Will biotech see an uptick in M&A?

By Rachel Arthur contact

- Last updated on GMT

Pic:getty/adamgault
Pic:getty/adamgault

Related tags: biotech, Financing round, Investment

The biopharma M&A market has slowed since 2019. But is a buyer’s market emerging?

While R&D engines are firing on all cylinders in small and midsize companies, the financial situation is often not so rosy. "Valuations for small and midsize biotechs dropped sharply in 2022, which may reignite the M&A market,"​ note analysts from EY in  their ‘Beyond Borders: EY biotechnology report 2022’

Valuations down

After two years of pandemic disruption, a certain level of normality is returning to the health care industries. However, the aftermath is also leaving biotech with ‘significant challenges’.

In 2021 and 2020, new capital invested in IPOs and funding innovation reached an all-time high of $104.7bn as biotech valuations also hit a record high in February 2021.

However, thanks to novel vaccines and effective antivirals that moved the pandemic to the rear-view mirror in early 2022, reopening trade fueled a rotation by investors out of expensive growth sectors like biotech and into value names most leverage to the impending V-shaped economic recovery.

This combined with a rapid acceleration in economic growth as well as a rapid rise in interest rates and inflation have sent biotech valuations plunging and access to new capital in the public markets became virtually non-existent.

“Among these challenges is a decisive shift in investor sentiment, which began in the last quarter of 2021. Over the past decade and particularly during the pandemic, biotech has enjoyed soaring valuations. By early 2022, these valuations had plunged dramatically.

“We are clearly living through an innovation renaissance, and the fundamentals of the industry are quite strong. But from a stock market perspective, we are living through the deepest and longest correction that we’ve seen in the biotech indexes since their inception.”

Among the casualties of this return to pre-pandemic valuations is the biotech IPO market, which saw unprecedented levels of activity in 2020 and 2021 but slowed significantly in the first quarter of 2022.

“Biotech financing is notoriously cyclical, and after growing from $53.4bn in 2016 to well over double this total in the record financing years of 2020 and 2021, the industry can now expect a significant reset.

"In 2021, innovation capital (defined as the amount of capital raised by companies with revenues of less than $500m) reached an all-time high of $104.7bn. By comparison, the average over the previous 15 years was $34.3bn.

"These smaller companies now face a more arduous path to the capital markets.

“For some biotechs, reduced access to capital will mean they have to navigate existential challenges. For many others, this shift will increase the desirability of exiting via acquisition, and it may galvanize M&A activity in the sector.

“Though a high number of deals were signed in 2021, most were minor plays, and overall deal-making value declined by 46%. High valuations and the array of possible funding options available to companies in the sector have slowed M&A activity.”

Small and midsize biotechs are the ones to watch in the biotech industry, being responsible for a growing number of FDA approvals for new drugs. In 2021, companies with less than $1bn in total sales represented 30% of new molecular entity market approvals and launches, up from only 10% in 2017.

But such companies are often ill-equipped to take drugs into the commercial stages. Their options include exits via acquisitions, partnerships, or developing their own commercialization activities.

M&A priorities

In parallel, big pharma balance sheets have 'never been stronger with record firepower to fund M&A'. Meanwhile, they know that collaborations and partnerships could be critical to achieving their growth targets (particularly as they head into a massive loss-of-exclusivity gap primarily due to biosimilar penetration).

“As valuations [of small and midsize biotechs] sink and financing becomes more challenging, a buyer’s market may emerge, with big pharma CEOs potentially reconsidering targets that proved too expensive to justify acquiring in the past.

"De-risked, late-stage biotech assets that fit naturally into a company’s strategic pipeline will be an M&A priority for these companies. Alternatively, leading companies may seek to pursue strategic alliances rather than outright acquisitions, continuing a notable trend in recent years."

So when could this M&A activity take off? "Dealmaking value decreased by 46% when compared to last year and remains slow thus far by mid-2022. With historic drops in target valuations, big pharma players may seize the opportunity for large-scale M&A later this year. In the interim, big pharma continues to favor strategic alliances, committing to a potential infusion of $314bn in 2020 and 2021 alone. Even if the US were to experience a macro-economic slowdown, our research shows that biopharma M&A has been driven by industry’s unique fundamental needs to drive growth."

The report can be found in full here​.

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