Biopharmaceutical Sector Update:
Evolving Financing and Deal Environment
April 4, 2022
In this report, we review biopharma market activity in the first quarter of 2022.
The Stock Market
Measured using the XBI index, biotech stocks ended down 16.4% year to date (through April 1 close). If one looks at the entire market worldwide, the biotech sector has traded down 22.4% for the year to date.
Last week saw normalization of the VIX which is now trading below 20%, reflecting the evolving situation in the Ukraine and increasing comfort with the Fed’s course in setting expectations on interest rates.
The life sciences sector as a whole increased in value by 1.8% last week. Diagnostics and HCIT both went up more than 5% for the week, although both sectors remain down more than 30% over the last 12 months.
We looked at the publicly-traded life sciences sector in some detail, tracking share price returns by over 20 microsectors. OTC companies and big pharma were the only two groups that traded up for the quarter. Diagnostic labs, biotech, animal health companies, biosimilar companies and life science tools companies fared the worst – each sector down more than 15% for the quarter.
The greatest dollar value gain for Q1 took place in AbbVie shares (up $47 billion in value) which fared well due to excellent data on Rinvoq® and good performance of its oncology portfolio.
The greatest percentage gains in value among big dollar gainers came from three China API makers (Ausun, Menovo, Hicin). Cho Pharma of Taiwan also performed particularly well with its glycan technology which can enhance antibody performance.
The greatest dollar value drop for Q1 took place in Pfizer shares (down $40.3 billion in value) which suffered due to the expected reduction in cash flow with the ebbing of the pandemic. Several of the larger biologics CDMOs have also suffered significant drops in value due to easing of capacity shortages with the ebbing of the pandemic.
After outflows in February, March saw money flow into biopharma funds. With $1.4bn flowing into sector funds, there is cause for optimism regarding future share price performance.
Commodities and the Bond Market
The world continues to focus on supplies of hydrocarbons due to the Russia / Ukraine war. Oil prices shot up last week and then came down quickly after the Biden Administration indicated that it is releasing 180 million barrels of oil from the Strategic Petroleum Reserve. The Japanese economy is particularly vulnerable and has taken measures to reduce the economic impact there of oil price increases. Germany is facing natural gas supply disruption and is taking measures to manage the situation.
The yield on the two-year U.S. Treasury went higher than the yield on the 10-year Treasury bond last week. This so-called inversion of rates is thought to portend recession, but we carry a story that indicates that the evidence for this is flimsy.
Consistent with the view that we are far from recession is movement in the spread on high yield bonds versus Treasuries. This spread continued to tighten last week indicating that credit markets are generally in good shape.
Last week’s U.S. jobs report was particularly strong with many people returning to work after the Pandemic. Barron’s ran a story indicating that the reversal of the Great Resignation is well underway. We see this at Torreya with the streets of Manhattan becoming increasingly busy in recent weeks. Getting a restaurant reservation is quite the undertaking as well – as society is returning to normal.
Biotech: The Moment of Truth
This year is a moment of truth for biotech. We find ourselves in a world where share prices are down, access to public equity capital is difficult and funds are favoring late-stage assets.
Companies need to deliver on key milestones and data to prove the value of their assets. Thus far in 2022, biotech has not covered itself in glory.
We take a look at history to get a sense of how long it takes for stocks to recover and capital markets to reopen. This is highly relevant as companies contemplate how to titrate resources to projects with the highest payoffs while controlling costs.
Past downturns (2000 and 2007) were followed by extended loss of access to capital. The average time for the follow-on equity market to recover from a severe Bear market in biotech equity is three to four years.
Following the market crashes of 1987, 2000 and 2008, it took the market on average four years to recover. By this metric, we could expect to see a normal IPO market in biotech return in 2025. We hope it doesn’t take this long.
We take a look at biotech balance sheets and note that biopharma companies raised $175 billion in equity in 2021, shattering the all-time previous record of $120 billion raised in 2020. An additional $9.6 billion was raised in the private debt and royalty monetization markets.
For Q1 2022 we have a tale of two cities. The venture equity privates market continues to far surpass levels of 2019 and is on par with activity from 2021. The IPO market in 2022 looks similar in volume to the market in 2019. Follow-ons are down versus both prior years. Basically, access to public equity capital is quite difficult for biotech right now while private capital is readily available (both debt and equity).
Median net balance sheet cash of top 500 public biotechs by value was $117 million for the latest reporting quarter, down by $10mm from the prior quarter.
Biotechs have not restrained spend, on average, through end of year 2021. As a result, average median years of trailing burn on the balance sheet has rapidly declined to around 2X cash. Actual cash on balance sheets today is obviously likely to be below this level given financial reporting lags.
Online biotech news sites have prominently featured stories on layoffs in recent weeks. One could get the impression that the industry is going through a major slimdown in employment levels.
We chose to look at this phenomenon by measuring LinkedIn’s data on employment levels by company. In total, we reviewed all U.S./EU large pharma and major pharmas with enterprise values over $10 billion. We also sampled 9 small specialty pharma companies and 47 biotech companies. In total, we looked at employment levels for 78 biopharma companies through April 1, 2022.
In the sample of 79 biopharma companies, total employment has been rising over time. We have seen employment rise in 2022 alone so far by 22,000 jobs.
In this sample of 47 small and mid-cap biotechs, the group has added employees overall since the start of the year. In the last two weeks there has been a 0.3% decline in employee count.
Put differently, the frequent news stories of layoffs hide a reality that biotech as a whole is not cutting employees in any meaningful way.
We then look at which biotechs are cutting employees and note that aggressive layoffs rarely take place until a company has less than a year of remaining cash. Even then, they keep most of their employees, presumably because they are needed for ongoing projects.
We then look at who is hiring given the layoffs taking place among small cap biotechs. The war for talent never ends in the life sciences industry. As employees leave small biotech, everyone else is scooping up the new talent on the market. AbbVie and AstraZeneca, for example, have both been aggressively stepping up hiring now that the life sciences labor market is easing up a bit.
It was an important day for the industry and a tough day for Amlyx when a panel voted against AMX0035 for ALS. Despite the huge need for effective therapies it appears likely that the FDA will ask Amlyx to produce more data prior to getting an approval.
Last week saw MD Anderson open the James P. Allison Institute as part of this we carry a story this week by Pam Sharma on the future of cancer immunotherapy.
IQVIA held a heavily attended webinar on R&D productivity across the industry. Torreya was pleased to speak at the webinar. Key topics included the rising importance of biotech and China in clinical trials, lessons learned during the pandemic and dropping R&D productivity in the industry.
We were struck by the news story that the human genome is now fully sequenced, opening up new potential for genetic medicine.
Vertex had very promising data for a Nav1.8 modulator for pain. The data for the high dose of the drug candidate looks impressive.
Last week saw two IPOs in China. The U.S. and EU IPO markets remain shut. Q1 2022 IPO volume was down by 52% versus Q1 2021. If China deals are taken out, the decline would be far higher.
Last week saw very weak follow-on market issuance volume. The largest deal was a $200mm raise by IGM on the back of its deal with Sanofi.
We saw $1 billion in private venture equity placements complete last week. This was a solid performance given market conditions.
Remarkably, the count of venture privates in the industry for Q1 2022 is at an all-time high level for the industry.
New venture capital fund raises were down in Q1 versus recent quarters. But, amounts raised were still robust by any historical standard. This year is on track to be the third highest in history for new capital raised in healthcare venture capital funds.
We saw four credit placements last week in a market that continued to be brisk.
Mergers & Acquisitions
Last week saw a consortium of PAI and Carlyle acquire Theramex and Eagle Pharma acquire Acacia Pharma. Both targets were UK based.
On an annualized bases, M&A volume in 2022 is on pace to make this year the slowest since we started tracking the market.
We are hearing a very consistent message from large pharma on M&A. Seller valuation expectations have yet to adjust to the current reality. Knowing how long a downturn can last, big pharma is being patient about moving on biotech M&A deals.
This said, we believe that the M&A lull seen in Q1 is unlikely to persist. We expect to see biotech M&A increase in April. There are an increasingly large number of motivated boards who will consider lower valuations and at Torreya we are seeing pharma on the hunt. Big pharma remains flush with cash and M&A firepower and is increasingly active in looking at better M&A targets.
Hot deal areas right now include differentiated mid/late-stage oncology stories, first-in-class targets in IO/precision/ADC oncology, neuroscience, nucleic acid delivery / therapeutics and growth-oriented commercial specialty pharma.
Please contact Torreya if you have any questions or comments: