{"id":995,"date":"2023-01-09T14:56:28","date_gmt":"2023-01-09T14:56:28","guid":{"rendered":"https:\/\/www.cic.vc\/scrip-asks-what-does-2023-hold-for-biopharma-ma-and-partnering\/"},"modified":"2024-04-16T12:30:04","modified_gmt":"2024-04-16T12:30:04","slug":"scrip-asks-what-does-2023-hold-for-biopharma-ma-and-partnering","status":"publish","type":"post","link":"https:\/\/www.cic.vc\/scrip-asks-what-does-2023-hold-for-biopharma-ma-and-partnering\/","title":{"rendered":"Scrip asks…What does 2023 hold for biopharma? M&A and Partnering"},"content":{"rendered":"
Executive Summary<\/span><\/strong><\/p>\n Deal-making between big pharma and biotech looks set to rise with a looming patent cliff increasing the need for the former to replenish its pipelines. Meanwhile, biotechs need partners to help them advance amid the ongoing big freeze on raising cash on public markets.<\/span><\/p>\n Conditions look ripe for an uptick in M&A this year after a fairly quiet 2022, while other types of strategic deals are also expected to increase in the face of a challenging funding situation for biotech.<\/span><\/p>\n In this second installment of our annual series, we asked more than 40 industry leaders and other stakeholders to comment on their expectations around mergers, acquisitions and partnering in 2023.<\/span><\/p>\n \u201cDuring 2022, there was a common question of \u2018have we reached the bottom yet?\u2019 as we saw company valuations drop dramatically, corporate ambitions shrink and, sadly, valued employees laid off as companies reacted to the challenging macroeconomic environment. Overall, that didn\u2019t seem to translate 1:1 to an increasing volume of deals done across biopharma,\u201d noted Richard Wilson, senior vice president, primary focus lead \u2013 genetic regulation \u2013 Astellas Gene Therapies. \u201cI\u2019m expecting we might see an uptick in deal-making in 2023, as larger organizations think that the time is right to start making more moves. That\u2019s not been as big a driver for us at Astellas as we\u2019re not trying to \u2018time the market\u2019 but, generally speaking, M&A feels poised to heat up a little more.\u201d<\/span><\/p>\n \u201cFrom an M&A perspective, we are expecting deal volume to increase in 2023 with corporate-led M&A leading the way,\u201d said Andrew Harrow, a partner in global law firm Goodwin\u2019s life sciences group.<\/span><\/p>\n He went on: \u201cBiopharma valuations have fallen, both in the private and public markets, and pharma companies are still sitting on plenty of cash; further, the need to fill their product pipelines remains. All of this, and the fact that the capital markets are still probably not a viable alternative option for most companies, should lead to an increase in M&A activity across the market.\u201d<\/span><\/p>\n While Harrow\u2019s summary of the situation reflected the broad view among many of those who shared their predictions and many foresaw an increase in deal-making, there were differences of opinion around the likelihood of outright M&A versus partnering deals, and others highlighted specific nuances they expected to see.<\/span><\/p>\n More M&A<\/span><\/strong><\/p>\n Bibhash Mukhopadhyay, managing partner of venture capital fund Sound Bioventures, anticipated \u201can uptick in M&A and partnering in general, at all levels of capital spend (few millions to multi-billions), all across the biotech \u2018food chain\u2019.\u201d He noted that the decline in the number and value of deals in 2022 had created \u201cpent-up demand in 2023.\u201d He thought there would be a \u201cfertile environment for both large ticket M&A (Alexion\/AstraZeneca -type deals) and scientific partnering activities,\u201d adding that large pharma and biotech would \u201ceye acquiring commercial franchises that will be EPS [earnings per share] accretive.\u201d<\/span><\/p>\n \u201cM&A continues to be a focus \u2013 the drive to acquire impressive pipeline opportunities that can impact patient communities,\u201d observed Gil Bashe, managing partner, chair global health at Finn Partners and a member of the incubators, accelerators and equity committee of the Prix Galien Award. \u201cMany companies are sitting on vast sums of capital. While the economic tumult will lead some to watch their cash flow, others will see this as an opportunity to jump in and acquire. Biopharma has seen this before and M&A will be hot.\u201d But commenting on a phenomenon that exploded during the pandemic, he noted: \u201cHowever, SPACs are not the golden ticket once expected.\u201d<\/span><\/p>\n Sarah Howell, CEO of reformulation specialist Arecor Therapeutics plc, was also bullish. \u201cI believe that we will see a surge in M&A in 2023 after a quiet 2022,\u201d she said. \u201cPharma are sitting on significant capital reserves and the model of accessing external innovation is still very much alive!\u201d<\/span><\/p>\n \u201cBig pharma will always be scanning the radar to add new assets, especially as some of the checkpoint inhibitors and treatments for diabetes and autoimmune conditions lose patent protection during the next few years.\u201d\u00a0<\/span>Dave Mehalick, Coeptis Therapeutics<\/span><\/em><\/span><\/p>\n Dave Mehalick, CEO of cancer cell therapy developer Coeptis Therapeutics Holdings, Inc., agreed: \u201cI believe M&A activity in 2023 will soar, despite rising interest rates. Big pharma will always be scanning the radar to add new assets, especially as some of the checkpoint inhibitors and treatments for diabetes and autoimmune conditions lose patent protection during the next few years. A lot of companies raised money at a time when valuations took off, so there may be some activity among smaller companies. Smaller-cap[italization] companies may merge as a matter of survival to stay aloft. The question now is about showing progress in product development that would entice partners to help fund programs or make outright acquisitions. But at the end of the day, I think we will be flying through some interesting skies well into 2024.\u201d<\/span><\/p>\n \u201cIn our sector there are positive indicators of a return to M&A activity and a willingness by big pharma to put their significant cash reserves to work \u2013 particularly given that a number of imminent patent cliffs will force decisions to refill the pipeline and revitalize revenue streams,\u201d commented Jack Bailey, CEO of cancer drug firm G1 Therapeutics Inc.<\/span><\/p>\n \u201cIn the last couple of years, major biopharma companies have done well relative to the general economy due to the fact that health care is an inelastic need, and many companies saw economic benefits from producing treatments for COVID-19,\u201d said Ying Huang, CEO of Legend Biotech Corp., another cancer cell therapy developer. \u201cThose companies are now looking to invest the cash they\u2019ve earned into new drug candidates and fill up the pipeline. In the next 5-10 years, there will be a number of loss of exclusivity events on major products. Once a company loses patent exclusivity, its cash flow could diminish very quickly. Many big pharma companies now need to go to market with new products that have exclusivity protection and market opportunity, which makes M&A very attractive.\u201d<\/span><\/p>\n \u201cGiven the challenging fundraising environment that 2022 brought, especially to smaller start-up companies, I believe there will be a lot of opportunities for value plays in 2023.\u201d\u00a0<\/span>Anu Hoey, Fountain Therapeutics<\/span><\/em><\/span><\/p>\n As Anu Hoey, chief operating and business officer of degenerative disease-focused Fountain Therapeutics, pointed out, those big pharma giants will have a wide choice available. \u201cGiven the challenging fundraising environment that 2022 brought, especially to smaller start-up companies, I believe there will be a lot of opportunities for value plays in 2023. M&A activity could ramp up as there are many companies with unique technologies and attractive valuations.\u201d<\/span><\/p>\n And the impetus comes not just from potential buyers, noted Marc de Garidel, CEO of cardio-renal drug development firm CinCor Pharma, Inc.: \u201cAs cash resources become scarce and 25% of public biotech companies need to refinance themselves within 2023, a number of biotech companies will have to downsize, merge with each other, or get bought by bigger players. Larger companies will be able to pick their choices as their preference is to acquire late-stage de-risked assets.\u201d<\/span><\/p>\n Editor’s note: As we went to press,CinCor announced it was to be acquired by AstraZeneca in a deal worth $1.3bn in up-front cash plus up to another $500m in a contingent value right.<\/span><\/p>\n For\u00a0Robert Tansley, a partner at UK regional venture capital investor Cambridge Innovation Capital<\/strong>, \u201cthe combination of low public market valuation coupled with shortening cash runways in a difficult fund-raising environment will lead to consolidation. The strength of large pharma balance sheets will facilitate significant acquisition in 2023 and we expect to see some eye-catching numbers. However, it is likely to be a buyers\u2019 market and a focus on quality.\u201d<\/p>\n \u201cWe could see bargain deals with public biotech companies that don\u2019t have enough cash to sustain operations.\u201d\u00a0<\/span>Petra Jantzer, Accenture<\/span><\/em><\/span><\/p>\n The strengthening of big pharma\u2019s hand was also underscored by Michael Tusche, Co-CEO of oncology company Treadwell Therapeutics, Inc. \u201cAlthough the early-stage pipelines at big pharma still seem relatively bare, they hold more of the cards than they did before,\u201d he said. \u201cSmall companies are turning to strategics in the face of a challenging fundraising environment. He agreed with de Garidel that \u201cwe\u2019re likely to see more deals for later-stage, de-risked assets,\u201d a view also shared by Chris Hollowood, CEO of Syncona Investment Management Ltd, a life sciences investment company, who foresaw \u201csubstantive M&A remaining focused on later-stage assets.\u201d<\/span><\/p>\n As Petra Jantzer, senior managing director and global life sciences lead at Accenture, observed, \u201cInorganic growth is as complex as ever. As the landscape evolves, late-stage targets will likely become ripe for opportunistic M&A. We could see bargain deals with public biotech companies that don\u2019t have enough cash to sustain operations. There will also be some competitive acquisitions of late-stage biotech companies at a high premium, as we\u2019ve seen with Amgen\u2019s acquisition of Horizon Therapeutics with a premium of approximately 47.9% to the last closing price.\u201d<\/span><\/p>\n Stephen Rosen, head of law firm Cooley’s London corporate practice, thought a \u201ckey theme for 2023 will be asset differentiation \u2013 it is no longer sufficient to be just buying future pipeline, something often seen particularly where companies have an asset that fails and therefore needs replacing. This next wave of M&A will see companies really focus on their core assets and look at targets and opportunities that can help move these core assets to the next level and beyond. This is attracting greater investor attention and we expect this to strengthen in 2023 and drive some of the M&A activity for companies with strong balance sheets.\u201d<\/span><\/p>\n Rosen sees \u201ca rebound in M&A as highly likely in 2023 and certainly in the early parts of the year,\u201d, noting that \u201ca number of companies have not raised enough funding to give them a meaningful runway through 2023 and beyond. Their boards will be looking at M&A to ensure that they, and their investors, can secure the best price possible before buyers start to use a declining cash runway as a reason to reduce the valuation.\u201d<\/span><\/p>\n For Jantzer, \u201cbio-platform deals are also expected to continue, with ecosystem growth pathways being utilized more often \u2013 in the form of partnerships or M&A \u2013 to access capabilities such as AI\/ML [artificial intelligence\/machine learning]. Balancing opportunism with discipline will be essential as biopharma, like all other players, requires a greater return on capital than before.\u201d<\/span><\/p>\n Another trend envisioned by Goodwin\u2019s Harrow is \u201csome consolidation of companies in the form of mergers of equals or investors seeking to combine portfolio companies as companies attempt to benefit from synergies and\/or expand development pipelines as an alternative to organic growth.\u201d<\/span> Tony Crisman, a managing director in Chicago at investment bank Lincoln International, tipped \u201cthe outsourced pharma services industries to remain a M&A hot bed as the biopharma sponsors will continually look to increase outsourcing across the board to optimize spend and create efficiencies.\u201d<\/span><\/p>\n Meanwhile, Cooley\u2019s Rosen flagged up another area of likely acquisition activity. \u201cLarge pharma will continue to go through a refocusing exercise, which is very likely to lead to disposals of assets\/businesses that are deemed to be non-core,\u201d he predicted.<\/span><\/p>\n The sharp decline in biotech companies\u2019 market capitalizations could also drive some other new trends in 2023 acquisitions.<\/span><\/p>\n \u201cBiotechs will always need capital and, given the current challenging environment to raise funds, alternative methods need to be considered,\u201d pointed out Dan O\u2019Connor, CEO of antibody drug conjugate developer Ambrx, Inc. \u201cThere are numerous public biotech companies with significant amounts of cash, trading at negative enterprise value, which would seem to create opportunities for strategic thinking.\u201d<\/span><\/p>\n \u201cGiven the choppiness in the public markets, we see 2023 as a potential premium year for a number of the private equity funds that will look to take companies off the public markets.\u201d\u00a0<\/span>Stephen Rosen, Cooley\u00a0<\/span><\/em><\/span><\/p>\n \u201cGiven the choppiness in the public markets, we see 2023 as a potential premium year for a number of the private equity funds that will look to take companies off the public markets. As cash has tightened and follow-on fundraisings have become more difficult, we think that there are a number of companies with potentially great assets that will attract PE interest given the depressed nature of public company stock prices,\u201d suggested Cooley\u2019s Rosen.<\/span><\/p>\n For Sound Bioventures\u2019 Mukhopadhyay, \u201cthe dark horse of M&A will be the SMID-CAP [small- to mid-sized market capitalization] publicly traded biotech that has one or two core drug franchises generating robust cash flow that wants to diversify its pipeline and will look among venture funded biotechs to acquire.\u201d<\/span><\/p>\n But it was Pierre Jacquet, managing director and vice chairman of L.E.K. Consulting, who had the most radical prediction, arguing that the circumstances are ripe for a possible return to big pharma mergers.<\/span><\/p>\n Pointing out that a majority of the biggest companies are facing significant losses of exclusivity for major blockbusters in the 2025-2027 time frame, he said \u201cthe biotech pool of external innovation is not big enough to fill all the revenue cliffs and loss of exclusivity faced by big pharma in the mid-term.\u201d He said that companies would be hard pressed to find a target company or \u201cstring of pearls\u201d to fill such a large gap, noting that \u201cthere are not many options left in the $10bn-$30bn market cap\u201d field, and although there are \u201cmore opportunities in the $1bn-$10bn market cap class, there are not a lot of them with the potential of generating significant annual revenues to fill the pharma gaps within the necessary time frame. The problem is that big pharma has cliffs of $10bn or more.\u201d<\/span><\/p>\n Jacquet anticipated that we might see a merger of companies trading in the $70bn+ market capitalization range as there is a lack of substrates from the biotech space to fill larger pharma revenue gaps.<\/span><\/p>\n Less M&A<\/span><\/strong><\/p>\n \u201cBearing in mind biotech wilderness periods can last for years, I think we should expect more licensing deals and only the same trickle of acquisitions in 2023.\u201d\u00a0<\/span>Andy Smith, Equity Development<\/span><\/em><\/span><\/p>\n As life sciences\/health care analyst at Equity Development and Scrip\u2019s Stock Watch columnist Andy Smith put it, \u201cMost biotech commentators are wondering what’s holding up big pharma buying biotechs now we’re more than a year from the last peak. Pharma, on the other hand, on their earnings calls say that there is no rush and that valuation expectations are still too high. Bearing in mind biotech wilderness periods can last for years, I think we should expect more licensing deals and only the same trickle of acquisitions in 2023.\u201d<\/span><\/p>\n Lincoln International\u2019s Crisman took a similar view. \u201cWith the IPO window closed, there are going to be limitations on capital raising and strategic alternatives for smaller biotech companies. This argues for more M&A; however, the recent steep valuations as well as the recent acquisition spree will put a chill on aggressive biopharma consolidators as they integrate assets and manage balance sheets,\u201d he warned. \u201cThis means more activity through partnerships, carve-outs and joint ventures is likely.\u201d<\/span><\/p>\n \u201cM&A between peers will remain slow, as publicly held biotechs are trading at low valuations. Too, the style of many recent biotech IPOs are such that the companies went public very early, which will give pharma some time to see whether the technologies play out \u2013 M&A will be slow there, as well,\u201d predicted Russell Potterfield, CEO and executive chairman of Endevica Bio, which is focused on developing a peptide therapeutic for cachexia.<\/span><\/p>\n The rationale for more M&A in biopharma is clear: biotech needs money, which big pharma has, while big pharma needs new product innovation, which biotech has. Nevertheless, previous years\u2019 predictions of big increases in M&A have not played out, and industry participants are not unanimous in believing they will in 2023, either.<\/span><\/p>\n And although Danish small molecule developer Galecto Inc.\u2019s CEO Hans Schambye acknowledged that \u201cthe very low valuation of many biotechs and the empty pipelines of most big pharma companies will ultimately result in an increase in M&A activity from the very low level we are seeing right now,\u201d he observed that \u201cpharma seems to be stuck in a situation where there is too much to choose from and they are afraid to be misled by the low valuations.\u201d He warned: \u201cThey will need to overcome this to compensate for their low internal R&D efforts.\u201d<\/span><\/p>\n \u201cDespite low valuations for many companies with promising assets, pharma has not been on a buying spree. In fact, the volume of M&A has dropped substantially over the past 12 months and the average deal size has been in decline over the past few years. The low valuations combined with the consistent nature of pharma to be risk-averse creates resistance to M&A activity on both sides,\u201d said Brian Wiley, chief business officer at immuno-oncology company Portage Biotech Inc. \u201cAs a result, partnering will likely remain the preferred option for deals despite the high likelihood of rising valuations in 2023 \u2026 Overall, while the number of M&As could increase simply because the current number is so low, the overall trend will favor partnering with robust early financial terms.\u201d Nevertheless, \u201corphan and rare disease will likely remain an attractive area for M&A due to stability around exclusivity and pricing,\u201d he added.<\/span><\/p>\n Goodwin\u2019s Harrow expected \u201cpharma companies to continue to push for alternatives to outright M&A \u2013 be that licensing\/asset transactions, option deals or collaborations\/strategic partnerships \u2013 allowing pharma to access, or have a first option over promising assets and\/or programs without having to pay the large upfront payments that have become a feature in many deals in recent years.\u201d<\/span><\/p>\n Partnering Trends<\/span><\/strong><\/p>\n While the funding downturn could drive M&A, it is also a potential catalyst for more partnering.<\/span><\/p>\n \u201cWe believe that the strategic commitment of pharmaceutical companies to partnerships is a trend that will continue in 2023 and beyond. Science is evolving so rapidly that most pharmaceutical companies do not have all the capabilities needed to create new technology platforms. Therefore, the introduction of drug development technologies and know-how through partnerships is essential for innovation,\u201d stated Yoshitsugu Shitaka, chief scientific officer at Astellas Pharma, Inc.<\/span><\/p>\n \u201cAs a category, partnering should see benefits, as smaller companies with good (or even great) technology will more likely choose to partner with larger companies rather than enter a slow IPO market in the first half of 2023,\u201d said Endevica Bio\u2019s Potterfield.<\/span><\/p>\n \u201cWe will continue to see big pharma tapping into smaller biotechs for partnerships, and potentially more co-development collaborations between biotechs to better navigate the current economic climate.\u201d\u00a0<\/span>Miquel Vila-Perell\u00f3, SpliceBio<\/span><\/em><\/span><\/p>\n \u201cConsidering big pharma is sitting on record cash reserves, one could expect increased M&A activity \u2013 but that was also the case in 2022 and it has been one of the slowest years for M&A since 2018,\u201d observed Miquel Vila-Perell\u00f3, CEO and co-founder at gene therapy company SpliceBio, S.L. \u201cNotwithstanding, we will continue to see big pharma tapping into smaller biotechs for partnerships, and potentially more co-development collaborations between biotechs to better navigate the current economic climate.\u201d<\/span><\/p>\n Daniel de Boer, CEO of Dutch RNA therapy developer ProQR Therapeutics N.V., agreed. \u201cM&A and partnering will continue to be a critical aspect of the biopharma sector, as it has in recent years. Partnering, especially, has the potential to really pick up in 2023, allowing smaller biotech companies to expand their offerings and progress pipeline candidates through key development milestones with the backing of a larger company.\u201d<\/span><\/p>\n \u201cFrom the perspective of the smaller biotech, there will be more of an appetite to partner assets in order to take molecules forward into the clinic without having to raise a large amount of capital,\u201d pointed out Fountain Therapeutics\u2019 Hoey.<\/span><\/p>\n Partnering rather than M&A could be better for both sides. \u201cPartnering will allow pharma to invest in novel approaches without as much financial risk. Partnering deals with substantial upfronts and\/or equity investments will provide an excellent opportunity to monetize assets without having to sell at an unfavorable valuation,\u201d commented Portage Biotech\u2019s Wiley. \u201cIt will also be attractive for many small to midsize companies that have multiple assets in the pipeline where an M&A is not likely to work. Partnering will also include an increase in preclinical assets, but the preferred stage for partnering will remain early clinical development after initial clinical proof-of-concept.\u201d<\/span><\/p>\n \u201cInnovation is at a peak, biopharma funding is at a low, and the patent cliff is about to hit. These factors will result in a lot more partnering in the sector in 2023. So, for biotech companies, 2023 may not be the year of M&A, but the silver lining is that pharma still has the cash and the desire to support the development of new drugs. In 2023, they may not be as open to acquiring, but they will partner to help biotechs cross the chasm and get to that next inflection point,\u201d said Antoine Papiernik, chairman and managing partner at European life sciences venture capital firm Sofinnova Partners.<\/span><\/p>\n \u201cThe biotech market downturn has accentuated the importance of good science and strong clinical data, whilst highlighting the important role that partnerships and M&A have in bringing innovative treatments to patients. In 2023, partnering will likely grow as deal terms improve for pharma companies, but I can see substantive M&A remaining focused on later-stage assets,\u201d commented Syncona\u2019s Hollowood.<\/span><\/p>\n Susan Conroy, CEO of TheraKind, a company that aims to improve medicine adherence through more patient-friendly dosing options for difficult-to-treat groups, foresaw that \u201cbiopharma companies [would] embark on more collaborative projects, sharing technologies in order to create more innovative new products in a de-risked manner.\u201d<\/span><\/p>\n \u201cWe will start seeing more cross-sector convergence. Companies from different fields of science and technology that haven\u2019t worked together before will be merging their capabilities.\u201d\u00a0<\/span>Marcus Schindler, Novo Nordisk<\/span><\/em><\/span><\/p>\n In a similar vein, Marcus Schindler, executive vice president for research and early development and chief scientific officer at Novo Nordisk A\/S, said: \u201cWe will start seeing more cross-sector convergence. Companies from different fields of science and technology that haven\u2019t worked together before will be merging their capabilities.\u201d<\/span><\/p>\n Astellas Gene Therapies\u2019 Wilson highlighted that the need for access to development and commercialization infrastructure and know-how could drive partnering in fast-growing, relatively young areas of biotech: \u201cIn gene therapy, we see more opportunity ahead for smaller companies seeking access to the later-stage capabilities and manufacturing capacity of larger organizations; partnerships are often the way to really unlock the value of many early-stage programs that are in the biopharma pipeline at this time.\u201d<\/span><\/p>\n David Kirn, CEO of genetic medicines company 4D Molecular Therapeutics Inc., pinpointed a trend he expected to see gain momentum in 2023: \u201cThere are many different business models for emerging biopharmaceutical business, and we\u2019re continuing to see an evolution. One model, in particular, I think we will see more of is the \u2018build-to-buy\u2019 business model involving financing from big pharma leading to successful acquisitions.<\/span><\/p>\n \u201cThis model allows a start-up company and a single investor, a larger pharma company, to work together for a period of time after initial funding of the start-up by the pharma company, before the start-up company is acquired by the pharma company at a pre-negotiated price. Securing a big pharma investment in a build-to-buy model will provide initial funding and can be very advantageous to start-ups in 2023 and beyond.\u201d<\/span><\/p>\n \u201cOne of the keys to success is to look at each collaboration with a customized approach so that it\u2019s a win-win for everyone, applying the best insights and capabilities of each partner to make important advances for patients.\u201d\u00a0<\/span>John Lepore, GSK<\/span><\/em><\/span><\/p>\n
\nAmarin Corporation plc\u2019s CEO Karim Mikhail had a similar take: \u201cLooking at the current M&A and partnering ecosystem, it is clear that, especially for smaller biopharmaceutical companies who are constrained by their cash position, many will need to come together to fund late-stage R&D, regulatory submissions, achieve pricing, reimbursement and market access and efficiently launch and commercialize their products.\u201d<\/span><\/p>\n