Biotech’s Survival Story: Companies Bear Down for Lean Years

Matthew Arnold
Principal analyst
Clarivate

Pharmaceutical companies are partnering more strategically, investing earlier, and spending bigger on a smaller number of deals, according to 2023 Clarivate data. In addition, 2022 data cited in a BioWorld (Clarivate) article shows a sharp deterioration in biotechnology companies’ ability to access capital, with financing down 48.6% from 2021 and 54.8% from 2020.¹ That’s not much of a shocker, but merger and acquisition (M&A) activity—which typically surges when capital markets tighten up—came in at its lowest level since 2013, with just 99 transactions last year potentially worth $75.3 billion. This is the lowest number of M&A deals in the past decade and the second lowest total in terms of potential deal value for biotech M&A.

It seems that pharma companies are proceeding cautiously in this uncertain economic climate, cognizant of rising interest rates, rumors of recession persisting, increased regulatory scrutiny on deals, and the unpredictable implications of the Inflation Reduction Act in the US. Moreover, with biotech valuations down, investors are reluctant to sell at deeply discounted prices.

However, the size of the partnering deals in biopharma that took place in 2022 was the second highest recorded, demonstrating that pharma companies are still willing to place big bets on potential innovations from biotechs—they’re just being choosier. But with many facing steep patent cliffs in the coming years, pharma companies can’t afford to simply stand on the sidelines.

As the patent cliff approaches, pharma looks to diversify

Flush with cash from its COVID-19 vaccine successes, Pfizer was the most acquisitive big pharma in 2022, with its $11.6 billion acquisition of Biohaven Pharmaceuticals, $6.7 billion pickup of Arena Pharmaceuticals, and $5.4 billion purchase of Global Blood Therapeutics (to name a few). Pfizer, like many of last year’s biggest spenders, is highly dependent on a small basket of products. Its top three bestselling therapeutics, Comirnaty, Paxlovid, and Eliquis, accounted for 63.9% of its global prescription drug sales in 2022. Pfizer is also expected to lose patent exclusivity on 11 drugs by 2030, including its bestselling breast cancer treatment, Ibrance.

The company’s planned $43 billion acquisition of Seagen is emblematic of large pharma M&A strategies in this bearish market environment. Seagen’s expertise in antibody-drug conjugates (ADCs) complements Pfizer’s cancer portfolio nicely. Unlike many of last year’s acquisition targets, Seagen boasts a robust late-stage development program. As much of the low-hanging fruit has been picked already, pharma companies are partnering with or acquiring biotechs at earlier stages of development—preclinical assets accounted for 49 of the 65 partnering deals with a potential worth of more than $1 billion in 2022, and the size of upfront payments was greater for these assets.

Bristol Myers Squibb (BMS) also hit the acquisition trail, expanding its precision oncology portfolio through the $4.1 billion acquisition of Turning Point Therapeutics. The transaction gives BMS a pipeline of investigational medicines designed to target the most common mutations associated with oncogenesis, including repotrectinib, a next-generation, potential best-in-class tyrosine kinase inhibitor targeting the ROS1 and NTRK oncogenic drivers of non-small cell lung cancer and other advanced solid tumors.

Merck leads biopharma partnering bonanza

Merck & Co.’s expansion of its partnership with Kelun-Biotech, a Chinese company, announced in December and with a potential total value of $9.475 billion if all milestones are met, is an example of a notable shift to Asia. This deal involves seven investigational preclinical ADCs.

Merck (known as Merck, Sharpe, and Dohme, or MSD, outside of the US) was the year’s most active company in biopharma partnering in 2022, participating in 15 such deals. Merck is set to lose exclusivity for Keytruda, the third biggest-selling drug (after Humira and Comirnaty) in 2028; and 64.5% of the company’s prescription drug sales come from its top three products—Keytruda, Gardasil, and Lagevrio. Merck signed what may have been the year’s most valuable arrangement and committed up to $22.7 billion, should all deals achieve their milestones.

Table 1
Source: BioWorld

With 12 deals, Sanofi was the second most active dealmaker in 2022, with two deals in the year’s top 10 and all agreements potentially worth $22.3 billion (see Table 1). Also with a pair of deals in the top 10, BMS committed the third-largest amount to biopharma partnering deals in 2022 at $18.1 billion across eight transactions.

Takeda was the No. 1 dealmaker in the Asia-Pacific region by spend, committing a total of $8.3 billion across four deals—although the company’s deal with Nimbus Therapeutics to acquire NDI-034858, a potential best-in-class, oral allosteric TYK2 Inhibitor, for $6 billion, accounted for the lion’s share of their spending.

Preclinical versus clinical-stage assets

Interestingly, while Big Pharma faces a major patent cliff starting in 2025, most of the high-value partnering deals focused on preclinical assets, accounting for 49 of the 65 partnering deals with a potential worth of more than $1 billion. Not only was the number of preclinical deals signed higher than in previous years, but so was the size of the upfront payments on offer. With scarce late-stage assets and pharma companies on the hunt for genuinely game-changing innovative science, this trend for earlier-stage assets is likely to be sustained.

• In contrast, 2022 saw year-on-year declines in both the number and upfront payment value of clinical-stage partnering deals. There were three deals involving clinical-stage assets among the top 10 transactions announced in 2022. These included:
• Takeda’s deal with Nimbus Therapeutics, which included a $4 billion upfront payment for a psoriasis treatment candidate scheduled to go into Phase III studies this year.
• Summit Therapeutics’ deal with Australian biotech Akeso, in which Summit Therapeutics licensed exclusive rights to develop and commercialize ivonescimab (PD-1/VEGF) bispecific in the US, Canada, Europe, and Japan for an upfront fee of $500 million, with Akeso Inc. retaining development and commercialization rights for the rest of the world, including Mainland China 19.
• Gilead’s Kite Pharma’s global strategic collaboration with Arcellx to co-develop and co-commercialize Arcellx’s lead late-stage product candidate, CART-ddBCMA, for the treatment of patients with relapsed or refractory multiple myeloma. Arcellx received an upfront cash payment of $225 million and a $100 million equity investment from Kite.

Much of the biopharma partnering activity focused on the acquisition of the key platform technologies that are expected to underpin the development of medicines in the coming decades. These include ADCs and bispecific antibodies, RNA technologies, artificial intelligence (AI), and machine learning as well as cell and gene therapy (CGT) treatments.

The Merck-Kelun Biotech deal also highlights the growing importance of Mainland China-based companies in the biopharma partnering ecosystem (Kelun-Biotech is headquartered in Chengdu, Sichuan). While biotech innovation still speaks with an American accent—with the US accounting for at least one partner in 43% of last year’s deals—one in four transactions included at least one partner from the increasingly influential Asia-Pacific region. Mainland China, in particular, is becoming an engine of biologics innovation.

Biotechs face a long winter

The tables have turned for biotechs. Recently flush with cash and having enjoyed years of easy access to capital, they now face a considerably altered financial landscape.

“The rapid devaluation of biotechs has brought about a role reversal in which biotechs are looking at some lean years while pharma companies hold all the leverage in the relationship,” said Mike Ward, global head of thought leadership at Clarivate in a May 2023 press release. “However, the fundamental dynamic underpinning these companies remains—they need each other in order to keep pipelines producing innovative medicines.”

For biotechs to survive the drought, they must:

• Based on past market corrections, plan for three to four years of scarcity. This demands becoming more strategic in terms of portfolio management and dealmaking. Capital efficiency is now an existential challenge for these companies, and they must prioritize opportunities carefully.
• Identify potential partners among large pharma companies that are seeking deals in their area of focus. Pharma companies may be taking a more conservative approach to dealmaking; but with patent cliffs looming, they must invest in technologies and platforms that offer them differentiated solutions.
• Hold on to the value of their assets by aligning products and services to the burden of disease and ensure a clear course to market approval and reimbursement.

Pharma’s role in symbiotic relationship

Pharma companies have a role to play in supporting the biotech sector through the lean years. Some caution is warranted as the global economy emerges groggily from an unpredictable pandemic period, but portfolio strategists and business development executives should bear in mind:

• Biotechs are pharma’s golden goose, and if they aren’t supported through this drought in funding, large pharma pipelines will dry up as surely as venture capital did for startups as the pandemic wound down. Accessing technologies like ADCs, CGTs, as well as AI and machine learning remains just as crucial to pharma’s future as it was when the tiller was open and the mood among financial types was favorable and frothy.
• The cutting edge of medicine is a moving target. With payers under enormous pressure to cut costs and US regulators opening the door, enabling direct price negotiations for some federal benefit programs, me-too products just won’t cut it anymore. Understanding where the market is likely to be five or 10 years out is mission critical, which necessitates staying abreast of the research attracting the most citations, the areas attracting the newest patent applications, recognizing which establishments or organizations are centers of excellence, and what metrics regulators and health technology assessment councils are weighting the most. Don’t hold out for fire sale prices if you see an opportunity—competitors may seize them first.
• East-West geopolitical dynamics are bleeding over into the life sciences. Recent months have seen a string of Mainland China-based biotechs establishing outposts in Europe at a time of escalating tensions between the governments of China and the US. Companies in this fast-expanding market are increasingly matching strides with their Western counterparts in terms of innovation and are seeking partners as they look to market their products globally.

Pharma and biotech companies need each other to build the therapeutic innovations of tomorrow. Through focused strategy and a clear-eyed view of the competitive landscape, both parties can make it there together.

Reference

1. Carey, K., "Biopharma Financings Stall in 2022; Four Other Years Higher than $60.8B Raised," BioWorld, 10 Jan. 2023, https://www.bioworld.com/articles/693196-biopharma-financings-stall-in-2022-four-other-years-higher-than-608b-raised