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The ‘blistering’ pace may further divide the haves from the have-nots.
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.
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.