A Record Year, But Will Recent Valuation Fatigue Continue?

Who would have predicted back in early March as we went into a COVID-induced lockdown, that the biopharma sector would see a fierce record streak of financings?

Of the $100 billion raised during the first nine months of the year by private and public biopharma companies, $85 billion of it was raised in the second and third quarters, following the onset of the COVID-19 pandemic. This blows away the prior record of $69 billion in 2015 and may add to a total for the year that could exceed the money raised in 2018 and 2019 combined.

Barbara Ryan

The IPO market in 3Q 2020 maintained its blistering pace, with deal volume up almost four-fold and deal value up over four-fold versus the same period last year.

Venture capital rounds backing private companies this year have also hit record levels. At $18 billion in the first nine months of the year, they are 12% above all of 2019 and 6% above the record set in 2018 of $17.4 billion.

M&A activity also picked up steam in the third quarter, with four multibillion-dollar deals crossing the tape. Given continued strong cash flows, this should continue to be a source of alpha for biopharma investors. The top 12 global pharma companies have more than $170 billion in “dry powder” for M&A, comprised of $76 billion in excess cash, and $94 billion in debt capacity.

In attempts to access innovation, achieve economies of scale, and to diversify their portfolios, these companies should be expected to continue a long-established addiction to M&A to sustain their growth.

Biopharma has been front and center in the fight against COVID-19 with more than 2,000 clinical trials for therapeutics and more than 165 preclinical and clinical trials underway for vaccines against SARS-COV-2/COVID-19. These initiatives literally are viewed as holding the keys to reopening the global economy and keeping it open. It should come as no surprise that investors have flocked to the sector.

And not all things are COVID-related. The FDA also appears to have not been slowed down by the pandemic and is on track in meeting PDUFA dates. In the first nine months of 2020, the agency has approved 46 new drugs, and there are 21 more expected to be approved by year end. Will the FDA set a new record as well?

Half of these approvals were for oncology drugs. It should then come as no surprise that the largest number of dollars invested in financings this year has been in the oncology space.

Biopharma businesses have held up well, with third-quarter earnings across biopharma continuing to show an industry with remarkable resilience during the pandemic, which I expect will continue. In general, biopharma revenues have held up, and there have been few changes in revenue guidance for 2020. Clinical trial delays rampant during the second quarter due to COVID have been followed in the third quarter with company announcements that many of these have been resumed. In addition, despite concerns early in the pandemic of the FDA becoming bogged down, as mentioned earlier, there is no evidence of that.

Despite the solid fundamentals, biopharma shares did slump in the third quarter, likely due to valuation fatigue following the substantial outperformance in the first half of the year, rotation into more cyclically sensitive industries whose businesses will benefit as global economies accelerate with the V-shaped recovery. Additionally, concerns over the presidential elections and pricing rhetoric have also left investors more tepid.

Will the recent underperformance continue?

Perhaps, as the presidential election uncertainties pass, and with the second wave of COVID threatening more shutdowns, investors will regain their enthusiasm for the sector as we close out the year. Therapeutics and vaccine progress later this year and into early next year could spark renewed investor enthusiasm.

Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec’s Editorial Advisory Board