Get used to markets with no nuance, says Blackstone’s Kiran Reddy

2023 will be a year to digest the upheaval of 2022, and the bar for catalysts has been raised: Reddy on The BioCentury Show

2023 will be a year to digest what happened in 2022, according to Blackstone’s Kiran Reddy, who said companies need to adjust to discriminating markets that don’t see nuance.

On The BioCentury Show, Reddy, senior managing director in the Blackstone Life Sciences group, discussed his perspective on the year ahead for biopharmas, the impact he anticipates of the Inflation Reduction Act, and the therapeutic areas where there could be step changes.

Overall, the fundamentals of the market remain strong, says Reddy, but 2022 delivered some shocks, on the back of a strong 2021. Companies will need to absorb the new reality and work out how to respond.

“I see 2023 as a digesting of 2022,” said Reddy. “There’s an appreciation of the fact that we have to go back to a different playbook. A playbook we had in the past in 2007 and 2008.”

Markets will continue to be more discriminating, as they were in the latter part of last year, but will reward good clinical data.

“2022 was very much hot or cold,” said Reddy. It wasn’t — and won’t be — enough just to deliver good data. “If you delivered in Phase II placebo-controlled trials statistically significant efficacy, and demonstrated that your drug was, in fact, far more effective than standard of care that was well beyond what would otherwise have been expected, those were situations where you were being rewarded with valuation increases.”

But if you were delivering on or below expectations, even if you had positive clinical data, “those companies were punished in the public markets.”

Reddy cited Prometheus Biosciences Inc. (NASDAQ:RXDX), which delivered good data in ulcerative colitis and Crohn’s disease “that looked very robust and superior in the refractory patient population,” and was rewarded. On the other hand, companies such as Gossamer Bio Inc. (NASDAQ:GOSS) also delivered clinical efficacy data, yet did not meet expectations, and were punished in the public markets, he said.

“Both of those companies might have commercially successful drugs. But there is no nuance in this market. That’s the reality of where we are,” said Reddy.

Reddy expects that behavior to continue, noting that investors have capital to deploy in the public markets.

“Investors are looking for safer haven companies that have really strong clinical datasets, and are likely M&A targets, and pharma has a real demand for new products,” he said.

The Inflation Reduction Act will change both strategies and valuations. It will likely lead to more “creative financings,” said Reddy. “If you want the full value of your asset, you probably will have to run multiple clinical trials in parallel to make sure you’ve got that period of exclusivity. That adds more risk to these projects. Before we could de-risk them with serial approvals. Now, we’ll need to see more creativity.”

“This is where more partnerships will ensue, and more creative financings,” he added, citing as an example that clinical stage assets with multiple indications can be funded with royalty structures.

Reddy also is keeping an eye on therapeutic areas that might see major progress. Cell therapies in immunology, and a resurgence of interest in obesity are high on the list, and IL-33 might be one of several mechanisms in chronic obstructive pulmonary disease (COPD) for mitigating mucus secretion that take the field beyond the traditional steroids. He’s still on the fence about non-alcoholic steatohepatitis (NASH), however. And there’s a long way to go in neuropsychiatry, but the breakthroughs might come via the use of precision medicine to segment the population.