What biotech companies should know about M&A in down markets

M&A in biotech

Mergers and acquisitions (M&A) are important elements of the biotech industry, especially for early-stage fundraising and bringing new drugs and treatments to the market. M&A offers one of at least two major exit points that ensure investors are more likely to get a return on their investment and that drugs and treatments can effectively go to market domestically and internationally.

However, recent belt-tightening in the biotech industry has a number of companies worried. Especially for early-stage biotechs, the market in recent years has been tough, and investors have focused on supporting companies in the later stages of development.

This dynamic was the focus of a panel, Recognizing the Patterns in Strategic M&A during Down Markets, at the Biotechnology Innovation Organization (BIO) CEO and Investor Conference on February 26 in New York.

Trends in life sciences dealmaking

To kick off the discussion, moderator Arda Ural, Americas Leader for Life Sciences and Healthcare at EY (Ernst & Young), discussed the company’s recent report, How life sciences can make the right deals in a time of change. The report places the era’s current trends within a larger historical framework, contextualizing and alleviating some of the industry’s anxiety today.

“I’m going to take us back to 2010,” began Ural. “Try to compare how the top line of the industry was suspended or sustained by the bottom line or pipeline coming from the products launched in biotech in the prior five years. If you look at around 2010-12, it was mostly small molecules [that lead the market], and then the biologics kicked in to get us go into a sustainable growth we saw until 2020.”

COVID, not surprisingly, was a singular event that shifted the market, the effects of which are playing out in different ways today. The top line for companies, Ural observes, exceeded the vaccine pipeline, but as the pandemic waned, those numbers have naturally slipped, and investors are looking for considerably more stable and mature deals.

To this point, the report’s key takeaways include:

  • In 2023, Big Pharma began to embrace big dealmaking once again, as numerous key products face the loss of patent protection in the next five years.
  • Companies across the life sciences sector should do the right deals now to deliver value into the future.
  • Companies must nurture the partners, deal structures, therapeutic areas, and strategies to navigate a time of global business and regulatory upheaval.

Later during the panel, Mayukh Sukhatme, President & Chief Investment Officer at Roivant Sciences, observed, “There are two markets that are happening right now: the haves and the have-nots.”

His observations are supported by the report, which found that “while the late stage assets (or biotech companies) enjoy a 73% premium one day post-announcement, 27% of biotechs in early stage development have less than one year of cash to sustain their operations.”

“For those of us who have been on the investment side of things, we’ve seen this movie before—several times,” reminded Anna Kazanchyan, Founder and CEO of Saghmos Therapeutics. She recalled how, in the past, there is always excitement and attention towards early stage innovation and investment, and that eventually that optimism is always met with a crash at some point.

However, just as optimism always eventually meets a crash, a crash will always eventually meet a more optimistic period.

“At some point, the pendulum swings,” she said. It seems that, at the moment, many innovative industry are waiting for that swing to happen.

The only constant is change

Whether from a bear to a bull market, or a bull to a bear market, changes in the market are the only constant.

What does that mean for biotech on the whole? What does the near-future crystal ball say?

“I’m overall pretty optimistic about the broader environment,” said Sukhatme. “These things are always hard to forecast for sure, but it’s been pretty bad for a couple years now, and we’ve tended to lead other sectors and now that we’re coming back down I feel pretty decent.”

Luckily, the future doesn’t seem nearly as bleak as the last few months. As Ural put it, “Bankruptcies are at an all-time high,”  even though he noted that that should darken the skies of tomorrow in the way many think it should. As Sukhatme noted, “There’s definitely room for improvement,” adding that, “If we look at the snapshot of where we are versus snapshot of wher we were just one year ago, there’s been tremendous improvements in space.”

While there is no one-size-fits-all approach to an industry as dynamic as biotech, there are a few things early-stage companies can do to get by. The report highlights a few recommendations.

1. Build more business-focused models.

“The life sciences environment is getting more complex,” the report states, “and no company can excel across all business models. Recognizing this, companies have in recent years begun ‘divesting to invest’: shedding peripheral businesses and units to focus on their core value offering.”

This was a tactic discussed last year at the BIO Investor Forum as well, and as we continue through 2024, it is proving to hold true.

2. Identify the therapeutic areas where you can add value.

Despite struggles, there are the stalwarts of the biotech industry (like the ever-consistent oncology space) that can provide some stability for early-stage companies. Chadé Severin, Partner, Mergers and Acquisitions at Skadden, notably pointed out that both oncology and the diabetes space are performing strongly amongst the difficulties saturating the market. Indeed, other CEO panels noted that these areas, especially in the diabetes space, are going to see an upswell of both investment and research.

“Companies are increasingly considering the strategic importance of specific therapeutic areas,” says the report. “By 2028, it is estimated that the overall global biopharma market will have grown ~US$419 billion; of this growth, US$142 billion (34%) will come from oncology alone. The huge growth potential of the oncology market is reflected in companies’ M&A spending over the past five years, which has heavily prioritized oncology. The changing regulatory landscape is also focusing attention on rare diseases; with legislation such as the IRA unlikely to affect their price-point orphan drugs have become one of the biggest M&A targets.”

3. Be aware of emerging, disruptive new opportunities, like GLP-1s, which are poised to shift the industry profoundly in the coming months and years as investors flood the space.

In the age of belt-tightening, GLP-1s undoubtedly broke the mold.

“The high prevalence and unmet need (of GLP-1s) means that the endocrine and metabolic therapeutic areas are forecast to grow US$78 billion in the next five years; the size of this opportunity could see pharma companies rethinking their strategies and directing Firepower towards the space.”

4. Find the right balance between acquisitions and partnerships, and build the right execution strategies to deliver value from M&A.

“Alliances and partnerships have become a major part of biopharma companies’ innovation strategies,” the report states. “Companies have often used alliances to investigate innovative clinical technology platforms; cell and gene therapy, antibody-drug conjugates (ADCs), and digital technologies have been among the five highest-value areas for alliance investment since 2020. Once these major opportunities begin to translate into commercial realities, companies will be willing to deploy serious Firepower in their direction.”

How to make M&A work for you

Make sure that it is the right M&A for you, rather than perhaps the first one that bites.

“It’s never too early or too late to talk to a financial advisor to understand the value of the company,” said Severin. Companies need to do the due diligence when it comes to licensing collaboration.

“If you [partnering with someone with] a provision that says we can’t operate in this country [and you enter into a partnership with them], you’ve foreclosed yourself from being bought by somebody who wants to be in that space,” Severin warned.

“Looking ahead, the dealmaking imperative will continue to gain urgency,” the report concludes. “Companies will need to keep finding the right targets and the right partnering approach to replenish revenues. Concentrating on the crown jewel core assets, building depth in key growth therapeutic areas and identifying assets that can truly unlock value will be key requirements. In every case, signing the deal will only be the start—good dealmaking is an ongoing process, and companies need to find the right partners to make it work.”

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