Biopharmaceutical Sector Update:
Evolving Financing and Deal Environment
September 9, 2021
In this report, we examine the financing and deal environment for the biopharma sector, with consideration of the ongoing COVID-19 pandemic.
Summary of key points:
- The Biden Administration unveiled a comprehensive drug pricing reform plan on Sep 9, 2021. This plan promises to allow the U.S. government to negotiate drug prices directly. Today, the U.S. is the last major global government that doesn’t directly negotiate prices. We believe that the sector overhang from this policy shift may be impacting investment in innovation and acquisitions.
- Last month was strong for public life science company equities, especially biotech, tools, and diagnostic companies. The whole life science sector rose 2.3% in the month ended Sep 6th. The current value of the publicly traded part of the sector is $8.5 trillion, an all-time record.
- Paradoxically, many biotech companies have felt like they are facing a significant downdraft in valuation. Two thirds of biotech stocks have traded down since February 8, 2021 when the market peaked.
- Our analysis shows that large caps ($10 billion+ valuations) are up 20%, while smaller cap names, particularly those with valuations under $200mm are down over 20% since the February 8, 2021 peak.
- The valuation decline has been strongest in gene therapy, RNA therapeutics (especially RNAi) and immunology. In contrast, capital has been rotating into gene editing and protein degradation stocks. Vaccines and neuro (particularly Alzheimer’s and psychedelics) are also doing well.
- Most public biotech companies have significant cash runway. The median Top 500 biotech company has $127 million in net cash on the balance sheet. This is up from $41 million in 2019.
- IPO activity has also been at near record levels throughout 2021 but took a breather in August. Equity follow-on volume remains steady.
- Last year, new capital into life science funds hit nearly $30 billion. In 2021 through August 31, $21.8 billion in life science venture funds has been raised. This is on a pace to easily exceed the total raised in 2020. The individual firepower of the top 20 life science venture investors is over $1 billion each.
- Not surprisingly, private placements of biopharma equity have also been off the charts since March of this year, also driven by huge amounts of available capital.
- The entry of larger players in the private debt market, particularly Blackstone, has pushed the total dollar volume of debt deals up to $7 billion (from $5 billion last year). However, the number of transactions has fallen in the same period.
- Surprisingly in 2021, some of the largest biopharma M&A activity has been led by financial buyers not Big Pharma. Financial buyers account for 7 of the top 20 largest M&A transactions in the sector to date vs. 3 last year. PE buyers are paying multiples over 10x EBITDA routinely due to their confidence in the ability to grow target companies and very low borrowing costs.
- M&A volume as a whole is down in the biopharma sector. This reflects relative paucity of Big Pharma buying activity—perhaps reflecting high sector valuations and political uncertainty in the United States surrounding the interest of negotiating drug prices for the Medicare/Medicaid programs.
Please contact Torreya if you have any questions or comments:
Data sources: S&P Capital IQ, Crunchbase, press releases and Torreya Calculations