Biopharma Reaches New Heights as Calendar Turns

A decade ago, my colleagues at EY (where I am a senior advisor) created the Firepower Index to understand a company’s total capacity to fund deals to achieve their growth goals. EY defines Firepower by the strength of a company’s balance sheet and market capitalization.

In 2021, the biopharma industry’s M&A Firepower reached a whopping $1.2 trillion, a level not seen since 2014, and 14% ahead of 2020. M&A, alliances, and partnerships have always been core to driving the industry’s growth strategies and satisfy their need to access innovation and talent, and this will remain the case.

However, the nature of dealmaking does shift with the times. The looming loss of exclusivity for many companies’ largest revenue-generating products increases the current urgency behind accessing external innovation and new products. EY’s findings show a shift in how they are deploying their available Firepower—away from outright M&A transactions toward strategic partnerships and alliances—and the team expects this trend to continue.

What’s driving the shift in how Firepower is deployed?

One, an innovation renaissance is clearly underway with the promise of novel cell and gene therapies and RNA- and DNA-based medicines to cure, not just treat illness. In order to remain competitive, the larger biopharma companies will need to aggressively pursue external innovation. The challenges to M&A are that many of the new innovators are extremely well funded, thanks to an open spigot of capital flowing into the sector. Through November 2021, biopharmas raised more than $80 billion through venture funding, follow-on offerings, and IPOs. That’s in addition to the $90 billion raised in 2020. Additionally, SPACs acquired many other biopharma innovators, and as of November 2021, there are more than 80 healthcare SPACs with money to deploy.

The liquidity available to fund innovation has given companies long runways and great optionality to create value beyond being targets for M&A. In other words, it’s a seller’s market, and buyers face fierce competition for assets and mounting premiums for M&A transactions. For companies that want to acquire late-stage de-risked assets, the premiums required to do so will be so high they challenge a company’s ability to generate appropriate returns.

Despite a market softening in 2021, EY research shows that acquirers paid on average a 62% premium for public companies versus their target’s share price one month earlier: That premium jumped to 112% for new modalities, a category of next-generation biologics commanding significant attention from acquirers. Further analysis showed even higher premiums for specific modalities: 150% for cell therapy companies, 108% for next-generation antibody companies (which includes antibody-drug conjugates), and 94% for gene therapy players.

No surprise, with these dynamics in play, the deal pendulum has shifted away from M&A, and more Firepower is being aimed at strategic partnerships and alliances. According to EY’s analysis, major biopharmas have deployed roughly 1.5 times more Firepower on partnerships and alliances relative to M&A since the beginning of 2020. Firepower deployed for M&A dropped from 25% of transactions in 2019 to 9% in 2021. The total value of biopharma M&A transactions in 2021 of $108 billion is one of the lowest on record and is 60% below the value in 2019.

However, the EY report suggests that the industry has not been as aggressive as it needs to be in signing larger alliances that share risk. Instead, in 2021, the industry swung to lower risk alliances that shift risk because of their lower upfronts and significant downstream milestones. That said, the amount of Firepower deployed on alliances has climbed from 9% in 2019 to 13% in 2021, but that represented a decline from 16% in 2020.

In its report, EY highlights the new modalities to watch:

• Cell and gene therapy—with 1,800 products in the clinic.
• RNA-based therapeutics—with more than 200 products in the clinic for a variety of indications.
• Next-generation antibodies and protein degradation technologies—biopharma buyers signed acquisition or alliance agreements worth $32 billion in 2021 for newer antibodies, and four companies in the protein degradation space raised nearly $800 million in IPOs since 2020.

I would like to thank the EY team for allowing me to share these highlights from the Firepower report: Subin Baral, global deals leader, Life Sciences; and Ellen Licking, strategy and execution lead, Health Sciences & Wellness. For more on the report, visit ey.com/firepower.

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