Will Recent Surge in M&A Dealmaking Save Biotech Sector?

Barbara Ryan
Founder, Barbara Ryan Advisors
Pharm Exec Editorial Advisory Board

2023 started out with a fair amount of investor optimism that biotech would come out of its steepest and longest bear market since the inception of the XBI index in 2006 and see an acceleration in M&A. The M&A would certainly be fueled by the combination of a high level of innovation; record firepower of $1.4 billion across the largest acquirers, according to EY’s Annual Firepower Report; and looming LOEs on products representing a total of more than $300 billion in revenues, leaving a vacuous growth gap to fill in order to achieve growth targets.

So far, there has been no recovery in biotech stock performance broadly, with the XBI down 3.4% year-to-date (at the time of this writing) versus an increase of 8.6% for the S&P 500. However, these data don’t do justice to the whole story, as the market continues to be increasingly bifurcated with an ever-widening divide between the haves and the have-nots.

The haves:

• Large-cap pharma companies with huge cash hoards and generally good financials are represented in the DRG index, and their valuations are hovering around record highs with the index down about 92 basis points year-to-date.
• Late-stage biotechs with solid data and near commercial assets can raise money, have seen much healthier stock price performance, and are the targets of M&A deals at massive premiums.

The have-nots:

• According to Tim Opler at Torreya, there are currently 211 companies in the sector trading below EV. These are earlier-stage, cash-guzzling companies with no or limited proof-of-concept data with few options to raise capital.
• These companies may, or may not, have compelling potential. But the fact is: they have limited capital and very limited access to more. Further, they won’t move the needle in the growth gap for the biopharma acquirers because their programs are too early and far away from commercialization. Previously, when the capital markets were flush and open to fund these types of companies, biopharma had to step up aggressively if they wanted access to these assets. Today, that is not the case. Interested parties can offer a small option deal and play for the next card to be turned over at very little cost. The power has completely shifted, and the earlier innovator has been pinned into being a price-taker.

For biopharma, the story so far in 2023 is clearly M&A, which is off to a strong run but reveals a continuation of the haves and have-nots theme.

Biotech M&A deals have tallied $64 billion so far this year. In the last few weeks alone, Pfizer said it will pay $43 billion for Seagen; Merck agreed to acquire Prometheus Biosciences for $10.8 billion; and GSK said it will buy Bellus Health for $2 billion. To quote Opler (who referenced his firm’s research), “It’s a blistering pace on track for $300 billion by year’s end, which could approach the all-time deal record of $328 billion in 2019.”

While investors may point to lower valuations as a catalyst to deals, the fact is that buyers seek valuable assets, and importantly for most, on strategy. There is currently a clear focus on future commercial big sellers versus early, unproven, and potentially interesting science. Thus, the M&A target pool is narrow.

To quote the luminary John Maraganore, former CEO of Alnylam Pharmaceuticals and advisor to a range of startups and investment groups, from a recent Endpoints article: “The vast majority of biotechs out there are undifferentiated, and, unfortunately, many of them aren’t going to make it. There should be some appropriate survival of the fittest in this environment where we end up with a much stronger group of companies on the other side.”

It sums up well the haves and have-nots theme.

To reiterate, the fundamentals across our industry are strong, and innovation is alive and well. M&A has been (and will always be) core to growth strategies for the largest companies in our industry. Biopharma is (and always has been) a growth industry, and that hasn’t changed either. There is a lot of money on the sidelines earmarked to be invested in the sector. But we will have to continue to live through the carnage of some recent funding excesses of unproven assets with too much competition.