Skip to the content

Could 2023 be the year of biotech megadeals?

14 March 2023

A meaningful uplift in deal activity poses a compelling opportunity for biotech investor.

By Marek Poszepczynski and Ailsa Craig,

International Biotechnology Trust

Deal flow in the biotechnology space – a key driving force behind innovation in the sector – has been sluggish in recent years. Merges and acquisitions (M&A) slowed considerably during the Covid-19 pandemic, when clinical trials ceased and most deals were postponed due to the economic disruption. Following the vaccine triumphs, deal activity practically ground to a halt in 2021, as biotech stock valuations soared to unjustifiable levels.

While macroeconomic uncertainty will likely persist this year, we are seeing several signs biotech M&A could be due a significant resurgence. News of potential deals are already making headlines, with Pfizer announcing that it has entered an agreement to acquire cancer-focussed Seagen for a considerable $43bn.

A meaningful uplift in deal activity poses a compelling opportunity for biotech investors, who can generate attractive returns when portfolio holdings are acquired. However, to have the best chance of capitalising on this, investors must get to grips with the M&A-driven drug development cycle.

 

A conveyor belt system

In 2013, AstraZeneca and several other large pharmaceutical companies decided to shut down their research and development (R&D) centres, opting instead to acquire promising products from smaller companies.

This structure allows more focused and cost-effective biotech players to undertake high-risk early-stage research effectively. Global pharmaceutical companies can then acquire projects that have received or are close to achieving drug approval and incorporate them into their existing development and distribution infrastructure.

While there are occasionally variations to this standard model, it still underpins today’s global healthcare sector a decade on. Indeed, M&A is key to helping large pharmaceutical firms combat the dreaded ‘patent cliff’.

After successful drugs are developed, put through clinical trials, approved, manufactured and distributed, their patent protection eventually expires – known as the patent cliff. At this stage, competitors can begin manufacturing and selling the product at a fraction of the price, greatly eroding its revenues.

With the pace of scientific innovation constantly accelerating, new treatments are also frequently outshone by newer, more effective alternatives before they even reach the patent expiry date. This further reduces the period in which development costs can be recouped from profits.

As such, it is critical pharmaceutical companies keep their pipelines brimming with new products – for which M&A is usually the most cost-effective and timely solution.

 

Dry powder at the ready

While the importance of sector M&A in fuelling drug development cannot be overstated, deal activity hinges on several factors. After all, acquisitions of new products are unlikely to go ahead if target assets are overpriced by the market – as was the case in 2021 – or if acquirors lack cash.

But it seems the stars may be aligning for a flurry of sizeable sector deals this year. The slow-down in M&A deal flow during Covid-19 and the hyped valuation period of 2021 meant many pharma companies edged nearer to looming patent cliffs without replenishing their pipeline with new, innovative products.

As a result, many global pharma companies have built large cash stockpiles over recent years – especially those making profits from the sale of Covid-19 vaccines, such as Pfizer and Moderna. With most of these businesses yet to deploy their cache of dry powder, we are looking at a fertile marketplace characterised by reasonably priced assets and cash-rich acquirors.

However, only certain types of biotech companies will be ripe for takeover in this environment, and investors must remain highly discerning over which players to target.

 

Finding the sweet spot

Biotech companies can broadly be divided into three categories: development-stage businesses who do not have a product approved; revenue-growth-stage companies who have an approved or launched product but do not yet turn a profit; and, lastly, profitable businesses.

The time-to-market for development-stage assets makes them less attractive to large pharmaceutical companies seeking to plug imminent cash flow gaps, while profitable assets tend to be much pricier.

As such, revenue-growth-stage businesses appear to be in the sweet spot. We are already witnessing a marked increase in interest from pharma companies around acquiring this type of business.

Meanwhile, innovative companies creating products that address areas of significant unmet medical need will always attract the attention of potential acquirors. Although keeping stock of the macroeconomic environment is always prudent, this bottom-up approach should help investors wanting to hold a portfolio packed with attractive takeover prospects.

Despite the more benign M&A environment in recent years, in our portfolio there has been a fair number of deals. The most significant deals last year were Pfizer’s acquisition of Biohaven and Amgen’s takeover of Horizon, and two portfolio companies have already been acquired this year – Albireo and Concert Pharmaceuticals. All four of these businesses had relatively recent or – in the case of Concert – imminent drug approvals with strong growth potential.

Marek Poszepczynski and Ailsa Craig are co-investment managers of the International Biotechnology Trust. The views expressed above should not be taken as investment advice.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.