An Update on the Financing and Deal Environment in the Biopharmaceutical Sector

Top Biopharmaceutical Industry Developments of 2020 and Outlook for 2021

January 11, 2021

In this report, we discuss key biopharmaceutical industry events of 2020 and the outlook for markets in 2021. We also discuss the implications of the U.S. election for the pharma sector in 2021 and the years to follow.

Markets Outlook for 2021

  • The biopharma share indices rose nicely in 2020. History indicates that there is roughly a 75% chance that biopharma shares will rise again in 2021.1
  • Recent weeks have seen normalization of market volatility as uncertainty around the U.S. Presidential election has been resolved. With strong fundamentals in place, a significant pool of quality private companies, we believe that, if anything, the IPO and follow-on equity markets for biotech will pick up in 2021, surpassing an already blistering 2020.
  • We also foresee a very strong environment for private capital raises. December 2020 set an all-time high water mark for amount of venture stage money raised.
  • The fundamentals that favor an increase in private venture capital raised are a shifting, more efficient ecosystem for new biotech company formation, record levels of capital available in venture funds, exceptional interest in private deals by crossover investors, and ongoing rapid innovation across the biosciences.

The Election and Implications for the Biopharma Sector in 2021

  • The results of the 2020 U.S. Presidential election and the recent pick up of two Democratic Senate seats in Georgia have important ramifications for the global pharmaceutical industry. In time, we expect to see broader healthcare coverage in the United States under the Biden Administration and the institution of Health Technology Assessments, which will put the government in the business of discussing costs and benefits of various pharmaceutical products directly with marketers.
  • The election news is almost certainly a net positive for the industry. The adverse effects of engagement with industry on pricing will be more than offset by the positive effects of greater healthcare coverage on the consumption of pharmaceutical products.
  • There could well be therapeutic area focus shifts with more availability of pharmaceuticals to lower income populations. We anticipate relatively rapid spend on products for cardiovascular, immunologic and infectious disease, and primary care products.
  • Further, we believe that biosimilars are very likely to see policy actions which will accelerate the move to true substitutability of these products, saving the system significant amounts of money. We believe that the market for biosimilars in the U.S. is likely to grow far more rapidly than the industry as a whole in the years ahead.
  • While Biden is not a dove on China, we foresee a more rational China policy involving multilateral coordination among G8 countries. We believe that the current brisk licensing activity to China will continue and that, ultimately, CFIUS rules will be somewhat less restrictive.

We Anticipate Less Big Pharma M&A and More Biotech M&A in 2021

  • We believe that the M&A market is likely to evolve significantly going forward. President-elect Biden has nominated two antitrust hawks for senior administration positions. Already, under Trump, AbbVie faced significant FTC resistance on antitrust grounds for its merger with Allergan, even though the companies had little overlap. We believe that the FTC and DOJ will be even tougher on larger pharma mergers, meaning that the trend of the last decade which has seen major consolidation of big pharma is unlikely to continue. We would not be surprised to see zero big pharma horizontal mergers get done in the next four years.
  • Consequently, big pharma, which has a continual need to build pipeline via M&A to replace products coming off patent, is going to need to hunt even more aggressively among biotechs for acquisitions. This portends a very high level of biotech M&A in the years ahead.
  • With normalization of credit markets, a positive environment for pharma and low rates, we believe that the wave of private equity buyouts of pharma services businesses will continue at an exceptional rate in 2021 and beyond.

Long-Term Outlook

  • One negative consequence of the Covid-19 pandemic has been increasing government deficits worldwide associated with a fall in tax revenue and an increase in relief spending.
  • In the U.S. specifically, we have seen the ratio of federal debt / GDP cross 100% for the first time in 2021. The last time the US got anywhere close to this level was World War II.
  • There are two factors which will make it very difficult to bring the debt under control over time. The first is increasing interest expense (notwithstanding the low inflation rate). The second is the inevitable growth of spending on Social Security, Medicare and Medicaid.
  • With low population growth and longer life spans, the pressure on entitlement program spending is going to be severe.
  • We believe that the U.S. will need to inevitably impose greater restrictions on federal pharmaceutical spend. Today, Medicaid and Medicare account for more than half of the $350 billion plus spent each year on pharmaceuticals in the United States.
  • While we cannot foresee the timing of any policy changes nor how they will hit the industry, we believe such changes are likely in the not too distant future.
  • We also believe that spend may impact disease states where spend per patient is particularly high, such as end-of-life cancer care.

Please contact Torreya if you have any questions or comments:

Stephanie LĂ©ouzon  |  Partner, London  |  |  bio
Tim Opler  |  Partner, New York  |  |  bio

1 Source: Cap IQ and Torreya Calculations