Mid-year review 2023 - Biotech 360°: Where are we 12 months after the bottom?

Table of Content

Portfolio Snapshot
Biotech 360° Overview

Small molecules: degrading fat and protein is key
Genetic medicine: it's no longer hope, it's real
Protein-based drugs: growing old gracefully
AI/Analytic services: BioGPT is soon here
Outsourcing services: execute or be executed
Tissue & Cell therapy: some sink, some float
Life Science Tools: sequencing the future

Year's favorite - an update
Catalysts/Risks

Portfolio Snapshot 

Where are we 12 months after the bottom?

Regulatory pressure is strangling Big Pharma: an opportunity for Biotech players

It got so bad between Big Pharma and Biden administration since the Inflation Reduction Act (IRA), dubbed "Innovation Reduction Act", that Merck and Bristol-Myers Squibb are suing the U.S. government. Biden hails the drug pricing reform as the “we beat Big Pharma” moment. This resounding defeat is felt through the ranks of the U.S. biggest pharma lobby PhRMA: AbbVie, Teva and Astrazeneca dropped their membership - A first in the lobby's history. Unfortunately for Big Pharma, troubles do not stop at the U.S.. The E.U. with their new pharma legislation is also challenging their future prospect. With instability in the two biggest markets, no wonder the XLV is negative YTD. 

The XBI is benefitting from Big Pharma's instability. Why? Because 70% of all therapies currently in clinical trials are in the hands of SMID biotechs. Investors know it and reward it heftily. Even among the Biotech universe, stocks with upcoming catalysts for 2023 are up >30% YTD, while those without are down ~8%. Meanwhile, Biotech companies are often shielded from drug pricing caps and legislation turmoils, making them appealing picks for Big Pharma (and Atonra's Biotech 360* strategy as well). Given current market conditions, the biotechs are not yet out of the wood either, and cost control is in full blast. Companies are implementing lay off plans to focus their pipeline and push back any need for further refinancing. In 2022, 119 biotechs went through staff layoffs . Already 68 did so far in 2023. Selection remains key.

IPOs, M&A: directionality is a bit foggy but reassuring

When Biotech trends are favorable, it rhymes with a flurry of IPOs, mergers and acquisitions (M&A), and capital raises. Where are we on the 3 fronts?

• IPOs are shaky, but proceeds are better than last year. In 2022, 22 biotech IPOed while only 7 did so far this year. But looking more closely, last year for 21 of the 22 IPOs proceeds were below $250mn, whereas this year, only 2 out of the 7 are. Investors do not need dozens of companies with low balance sheets but rather a few with good stability.
• M&A is trending positively: ~$90bn has been spent on M&A since January. Obviously, Pfizer's buyout of Seagen for $43bn makes up the bulk of it as the biggest M&A since AbbVie bought Allergan in 2019, but the overall figure is still a 40% YoY increase.
• Capital raise is a two-tale picture: on one side, publicly listed companies raised 75% more capital compared to the same period in 2022, but on the other side, venture capitalists invested only $7 billion into biotech and pharma companies in the first quarter of 2023 — a three-year low.

It is blatant for VCs that the SVB demise was a big loss to the biotech ecosystem and a blow to their funding. But the consequences we wrote about are materializing: with reduced competition from start-ups, the net present value for listed companies of remaining assets (notably the strongest ones already in clinical trials) trended higher. In line with our view, cash deployment by pharma on deals and M&As also increased: we are on track for a >$200bn M&A year. This is less than the record $328bn set in 2019 but above all other years on record.

Obesity, NASH, and Alzheimer's development at the forefront of talks

It is news to no one that people worldwide are getting fatter and older, increasing the prevalence of obesity and dementia. Two markets in the $50bn-$100bn range and likely very undervalued, both costing directly and indirectly trillions of dollars in GDP. 

Yet unlike previous years, the obesity drug market is giving hope to hundreds of millions with supply-limited but very performant drugs: Ozempic and Mounjaro, the crown jewel of Novo Nordisk and Eli Lilly. Clinical data just showed that the oral form is as good as the injected one, but the supply will be even more limited. Additional data about cardiovascular benefits are expected this year. The whole story for the following years is about manufacturing and reimbursement for both leaders.

One of the major complications of obesity is Non-Alcoholic Steatohepatitis (NASH). NASH is a liver deadly disease in which excess fat is stored inside liver cells, making it harder for the liver to function until it stops working altogether. The $35bn market is orphan of drugs. Intercept the leader still trying to push the FDA for approval of its leading asset despite strong resistance from the scientific community, but since December, the whole space has been on fire as Madrigal Pharmaceuticals published ground-breaking results. Other players in the space are tagging along, being up 2 to 3 digits as well.

Last but not least, the good but not paradigm-shifting data of Eisai on Alzheimer's disease shapes a new future for Alzheimer's treatment and investment. Yes, the "plaque in the brain" hypothesis is one of the longest-standing but least-validated hypotheses for what drives the disease progression. Nonetheless, Eisai piggybacked on Biogen Adulhelm by providing a clearer, clinically observable, disease-modifying response to a drug for Alzheimer's disease. A move that opened a door for Eli Lilly with even superior results in the field. Despite questions about safety and whether the price will be worth the slowing down of the disease, the Centers for Medicare & Medicaid Services (CMS) are agreeing this time to reimburse the treatment in case of full approval. 

Better days are ahead for patients worldwide, even when the benefits are not so clear-cut.

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Degrading fat and protein is key

What did we say?  

In our annual outlook published early December, we primarily focused on two key areas: oncology, with a particular emphasis on the ASCO conference, and data related to NASH.

• Oncology: ~50% of early-stage companies that IPOed in 2020/2021 are oncology-focused. Therefore, we expected data from them at ASCO 2023. Since the abstract's releases and the presentations at the conference, the XBI index rallied ~6.5%, while the bigger players rallied 3% (NBI and XLV), showing again that the value baked in the pipeline of the SMID biotech remains underappreciated.
• NASH: our December outlook was written a few days before Madrigal Pharmaceutical published its exceptional results. Never before had any drug reversed the progression of liver fibrosis, instantly turning Madrigal into the fifth best-performing biotech stock since Feb 2021. 

For 2H2023, NASH is bound to keep a high spot in investors' interest, and protein degraders have their cards to play.

NASH is getting disrupted

NASH is one of the prevalent diseases plaguing humans. Prevalence in adults is around 6% worldwide and is expected to reach ~9% by 2030. NASH is boosted by a combination of obesity and pre-or-diabetic condition and is on course to be the n°1 cause of liver transplants. On top of it, NASH is a cemetery of potential blockbusters. Few diseases have known so many clinical trial failures.

Intercept, a leader in the space, which failed its last Phase 3, is still trying to appeal to the FDA, but the Adcom, the group of experts advising the FDA, resulted in 12 votes against and 1 abstention, leaving little chance that on June 22nd, the FDA outcome will be positive. Especially given that Viking Therapeutics, 89bio, Akero, and Madrigal have all released very encouraging data. 

Despite this possible setback, 2023 is still en route to being the breakthrough year for NASH, with Madrigal submitting for FDA approval its lead asset.

Protein degrader's time to shine is 2H2023

Protein degraders are small chemical molecules designed to bring a target protein within a cell to the cellular trash machine, for it to be degraded by the human body itself. Just a reminder of why protein degraders are nothing short of being a potential revolutionary biotechnology: 90% of drug targets are protein, and most are currently undruggable. 

The difficulty is that such a novel approach is going after targets for which conventional approaches have failed so far, making the market wary of players in this space. If everyone failed previously, why would they not? Proponents often point out that Revlimid, one of the leading cancer drugs (~$10bn revenues in 2022), was shown to act as a protein degrader only years after its discovery. But it is unlikely that Revlimid is and will be the only viable protein degrader; others will follow, the difference being that it will be by design this time. 

All major players in the field have 1-4 major catalysts by year-end:

• Kymera: Sanofi should start a Ph2 with their lead asset in immunology, while Kymera expect 3 clinical data updates in oncology 2H2023.
• Arvinas:  Supported by Pfizer, Arvinas should start 2 Ph3 clinical trials, representing the most advanced pipeline asset for protein degraders.
• Nurix: The blood cancer-focused company has 3 program updates by year-end.
• C4 therapeutics: despite the first disappointing results blowing up the stock to bits (pun intended), the company has 3 major clinical updates by year-end.
• Monte Rosa Therapeutics: their major clinical read-out for solid tumors in 2H2023 is coming.

Underappreciated disruptive clinical assets in a fast-growing segment are bound to be among atonra’s favorites.

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It's no longer hope, it's real

What did we say? 

Our yearly outlook focused on gene therapy pricing and 2 new modalities going from ideas to reality.

• Price proved indeed to be a key investors' worry; bluebird bio, UniQure, and BioMarin's stocks are all negative YTD despite having recently secured access to the market.
• mRNA cancer vaccines would progress and attract investor interest: Moderna and BioNtech did deliver 2 to 3 positive clinical readouts, but all eyes remain fixated on dwindling Covid-19 revenues.
• CRISPR gene editing: As the pipeline progresses, we expected stocks to start diverging, which happened. The closer to the market, the biggest the gain, e.g. CRISPR therapeutics is up 49%, Intellia 30%, Beam Therapeutics -10%, Verve Therapeutics -3%, and Prime Medicine -13%.

For 2H23 mRNA vaccines and CRISPR stocks are likely to remain under the spotlights.

mRNA cancer vaccines are advancing well

As a reminder, BioNtech and Moderna are running ~50% of the mRNA clinical trials in the world. Both companies combined have over 70 programs running (of which >50 outside of Covid-19). 

Both companies have published good, if not excellent (in the case of Moderna), data. Merck, which exercised a $250mn option to develop and commercialize cancer vaccine mRNA-4157/V940 jointly for high-risk melanoma, could not be happier; the latest data showed the combination treatment reduced the risk of melanoma spreading to other parts of the body or death by 65% compared with Keytruda alone.

2H23 should solidify the hypotheses that mRNA cancer vaccines could be a useful tool in the oncology toolkit.

Gene editing is on track to deliver a bright future

If 2015-2020 was the stealth phase, 2020 was the market discovery, 2021 was the proof of concept, 2022 was the Cambrian explosion, and 2023 will be the selection year. As most companies except Prime Medicine will deliver clinical data in 2023, the divergences between stocks in the sector will amplify.

CRISPR therapeutics and Intellia both continued to deliver encouraging data. Patients treated with both of their lead assets have so far been cured (>95% reduction of negative events experienced). CRISPR therapeutics therapy approval by the end of the year is almost a given. The issue will be price, reimbursement, and availability. The sickle cell disease space is getting crowded with now classical gene therapy available, a gene editing therapy "almost approved", and competitors are not trailing so far behind in clinical trials.

For companies still in the earlier stages of the product pipeline, the situation will be more difficult, especially for Editas, Beam Therapeutics, looking to compete with CRISPR Therapeutics. Verve Therapeutics and Prime Medicine have at least a differentiated pipeline.

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Growing old gracefully

What did we say?

Our yearly outlook focused on China's biotech slump, Alzheimer's disease new drugs, and the Seagen M&A story.  

• China: The paradox continues. Pharma companies like Astrazeneca are bullish on China, its CEO even said that the UK and the rest of Europe are falling behind China and the US in the creation of biotech firms and clinical trials of new medicines, yet investors remain wary of Chinese stocks, with MSCI China Health Care down double digit YTD. 
• Alzheimer's new treatments: Despite unclear benefits of the anti-plaque antibodies, the world got excited again. Eisai is probably getting full approval next month for Leqembi, and Eli Lilly will follow, but later.
• Seagen: Seagen was not a cheap company, and no merger of >$40bn has happened since AstraZeneca bought Alexion. Merck's hesitation did leave the door open for Pfizer to snatch it for $43bn. 

For 2H23, the focus is "how to grow old gracefully?" with Alzheimer and Obesity in sight as main concerns.

Alzheimer's drug beat reason for needs

The data from Eisai and Eli Lilly's latest antibodies emphasizes the fragility and hopes built-in the field. Despite both assets having to prove clinically meaningful, the FDA and CMS are willing to go forward with approval and reimbursement.

We wrote about our concerns on the efficacy of Eisai's antibody, a concern shared with physicians voicing that there was only a 0.45 point difference between the average change in a dementia score (CDR-SB score is an 18 points scale..) in the two groups after 18 months. True, Lilly scored better with its antibody because it targets a second harmful amyloid protein, pyroGlu-Abeta, which is found primarily in plaques and is thought to act as a “glue.” But in both cases, we talk about a slowdown of the disease, a slowdown with 2 monthly intravenous injections costing 25k per year per patient in drugs only. The Institute for Clinical and Economic Review (ICER) concluded that Eisai's Leqembi is too expensive to be cost effective.

Nonetheless, we expect the FDA to go forward with accelerated approval for Eisai and classical approval for Lilly. For all it is worth, at least it put the brain back at the forefront of biotech investment.

The $100bn peptides: Novo vs Lilly

Obesity is the biggest threat to health globally, mostly due to the constellation of diseases that arise from it and the lack of means to address it. For a long time, it was quite similar to Alzheimer's disease: it's a slow-progressing disease with little to no cure.

Yet unlike previous years, the obesity drug market is giving hope to hundreds of millions with supply-limited but very performant drugs: Ozempic and Mounjaro, the crown jewel of Novo Nordisk and Eli Lilly. Novo's clinical data just showed that the oral form is as good as the injected, but the supply will be even more limited. Additional data about cardiovascular benefits are expected this year too, and should expand the addressable market to other indications.

The whole story for the following years is about manufacturing and reimbursement for both leaders. Both active ingredients are peptides, which makes them more complicated to manufacture than small chemical molecules. Additionally, Novo's CDMO Catalent is battling with its own production issues making manufacturing indicators and prescription data two KPIs to follow into year-end.

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BioGPT is almost there

What did we say?

 Three topics were brought forward in our annual outlook:

• AI for drug discovery: similar to the gene editing stocks, we expected stocks to start diverging as pipelines and services differentiate. The most advanced got rewarded and reversibly, e.g. Schrodinger Inc was up >100%, while BenevolentAI dropped > -50%.
• Digital clinical trials: we expected a push forward, and the FDA published a framework on March 23rd on how it plans to address long-standing questions on using digital health technologies in drug clinical trials. 
• The rise of radiomics: the automatic extraction of data from medical imaging, often leveraging AI capabilities. No further than a few weeks after our publication, Bayer bought Blackford Analysis in the space, and two months ago, Facebook released a Segment Anything Model, and one of the first publications was around medical imaging.

For 2H23, AI drug discovery and generative AI are front and center.

AI drug discovery: a chaff and wheat moment

2022 was full of positive catalysts for AI-driven drug discovery, including Google’s DeepMind publishing the structure of 200mn proteins, which will help accelerate the research for new treatments. Aside from DeepMind, the field is progressively gaining momentum, as Sanofi signed multiple deals, some of which crossed the $1bn threshold.

However, business models are not yet proven, with AI players encountering difficulties in monetizing their software platforms and having to launch drug-discovery processes by themselves. An example of this struggle is BenevolentAI having to slash 50% of its staff and 80% of its pipeline to limit cash burn until the company can show clinical efficacy. 

On the other hand, Recursion Pharmaceuticals going big on AI and acquiring 2 biotechs to serve clients better was rewarded with an 80% stock jump.  Schrodinger Inc, the top performer YTD, also continued to attract clients and accrue clinical data. We expect this divergence between players to increase as the year progresses.

The use of AI was rewarded for service providers

AI-powered clinical trials are progressively settling in, as highlighted by the good dynamics of players such as IQVIA and Veeva Systems Inc. The opportunity remains consequent, as the penetration rate of such technologies remains at the beginning of the curve. The FDA releases a Digital Health Technologies framework for clinical data acquisition in drug and biological product development to support that trend toward digitalization and AI use.

The key drivers will remain the efficiency advantage, both in time and costs, due to AI-driven optimization. As the head of artificial intelligence at IQVIA highlighted a few months ago: "By integrating AI/ML, the workload placed on human teams can be drastically reduced". No wonder the FDA pushes for it too, as it means better margins for CROs, faster data processing, and eventually cheaper healthcare. 

We expect the next quarterly reports to display margin improvement for service providers using AI.  

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Shortage, shortage, shortage

What did we say?

The sector is going through a slump. We highlighted three topics:

• Sector difficulty: we expected, on one hand, the downfall for Contract Development Manufacturing Organizations (CDMO) involved in Covid-19 products, which is still unfolding, and on the other hand, that big R&D spenders would spend again on CDMO, which is slower than expected.
• The importance of execution for CDMO: the nosedive in Catalent's reliability has been heavily paid for by its investors. The buyout rumors by Danaher only lasted until Catalent showed its last quarterly report.
• Potential big M&A in the CRO space: it did happen, led by Syneos Health being snapped up by three private investment firm affiliates for the eye-watering sum of $7.1bn. 

For 2H23, CDMO execution being scrutinized, as well as consolidation-oriented M&A in the space are trends likely to continue.

Execution, Execution, Execution

Execution is notoriously crucial for CDMO. Catalent's story depicts the importance the market prices in execution from CDMOs. It's not without some similarities with Emegent Biosolutions. The market punishes those players that the FDA points as not compliant. 

Over the next 5 years, more than 250 drugs are expected to be launched, representing more than $100bn in new spending. The money will only flow toward reliable suppliers. Reliability metrics will be paramount for the rest of 2023 and onwards.

We also expect the different markets to favor onshoring or nearshoring, as a CPHI North America panel discussion forewarns: "CDMO supply chains are potentially the biggest single risk to product resilience". In anticipation, we have diversified our CDMO geographies. 

A world fragmented, in consolidation

For CDMO, we expect the top five companies to have around 40% of the market in 2030, from around 15% in 2023. This will be done mainly by M&A; we saw several already, including Lonza acquiring Synaffix. 

A similar trend for CRO is also predicted, and we saw, for example, Singapore-based Novotech, the leading Asia-Pacific-centered CRO, acquire EastHORN, a European CRO with clinical, medical, and regulatory expertise.  But maybe the most interesting story now is that Labcorp has finished spinning off its CRO segment called Fortrea. The resulting company is a giant in the space with ~19k employees and will have some firepower to negotiate future acquisitions.

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Some sink, some float

What did we say?

 We highlighted 3 topics in the field in our outlook:

• Legend Biotech rise: data were expected in the first half of the year, and they have not disappointed. Unsurprisingly the stock is one of the best contributors in our portfolio.
• The diversification in cell type: we expected investors to diversify their exposure to the cell therapy space into Natural killer cells. Unexpectedly Johnson & Johnson trashed one of the biggest deals in the space, pushing investors to move away from Natural Killer space and to crowd again the CAR-T space to stay exposed to the cell therapy market.
• New investments in production facilities: numerous deals have happened, like the Genscript's Probio division raising $224mn, but all commercial players are still supply constraints. More deals should keep materializing.

For 2H23, after Fate Therapeutics blew up in January, the NK space will be under fire; on the other side, in cell therapy, the question is whether the rising star Legend Biotech can keep up with the hype.

Natural Killer cells are in trouble

Today the focus is heavily on T-cells for cell therapy. It's important to remember that the immune system is a complex structure made up of a variety of cell types. Among these, Natural Killer (NK) cells play a crucial role in identifying and eliminating malfunctioning cells. As their name implies, these cells are naturally equipped with the necessary tools to eradicate cancer cells effectively.

In January, the poster child of NK cell therapy, Fate Therapeutics, took a serious dive and the whole space with it. Why? Because Johnson & Johnson broke their $3bn deal, the biggest in the sector. Knowing Johnson & Johnson is a major actor in cell therapy, we believe they are redirecting their effort to Legend Biotech and the CAR-T space due to its more mature state.

Therefore, we expect the NK space to stay depressed until a player can produce convincing Phase 2 data. In the meantime, the CAR-T sector will be reinforced, a hypothesis further validated by the deal signed between Kite and Arcellx in April.

Legend Biotech keeps rising. Can it keep up with the hype?

The stock has been up almost 100% since March 2022, its first FDA approval. Now Legend Biotech is looking for three avenues of growth for its cell therapy: firstly, by increasing sales of Carvykti, secondly, by moving earlier in the lines of treatment, and lastly, expanding the indications to other cancers. All three missions are currently unfolding as planned or even better.

This semester the stock is up >60% since leaked and confirmed data show better than expected efficacy and add support to the $5bn peak sales projection. One has to fathom how impressive their data is: after treatment, 73% of patients are cancer free of one of the deadliest blood cancer, and we are talking about patients that failed four or more prior lines of therapy, including a proteasome inhibitor, an immunomodulatory agent, and an anti-CD38 monoclonal antibody. 

The roadblock to a higher stock price is manufacturing. Today, Legend Biotech can not serve more than 1'000 patients per year at full capacity or, in other words, generate more than $400mn. Q1, they racked $72mn working at ~70% capacity if the supply constraint is lifted faster than their competitor Bristol-Myers Squibb's Abcema, Legend Biotech revenues will skyrocket.

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Sequencing the future

What did we say?

 In our annual outlook, 3 topics grabbed our attention :

• Spatial Biology is going uphill. We postulated that 2023 would be crucial to see if the launch of both companies' new products is driving enough sales and adoption. 10X Genomics is indeed showing strong traction while Nanostring Technologies dipped.
• Sequencing space. We expected the competition to be fierce in the sequencing space and we were right; the competitors of Illumina are displaying strength while the leader faltered.
• DNA synthesis tech would reach the market. The space is bubbling with private actors raising money while listed players are readying their next generation. Yet the biggest news is Genscript launching a new synthesis service 20% cheaper than competitors while being the fastest.

For 2H23, DNA sequencing and protein sequencing are making waves

The sequencing battle intensifies

We postulated that 2023 will see the battle between Pacific Biosciences, Illumina, and Oxford Nanopore Technologies increase in intensity. Each represents a blend of conflicting and/or complementary DNA sequencing technologies.

As a reminder, Illumina sequencing-by-synthesis uses a proprietary platform to amplify fragments of the genome being sequenced and then reads which base is added as the fragment is synthesized using fluorescently tagged bases. Pacific Biosciences sequencing-by-synthesis use circularized DNA fragments that can sequence continuously, giving "longer" reads and better accuracy. Oxford Nanopore Technologies  sequencing is very different; DNA is passed through a protein nanopore with an electric current. Each of the four bases in DNA causes a unique disruption in that current, which can be measured and translated into the respective base.

Pacific Biosciences, with its new machine and chemistry, is taking the lead this year and is up 60% already. Illumina is flat and having to deal with its Grail divestment at a time it should rather focus on its offer. Our bet is that Oxford nanopore with a pocket-sized sequencer will be fitter to be used in all genomics initiatives. A typical example is the Earth Biogenome Project, currently underway and aiming to sequence the genomes of all complex life on Earth by 2028. That’s some 1.8m species, but to date, only a fraction of this amount has been sequenced. 

Proteomics is still the future Graal in sequencing

Proteins are the effectors of biological functions through their structure and concentration. Unfortunately for us, they are more complex to sequence than DNA and change in concentration over time.

Currently, sequencing protein is typically done through mass spectrometry in most cases. They are big machines with complex protocols, high costs, and limited output. Our bet is that nanopore sequencing also in this space is getting closer and will open a massive market.

Better and faster protein sequencing would increase the speed of discovery for biomarkers in thousands of diseases and help design better-performing diagnostics assays. 

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Year's Favorites 2023 - An update

Moderna

(MRNA US)

Cancer vaccine progress, but investor's eyes remain on Covid

Moderna is a name that must ring a bell by turning two exploits into one within the last two years: validating a use for mRNA in vaccines and making bank with it.

Only Covid-19 vaccine sales seem to drive the stock price; collaborations, acquisitions, and pipeline progress beyond Covid-19 are all neglected. CEO Stéphane Bancel even recently said to be “going full steam in rare disease.” With a suite of liver-targeted mRNA therapies already in the works, the company announced plans earlier this year to bump its R&D budget to $4.5bn and hire about 2,000 new employees. A move we wrote about in the Moderna story for 2023: it's a transition year.

At least both Covid-19 vaccines manufacturers, BioNtech and Moderna, have clarified the expectation about the lower sales for the year, as the FDA will continue forward only with bivalent vaccines and E.U. reduced its order by 30%. We expect the Covid-19 market to still generate between $3-4bn annually for the years to come.

Neurocrine

(NBIX US)

Catalysts are for 2H23 anyway

Neurocrine Biosciences is an American biopharmaceutical company founded in 1992 focusing on treatments for neurological and endocrine-related diseases and disorders.

In January, the company made an unexpected gene therapy deal with Voyager therapeutics:$175mn up-front, including a $39mn equity investment, up to $1.5bn in potential development milestones, for a Parkinson's gene therapy. A deal not welcomed by investors worried about the sales of Neurocrine Biosciences's only revenue-generating asset. Despite two beats in revenue, the worry still lingers.

The good news is all clinical catalysts are expected for 2H23, strengthening our conviction in Neurocrine to continue being a leader in the CNS space:

• Crinecerfont is well-positioned for Phase 3 read-outs. Phase2 data showed reductions in the three key hormone markers 17-OHP, ACTH, and androstenedione, giving confidence for the treatment of Congenital Adrenal Hyperplasia, a family of genetic diseases involving excessive or deficient production of hormones thus impairing the development of children.
• NBI-921352 Phase 2 data in adults for Focal Onset Seizure in Adults Seizure.
• NBI-1065846 Phase 2 data in Anhedonia in Major Depressive Disorder.
• NBI-1117568 Phase 2 in Schizophrenia, whose read-out may be feasible by year-end 2023: while Phase 2 just started enrollment and is officially expected in 2024, a similar trial by a competitor, Karuna, took 12 months from start to finish.
• The submission of the sNDA for HD-chorea for Ingrezza is expected to receive approval in 2H2023.

Genscript

(1548 HK)

A good company in a bad environment

To secure sufficient cash for the next two years, Genscript did the following in 1H23:

• Sold shares and now holds 48.38% of Legend (LEGN).
• Raised money for Probio (~US$220mn)
• Bestzyme (owned at 85% by Genscript) just received a strategic investment of Rmb250mn from Hillhouse and other investors in May.

The company expects free cash flow to turn positive in 2025, which is a year before our projection. All thanks to the following points:

• Cell therapy: increases the sales and manufacturing of Legend Carvykti by increasing capacity to 1'000 servings this year and further to 10'000 in 2025.
• Life Sciences products and services: the company expects GP margin of its facilities in Singapore to turn positive this year and that of its U.S. facilities next year. FY23 guidance revenue growth for this segment remains at 10-20%.
• Probio (CDMO): Manufacturing capacity will be ready around the end of 2023. The first stage of the Gene and cell therapy overseas plasmid plant will be ready by 2024. FY23 guidance for CDMO remains at 30-50%.
• Bestzyme: The revenue composition became diversified with the launch of new products of industrial enzymes, such as Protease for washing. The company expects the commercialization of synthetic biology products in 2024. FY23 guidance remains at 20-30%.

Of course, the risk of R&D slowdown in academic and Big Pharma budgets has not moved much and needs to be monitored, but the obvious elephant in the room is that Genscript stocks trade in Hong Kong. Currently, Hong Kong stocks are hit by depressed sentiment. Despite that, we see Genscript as an incredibly well-positioned company in the life science space, and moreover, it is currently valued at less than the share of Legend it owns.

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Catalysts

• Deals keep picking up. The M&A activity could be en route for a good year >$200bn.

• Beating standard of care in key indications. The industry will get a boost should the industry players deliver drugs that live up to the promise.

• Merck's lawsuit is successful. If the pharma players bend the IRA even just a bit, it would mean a lot for their future revenues.

Risks

• Clinical failure in new tech trials. Cell therapy, gene therapy, and mRNA have all opened new markets in recent years, but clinical failures would reduce confidence in their sizing.

• Funding drying up. Should raising public money become challenging, the pace of biotech innovation may be hampered.

• China new legislation. If China gets inspired by the U.S. or E.U.'s most recent legislations, it might contribute to increase pressure on pharma/biotech businesses.