In a commentary earlier this month, Vijay Pande, PhD, a general partner with Andreessen Horowitz (a16z), joined three colleagues in highlighting some two dozen “jobs to be done” in the life sciences through artificial intelligence (AI). They ranged from novel hypothesis generation and prioritization, through design and testing through clinical trials, to therapeutic area selection and pipeline prioritization.
“In life sciences, the combined existence of large amounts of complex, multimodal data paired with labor-intensive, high cost tasks creates an optimal opportunity for AI to fundamentally change the future of an entire field,” Pande and colleagues Becky Pferdehirt, Bryan Faust, and Zak Doric, recently wrote on a16z’s website.
Not among those jobs listed was positioning startups for future growth by being acquired by biotech and pharma giants through merger and acquisition (M&A). Speaking with Bloomberg News during the recent 42nd Annual J.P. Morgan Healthcare Conference, Pande said the market for startups wishing to go public through initial public offerings (IPOs) remained chilly, fueling M&A activity that is expected to further heat up in 2024.
EY recently updated its industry dealmaking figures to cover all of 2023—numbers that further support its view that M&A is due for a comeback. EY has calculated a 51% jump in the dollar value of biopharma M&A during 2023, to $215 billion (from $142 billion in 2022).
The 2023 figure had reached $191 billion through December 10, when biopharmas announced a flurry of late-year deals that added 13% to the dollar value of M&A transactions. The biggest of those was Bristol Myers Squibb (BMS)’s announced plans to acquire neuro drug developer Karuna Therapeutics for $14 billion, the second largest M&A deal of 2023.
Those deals brought to 129 the number of buyouts announced during 2023, just three more deals (2%) above the 126 reported for 2022.
Pande, who is also founding investor of a16z’s Bio + Health fund, recently discussed M&A trends, as well as the success of metabolic drugs, the potential of gene editing therapies, and the development of artificial intelligence (AI)-based treatments with GEN Edge. (This interview has been lightly edited for length and clarity)
GEN Edge: Biotech industry leaders expect M&A to come roaring back this year. Yet so far, we’ve only seen a few deals up to $2 billion. How far away is an M&A comeback?
Vijay Pande: Last year, there wasn’t really much. This year, there’s a little bit, but I have a feeling the big fireworks will happen next year. I think it’s a combination of factors. First off, the macroeconomic picture is better, but not all the way better, and a few rate cuts could go a long way, right? And part of it is that we went from irrational exuberance in ‘21 to irrational pessimism. As that shifts back to, hopefully, a little more rational thinking, the markets will come back. But [interest] rate cuts will signal to people that it’s the beginning of the end.
Based on what [the Federal Reserve Board] promised [at least three rate cuts in 2024], one would think things might come back, which is great timing for JPM ‘25.
GEN Edge: How much does the M&A comeback also hinge on a comeback for the IPO [initial public offering] market?
Pande: That’s true. If some companies come out and there’s not excitement, then I think that will probably cool it down. We did see a little bit of IPO activity late last year, and I think that got people’s attention, and people were getting ready to go out. I don’t think anyone wants to go out in this market. but I wouldn’t be surprised if people are making preparations, such that when it opens, everyone wants to be out before it closes, if it were to close quickly.
GEN Edge: Three biotech companies have filed to go public so far this year, which is more activity than seen in recent years. What signal are companies looking for before going ahead with their IPOs?
Pande: It’s a combination of [things]: the rate cuts would give people hope. And then it’s just, how do these IPOs do in the public markets? Part of that is pricing, because if they’re poorly priced, they’re going to fall flat on the public market. Part of that is making sure that the pricing is done very thoughtfully.
GEN Edge: How much M&A activity is patent cliff driven, and how much is it a result of other factors?
Pande: I think it’s the standard things that we hear. Pipelines are a key driver for pharma. The other part, though, is that many pharmas have done pretty well, especially in the metabolic space, which gives them an opportunity. If I were them, sitting on the sort of resources they have, they could have generational opportunities if they made the right purchases.
GEN Edge: Within the metabolic space, certain diabetes and weight loss drugs have become blockbusters in the past few years. How far does this open the floodgates to M&A for metabolic drug developers? Obviously, pharmas have the money to do deals. Can smaller biotechs with an obesity niche pursue M&A as well?
Pande: I think so. Part of it is that [buyers] will want to differentiate, and drugs that they can work with that would differentiate would be important. There are different types of differentiation. One of our portfolio companies, BioAge Labs, has azelaprag, a drug that they plan to study in a Phase II trial with Eli Lilly which works towards actually avoiding muscle loss in patients losing weight. In Phase Ib, it led to muscle gain even for patients sitting in bed.
We’re going to see that type of differentiation greatly sought after, because everyone will want the best drug if they could. Other areas of differentiation would be also to take things orally, if you can. I think that would be a combination that would also be very powerful.
GEN Edge: How has the success of weight loss drugs translated into startups?
Pande: There are not a lot of startups. GLP-1s aren’t that new. Let’s put it this way: I think metabolic [drug development] now is up there as a category. So, people are thinking, do we do oncology? Do we do CNS? Do we do cardio? Do we do metabolic? Metabolic has earned the right to be in that type of discussion when we’re talking about therapeutic areas.
GEN Edge: You mentioned CNS. Some 5–6 years ago, drug developers were leaving the space, including Pfizer and Amgen. What has changed since then?
Pande: A variety of things. One is new modalities, which I think got people excited. Gene editing for CNS could be interesting if you think about it for certain types of diseases like Huntington’s disease—or even Alzheimer’s disease, where the genetic origins are well established, but the actual mechanisms of the disease are quite tricky. It’s hard to imagine a small molecule in those situations. For a genetic medicine to be able—for example, in Huntington’s to remove the glutamine repeats, that is very intriguing. The other area in CNS is that we’re seeing [technologies] such as AI that will help unravel the complexities of human disease biology.
GEN Edge: Speaking of gene editing, we saw Casgevy win FDA approval last month. Casgevy’s approval is a milestone for genome editing therapy, but there is concern about what payers would accept in terms of these treatments. How poised is gene editing to grow into at least as large a field as gene therapy, if not further?
Pande: You make a good point in that there’s the actual biophysics of it—how well can we edit, and edit on target without off-target effects? There are the practicalities of can we deliver it, ideally with specificity, such that we don’t have to have a huge dose.
But the third issue is, how does it get paid for? There are a lot of benefits I think people haven’t incorporated yet, practical things like compliance, which is always an issue. All my friends are doctors, and often, their top three headaches center on compliance. The compliance of [gene editing therapy] is perfect. For certain populations where compliance is an issue, this could be really dramatic in terms of their efficacy.
But the question is, how much can payers pay for it, especially when obviously people can change healthcare plans. It may be different for CMS [Centers for Medicare & Medicaid Services], where they’re going to be under Medicare all the way through. So that might be an area where it’s in some sense effectively single-payer and that could resolve it.
It still remains to be seen how payers will handle it, but once we get past that, getting to the science is very exciting because what we’re talking about, finally, is cures. I remember when I was a grad student, I would use the C word and my faculty colleagues would remind me, ‘We have treatments. We don’t do cures.’ But actually now, we’re really talking cures. That’s getting us into a new world. And that new world has the friction of, we have to figure out how we do that. But it’s worth doing! I’m confident we’ll figure something out. Then once we get to the other side, I think we’ll be better off.
GEN Edge: Why is gene editing developing so rapidly, advancing from basic research to trials?
Pande: Part of it is, it was very clear how this could be used as a new therapeutic modality. I think it got so much excitement because we’re doing something fundamentally different. If you think about what most small molecules do, it’s almost a little crazy, right? We develop a new small molecule that will be an agonist or antagonist to this enzyme. Almost like, if your car broke down. You put a screw in a new spot and somehow the car works. Versus if our car breaks down, we just replace the part. This is actually a very different mode of thinking and that obviously causes excitement.
Secondly, with genomics and so on, we actually have strong causal evidence of the genomic part of disease. So, you put those two things together. This is a very different paradigm, so you can see why there’s excitement. And excitement leads to research and dollars, which leads to results.
GEN Edge: How robust has company formation been in gene editing?
Pande: I think one of the big changes is that when we were in a low interest rate environment, there was a lot of cash, a lot of investment and there were a lot of companies. In some ways, it was a frustrating time because all the talent was diluted between these companies. We all say it’s very difficult now in a higher interest rate environment; there are fewer companies. But what happens is that the best founders now work together. So instead of three companies, there’d be one company and that one company would have the brain trust of all three. So, that’s a much stronger company, and then they can recruit the best of the best. It feels like it’s a much better environment.
Traditionally, these downturns are great times to build companies, because the best companies will still do well and you’re forced to make decisions. When money is easy, you can just spend your way out of things. Now, I think, you’re forced to have to be clever and thoughtful. That’s great discipline for company building, especially in the early days of a company.
GEN Edge: You mentioned AI. How will it continue reshaping biotech this year?
Pande: On both the life sciences side and the healthcare side, there are three key pillars that we’re seeing. The first is personalization or localization. For both healthcare and life sciences, AI allows one to come up with solutions that are really much more tailored to the individual, whether something like the realization of personalized medicine, or generative AI. AI allows one to create AI-like nurses that could understand your health issues and speak at length about your concerns and so on. The personalization is something that is key and often lacking.
A second pillar is much greater rapidity rolling out of this technology. It’s amazing. I see even startup CEOs of ours using this technology to replace data science teams where they themselves can get their questions answered and understand the detailed nature of their businesses and then rolling this out much more broadly.
The third pillar we’re seeing is scale—this can be done just so easily at a very large scale. One of our companies, [large language model developer] Hippocratic AI, is on the verge of having essentially AI nurses. And in a time where we have this huge crisis staffing crisis, AI could be a huge answer to those issues and those great needs.
GEN Edge: You have also predicted that while last year, AI was being further developed, this year it gets implemented. What’s the distinction?
Pande: Last year, I think, we were seeing technology demos. We were saying, ‘Oh my God! This is so cool.’ This year, we’re hearing, ‘How do I get it? Where do I buy it? How is it going to change my life? How does AI actually get put into the doctors’ workflows? How does it actually get put broadly within pharma to be able to change identification of targets, or to more rapidly drug those targets?’ I think we’re starting to see the implementation phase.
Broadly, I see pharma, big and small, interested in AI. Some of them have very strong AI teams internally, some of them want to partner, and some of them do both. What we’re going to see is some combination of partnership and building internally. Typically, historically, pharma will build internally, but actually it will make big leaps through M&A, and I don’t see this as being any different.
GEN Edge: There’s a handful of leaders in the field. Many other companies say they’re AI companies but have to rely on platforms from the leading companies. Also, tech companies like NVIDIA and its competitors are expanding in life sciences AI.
Pande: What’s very interesting is that I’m seeing tech leaders of both small-scale companies like new startups, and large-scale companies like the incumbents be very excited about life sciences and healthcare.
When [NVIDIA Founder, President and CEO] Jensen Huang was asked what the next big thing is, he said, “digital biology,” and had no doubt. My understanding is that for NVIDIA’s NVentures [venture capital arm], roughly half of their investments are in the life sciences and health. Jensen is a real visionary amongst that [tech] crowd. But if you look at Amazon, and you include Google and Apple, they’re all interested in this space. The TAM [total addressable market] is obviously huge.
The big change right now is that when I told people a few years ago that healthcare is a tech problem and tech will be critical in the solution, there was a lot of skepticism because doctors never really used tech. It didn’t really fundamentally change their lives. They’d still use a whiteboard. They could do something on the computer but does that really change their lives when the tech they had often seemed more like an impediment?
I think AI is fundamentally different. It’s something when I see doctors use it, they get excited about it, and that was not that way before. We’re seeing payers and providers coming to us, and to our portfolio companies, and so on to learn about what could be done. There’s a level of excitement that you see in other areas of tech that I’ve never seen in life science or healthcare. And that that seems fundamentally different.
GEN Edge: How will that change lead to particularly faster drugs or less expensive ones?
Pande: Yeah, both are big challenges. The big, big challenge where you think about cost or speed is probably clinical trials. If you work backwards from that, you can decrease cost by increasing the probability of outcomes of clinical trials, the success rate. And you could decrease time with clinical trials being more successful.
A lot of the failures in trials is not Phase I, it’s typically Phase II or III, it’s efficacy. The fundamental question is, do we understand human disease biology well enough, such that these trials will succeed? Typically the problem isn’t hitting the target. The problem isn’t being safe from a Phase I point of view. It’s really the complexity of disease biology. I think that’s where AI has a chance to make a dramatic impact. Certain startups are really going directly after that, [a machine learning-based drug discoverer/developer in a16z’s portfolio] insitro being an obvious example.
GEN Edge: What about some of the leading big-name developers of drugs based on AI, such as Exscientia, Insilico Medicine, and Recursion?
Pande: Remember how in the dot-com times, there was a big shakeout? There were a lot of companies doing e-commerce, but Amazon was the one that emerged. Time will tell who’s got the goods.
GEN Edge: Will AI ultimately have only a handful of major players and then other niche ones? Or will we see more than a couple of companies emerge?
Pande: Both in life sciences and healthcare, there’s not a winner-take-all dynamic that we see, but there are only so many Amgen- or Genentech-scale companies. I think there could be an Amgen, a $100-billion company, coming out of this. There’ll be some $10-billion companies and there’ll be some billion dollar companies—the full spectrum.
It’s hard to build an Amgen or an Alnylam (Pharmaceuticals) or something like that. It takes dedication to building a true platform. Usually what happens, unfortunately, is that the platform gets thrown away once the first asset gets created. To fight that is really, really hard.