in equity since Q1 2019, with at least $10M secured in a single funding round.

[ii] Many Orphan drugs gain approval for follow-on Orphan indications, broadening patient reach and supporting Rare Disease R&D. Under existing IRA regulations, these drugs would lose their exemption from pricing controls, limiting the ability of drug makers to recover development costs and reinvest in their pipelines.