2022 Looks to Be a Banner Year for Biotech M&A
The pandemic has markets poised for an M&A frenzy
Pandemic, sM&Andemic. There has been a parade of IPOs and SPACs in life sciences and biopharma over the last few quarters, moving to years now. Biopharma Dive’s database shows that in 2020 there were 71 biotech IPOs greater than $50 million, raising about $15 billion combined, up from $4b in 2019. To date, 129 companies have IPO-ed in 2021, according to the BioPharmCatalyst Biotech Stock IPO Calendar, putting it on track to be even higher by year-end. On top of those is the so-called “downpour” or “raining” of SPACs in 2020 and 2021. In total, 237 SPACs raised roughly $83.4 billion in 2020. By March of 2021, 370 U.S.-based blank-check companies had already banked more than $118 billion. There seems to be no end in sight — which is great news for the entrepreneurs, investors, and shareholders alike.
Unlike most other industries, biotech revenues may take years to materialize — if they ever do. Investors should anticipate secondary offerings and other financings in coming years. In the past, M&A was the bread and butter exit for startups. Even with the present public market exuberance, we feel the market is primed for an explosion of transitions in the short term. And the two are not mutually exclusive. Gilead acquired Forty Seven (FTSV) for $4.9b in 2020, less than two years after the company listed on the Nasdaq. M&A enables efficient allocation of resources across the ecosystem. All in all, these benefit the broader industry: Innovations are translated from bench to bedside, and capital recycles to fund the next interventions. All this creates an efficient process in drug discovery and shortens the time it takes for these innovations to get to patients. As they say in the industry, “They are waiting.”
Some of the industry’s largest players are now driving the M&A landscape after banking big money during the pandemic. Two notable examples are Moderna ($4.2b in Q2 up from $1.7b in Q1) and Pfizer (estimated $33b in 2021) — not to mention those boosting their balance sheets with diagnostic, reagents, tools, supply chain, etc. to deliver these treatments. And to boot, much of this is subsidized — rightfully so, in my humble opinion. What do you think those management teams plan to do with all that cash? Especially as they know the Covid gravy train will eventually dry up. Moderna has already signaled acquisitive interest. For the companies that haven’t benefited, they’ll be “forced” to bolster their pipelines and acquire companies/assets or risk losing their competitive edge. Layer on top of that all of the newly public companies looking for places to put their rakings to work. (Hi, Ginkgo with $2.5b in deal proceeds). Taken together, this is a perfect storm for an M&A frenzy.
Most of the startups we’ve met in the last two or three years feel far more focused on IPO-ing (or SPAC-ing) — a contrast to the not-so-distant past where an IPO was almost an afterthought for life science or biotech. I am not saying one is better than the other; quite the opposite, in fact. The prudent move is to take advantage of market situations at the time that is right — and the market winds are public right now. But that will not always be the case. In the past decade, companies have banked more than $1 trillion in M&A deal transactions. R&D-stage transactions accounted for $45B in 2019, most relevant to profitless biotech startups. Being prepared for either an IPO or M&A is good business practice. I will discuss transaction planning in a future blog post. In keeping with the financial tone here, below is a walkthrough of how assets are valued:
Biotech companies spend years and even decades before their products hit the market. As an industry, only 5% end up being marketed drugs, and fewer end up being blockbusters; however, those that do really transform patients and their families' lives. The response to Covid-19 has set new records for just how big that transformation can be. The standard for biotech is two revisions to the risk-adjusted discounted cash flow (rDCF) method. The terminal value is set to zero for patent cliffs, and generics hit — with an average of only about 5 years of revenue after NDA/BLA. A discount factor is then assigned according to the success rates of the clinical stage. The back-of-the-napkin with industry average assumptions is that a $1 billion dollar a year drug is worth $88 million at first human dosed and $532 million at Phase 2, underscoring one reason Phase 2 is the classical acquisition point.
Extend that further, and that same $1 billion a year blockbuster drug nets out to a present value of about $4 million at the preclinical stage, with just two assumptions: 8 years to market, and blockbuster when it gets there. The outcome is independent of the nature of the disease and the quality of the innovation. This may feel counterintuitive at first (it did for me), and it is part of why discounted cash flow (DCF) is not good for early-stage biotech. Fundamentally, the terminal valuation is defined more by the nature of the problem solved than the innovation solving it. The most successful players in the biotech industry are the ones who have combined the science of a groundbreaking innovation and the art of a compelling narrative. The next time you see M&A activity in the news, assume that the involved parties have accomplished both.
Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.
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