Biotech stocks—on the up
Against a backdrop of strong general market performance, the Y&P Large Cap Biotech, Y&P Mid Cap Biotech, and Y&P Small Cap
Biotech Indices did exceptionally well in the first three quarters of this year, increasing by 58 percent, 68 percent and
161 percent, respectively. This is a continuation of their strong performance last year.
Equity markets have fallen in love with the biotech industry again. With relatively low market float, modest to moderate movements
of capital into the biotech sector have caused significant increases in the price of shares as investors have searched for
growth areas to invest in.
For some time, market sentiment towards the biotech industry was decidedly mixed, except for established biotech companies
and companies with positive late stage data. But the sentiment changed last year and continues this year.
Biotech M&A—consistently modest
Given the perception that Big Pharma needs to fill its product pipeline, Biotech M&A activity has been chronically modest
for the last couple of years, with just a few exceptions.
In the first three quarters of 2013 there were 21 biotech M&A deals completed worth $6 billion. This compares to 19 deals
worth $19.7 billion for all of 2012. Dollar volume has fallen, but the number of deals has increased. The dollar volume decrease
was largely due to Gilead's acquisition of Pharmasset in 2012 for $10.4 billion. But it was not the only large deal last year.
Dainippon Sumitomo acquired Boston Biomedical for $2.6 billion and BMS acquired Inhibitex for $2.1 billion.
The reduced number of large deals is partly due to the very high stock market valuations and the bidding up of prices for
late stage biotech companies which has dampened the pharma company pursuit of certain biotech companies. Also, for much of
this year biotech companies have had an attractive IPO climate as the alternative to a sale option.
Although pharma and biotech executives believe that there should be a great deal of M&A activity, pharma companies are accomplishing
many of their strategic goals using other alternatives to M&A such as licensing and partnering.
Interestingly, earn-outs have become a major portion of transactions this year, featuring in 13 of the 21 deals completed.
Although earn-outs or "structured acquisitions" involving contingent payments have been common in biotechnology M&A deals,
they peaked in 2011 and fell to 32% of biotech deals completed last year. This has changed dramatically thus far in 2013,
surging to 62%. The primary reason has been an increased need to bridge the value gap between buyer and seller.
Interestingly, as of September 30, the value of deals announced but not closed was only $500 million (with one deal). This
suggests continued weakness looking forward in biotech M&A volume.
Gains in biotech financing
Debt financing has been close to a standstill. Only $492 million of non-bank debt was issued in the first three quarters of
2013 compared to $794 million for all of 2012. This is a continuation of an almost non-existent debt financing market for
a number of years.
Equity issuance volume in the first three quarters of 2013 was much stronger, with 78 offerings worth $5.9 billion compared
to 85 offerings worth $5.6 billion for all of 2012. This puts the industry ahead of last year's pace in terms of both number
of deals and dollar volume.
The IPO market has become exceptionally strong recently with a surging stock market and very positive biotech stock price
performance. First three quarters 2013 issuance includes 29 biotech IPOs totaling $2 billion. This is a huge increase over
the 13 IPOs in 2012 and the 6 in 2011.
Although there have always been long periods between the periodic biotech IPO frenzy that happens from time to time, this
time around the inactive period was particularly long. The real question will be how long this peak period lasts. At least
in the past, the peak periods have been relatively short.