Biotech M&A Rebound Bodes Well For Venture Investors

An employee working in a Triumvira laboratory. Top drugmakers will pay large sums for prospects they deem to be solid bets / Triumvira. Biot...

An employee working in a Triumvira laboratory. Top drugmakers will pay large sums for prospects they deem to be solid bets / Triumvira.

Biotechnology mergers and acquisitions are rebounding, a promising development for venture capitalists at a time when few startups are going public. Top drugmakers could soon forfeit billions in revenue as medications lose patent protection. Meanwhile, valuations of smaller biotech companies have retreated from pandemic-era highs, leading to more acquisitions.

“Large pharma still has a lot of cash, and they have a lot of drugs that are going to go generic over the next five to 10 years,” said Mike Perrone, a biotech specialist with financial-services firm Robert W. Baird. Worldwide, biotech M&A deal value reached $93 billion in the first half, putting 2023 on track to be the busiest year since 2019, when the deal value was $328 billion, according to financial services firm Stifel Financial.

Through July 11, there were 22 biotech acquisitions in the U.S., Canada and Western Europe with upfront equity values of more than $100 million, according to investment bank Leerink Partners. If such activity continues in the second half, biotech M&As for the full year could number in the 40s for the first time since 2017.  

While these trends point up, some headwinds could slow the momentum. The Federal Trade Commission under the Biden administration has policed M&A aggressively, suing in May to block the merger of drugmakers Amgen and Horizon Therapeutics.

“This uncertainty is not good for deal planners, and may lead to delays in the completion of some deals, which may have some inhibitory effect on future deal-making, at least during this FTC administration,” said Matthew Gardella, an M&A partner with law firm Mintz Levin Cohn Ferris Glovsky and Popeo.  

Companies with drugs in clinical trials are better positioned to be acquired than earlier-stage biotechs because drugmakers must fill revenue gaps quickly, investors said. Some 55% of biotech M&As this year have been for clinical-stage companies, compared with an average of 47% from 2019 to 2022, according to Stifel. “The urgency by pharma goes up each year as you approach patent expirations,” said Dr. Roderick Wong, managing partner and chief investment officer of life-sciences investor RTW Investments.

Because drugmakers are favoring companies with later-stage drug programs, most biotechs being acquired this year have been publicly traded. Of the 22 biotech acquisitions Leerink recorded through July 11, three were for private companies or business units. ““Large pharma still has a lot of cash, and they have a lot of drugs that are going to go generic over the next five to 10 years.” ”— Mike Perrone, biotech specialist with financial-services firm Robert W. Baird

Many clinical-stage biotechs went public during the rush of initial public offerings in 2020 and 2021. As a result, fewer startups fit acquirers’ needs. “There really is just a scarcity of assets that remain private,” said Dan Lepanto, senior managing director, healthcare mergers and acquisitions for Leerink.

Playing the long game, biotech venture investors often hold their shares and sometimes continue to invest after the IPO, enabling them to profit from acquisitions of public companies. “Our job is to continue to support those companies,” said Dr. Simeon George, chief executive and managing partner of biotech venture investor SR One. 

Sound strategy and execution are vital for biotechs seeking to get buyers’ attention. Often, startups don’t fully think through issues such as which disease would best showcase their drug’s competitive advantages, said Otello Stampacchia, founder and managing director of Omega Funds, a life-sciences venture firm. “The competitive positioning has to be very clear,” Stampacchia added. 

 Companies marrying strong competitive positioning with clinical data are being rewarded. One cashing in is venture-backed Nimbus Therapeutics, which in February sold a subsidiary holding one of its drug programs, a potential plaque psoriasis drug, to Takeda Pharmaceutical for $4 billion upfront and $2 billion in success-based payments.

A few elements drove Nimbus’ success, said CEO Jeb Keiper. Nimbus advanced the drug into later-stage clinical trials and generated promising data showing the compound’s potential to help patients with the most common type of psoriasis. The program also could be a “pipeline in a product” given its potential to treat other immune or inflammatory diseases, he said. As a result, several parties expressed interest, Keiper said. 

Top drugmakers will pay large sums for prospects they deem to be solid bets, said Robert Williamson, president and chief operating officer of biotech startup Triumvira Immunologics. “Large pharma is really looking at de-risked assets, the bar is high,” he said. “No one’s sticking their neck out right now.”