But will Washington’s dealmaking stance upend the momentum?
For the first time since January 2022, the Fed did not raise interest rates at its latest meeting, halting a streak of 10 straight previous hikes and putting at least a pause on the most rapid Fed-induced rise in interest rates in history. That is great news for rate-sensitive biotech stocks. The prolonged and unrelenting string of rate hikes was the No. 1 enemy of biotech valuations, which—as the longest dated of assets—trade inversely with rates. While the market is not wholly convinced that we have seen the last Fed rate hike, it does appear to be looking ahead to a potential for future rate cuts due to a slowdown in inflation, economic growth, rising unemployment, and (potentially) a recession.
This Fed pivot is a major positive shift in the macro climate in favor of biotech. Combined with continued solid momentum in M&A, it has fueled more than a 20% rally off the year-to-date lows as investors rotate back into growth from value. To be expected, capital markets activity has picked up with a healthy flow of follow-on offerings. According to data from SVB Securities, the largest participants, not surprisingly, are the biotech-dedicated investors who have been the biggest winners in M&A trades this year. If sector performance continues to be positive, other life sciences funds will seek out alpha here as will the long-departed generalist investors.
The number of companies in the sector trading below cash is also now declining with the valuation correction, positive datasets, and newfound discipline behind spending, program prioritization, and consolidation.
Large pharma is flush with cash and—according to EY’s most recent annual Firepower report—they have more than $1.4 trillion to fund M&A, strategic partnerships, and collaborations. M&A has always been a core pillar of leading companies’ growth strategies, and emerging biotech innovators are their targets. The need has never been greater. In addition, they will face LOEs for products with revenues exceeding $300 billion, beginning in 2025. I expect a strong year of M&A and dealmaking in 2023.
My colleague, Tim Opler of Stifel, says of this year’s M&A activity: “It’s a ‘blistering’ pace on track for $300 billion by year’s end, which could approach an all-time deal record of $328 billion in 2019.” These metrics are according to his firm’s research.
While macro factors may be shifting from headwinds to tailwinds, there are industry-specific storm clouds overhead fueling uncertainty that could threaten short- and long-term fundamentals. Companies and investors will have to monitor these closely.
In a Financial Times article titled “Big Pharma Dealmaking Recovers with $85bn M&A Splurge,” Jamie Smyth talks about M&A trends and the potentially chilling effect of the Federal Trade Commission’s Amgen-Horizon Therapeutics merger suit on biopharmaceutical innovation. Smyth cites Paul Hastings, chief executive of Nkarta, an early-stage biotech company, and an outgoing chair of BIO, the biotech industries’ main lobbying group. Hastings warns “that US antitrust authorities’ tougher stance on pharma/biotech deals risks upending a decades-long business model that underpins innovation. This model attracts investors to biotechs that are pursuing high-risk research in the knowledge that large companies may later buy them and supply the funds needed to complete expensive clinical trials and [commercialize] new drugs.” Smyth also adds that, in the past two decades, small- to mid-sized biotechs have grown in importance to drug development.
The Inflation Reduction Act (IRA), passed in August of 2022, gave Medicare the power to lower prices on certain top-selling drugs that have no competition—starting with 10 medicines in 2026. But the details of the process were left to the US Department of Health and Human Services (HHS) to work out, and it has since released initial guidance and a timeline that will name the first set of drugs up for negotiation by Sept. 1. In addition, the US Chamber of Commerce, Merck, and Bristol Myers Squibb are suing HHS over the IRA, arguing that is unconstitutional.
I believe it’s true that fundamentals for many across our industry are strong, innovation is alive and well, and M&A is—and always has been—a core pillar of the growth strategies for the largest companies; and there is more money to fund it than ever. Biopharma has always been a growth industry, and I don’t believe that has changed or will. There is a lot of money earmarked to be invested behind good data, and patients will be the ultimate beneficiary of the substantive advances our industry continues to deliver.