Investors ended 2018 with a sour outlook for biopharma, as fourth-quarter economic worries erased massive share-price gains the sector had enjoyed in the first half of the year. Dealmaking was down during the year, as were licensing deals.

But beyond Wall Street, innovation flourished during the year, with a record 62 FDA approvals of novel drugs, plus nearly $17 billion in venture capital poured into biopharma startups. Biotech initial public offerings also performed well.

It all paints a clear sign of health in the industry—but with caveats—Vantage analysts said in their Pharma, Biotech and Medtech 2018 review (PDF).

"The opening weeks of 2019 have seen a certain stability return to global stock markets, which has helped the biopharma and medtech sectors regain lost ground," the analysts wrote. "The question is whether this renewed optimism will be long lived, and the answer to this largely lies in macro issues from beyond the sectors."

After climbing 15% for the first nine months of 2018, the Nasdaq Biotechnology Index finished down 9% for the year. The S&P Pharmaceutical Index was up, but only by 5%.

One big issue weighing on investors’ minds, of course, is drug pricing. The Vantage analysts estimated that the drugs approved by the FDA in 2018 could be bringing in $24 billion a year by 2023, driven by blockbuster demand for many of the 17 cancer drugs that were cleared, as well as Alnylam’s RNAi drug Onpattro to treat nerve damage from hereditary transthyretin-mediated amyloidosis and the CGRP migraine drugs from Teva, Eli Lilly and Amgen. But that assumes freedom in pricing, which seems far from guaranteed.

In fact, the Vantage analysts pointed out, "many big pharma executives have warned that price hikes will be harder and harder to push through." The key question, they added, "is how much longer drug price increases can be relied on to boost the performance of the biggest pharma players."

The Senate’s grilling of seven Big Pharma executives earlier this week put the issue of drug pricing front and center. It wasn’t exactly a friendly exchange. At one point, Sen. Ron Wyden, D-Ore., asked AbbVie CEO Richard Gonzalez to explain in writing within 10 days what would happen to his bonus if the company lowered the price of Humira, the world’s top-selling drug.

Gonzalez, who was hammered during the proceedings for "price gouging" by charging more for Humira in the U.S. than overseas, responded that the company has "struck a reasonable balance" on its pricing of the product.

Several bills are floating around Congress proposing everything from allowing patients to buy low-cost insulin from Canada to ending the rebates drugmakers award to insurance companies. That’s why some analysts are warning investors that this week’s hearing was far from the end of the drug-pricing debate in Washington. The hearing was merely "the junction of an important dialog on the role of government in drug pricing, healthcare affordability, and patent-related pricing powers," Wells Fargo analyst David Maris wrote in a note to investors on Tuesday.

If pharma executives no longer have the freedom to boost prices at will, they will find themselves under more pressure to increase volume sales, the Vantage analysts said. That, in turn, should prompt an uptick in licensing deals and acquisitions.

This year started off with a bang when Bristol-Myers Squibb made its $74 billion bid for Celgene. That doesn’t guarantee 2019 will be a big year for megamergers, the Vantage analysts wrote, but the pressure to bulk up drug pipelines coupled with depressed valuations bodes well for an active year in M&A, they said. And several companies are under pressure to turn up the volume on dealmaking, including Merck, Gilead and Amgen.

"If volume is the game, then offering clear innovation will become ever more important," the Vantage analysts concluded. "Few big companies boast well-stocked pipelines, however, so perhaps those hoping for an uptick in takeovers this year have another reason for optimism."

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