5 trends in biotech dealmaking to watch in 2021
Biopharma dealmakers had tempered their excitement heading into last year. After 2019 brought an unprecedented amount of activity, the odds of having another record-breaking stretch — especially so soon — looked slim. They also felt that with the upcoming U.S. presidential election and its potential impact on drug policy, some companies would take a wait-and-see approach to deals.
What they hadn't planned for was dealmaking grinding to a halt as a once-in-a-century pandemic took hold.
The lull lasted about two to three months in the spring, according to experts who spoke to BioPharma Dive. By June, deal negotiations were churning again. Business development teams got used to virtual meetings, and rubbing elbows online rather than at conferences. Some even noticed an unusually high appetite for mergers and acquisitions once companies got their bearings.
"Our M&A group for the last couple months has been redlining," said Barbara Borden, co-chair of the M&A practice at Cooley.
A big run at the end of the year — including a $39 billion acquisition from AstraZeneca — wasn't enough to offset the slower pace at the start, though. Ernst & Young tallied $159 billion worth of life sciences dealmaking in 2020, well below the $200 billion that's become the annual standard as of late. PwC found the number of deals fell too, down 2% compared to 2019.
Still, dealmakers see the uptick in the back half of 2020 as a good sign, and expect a more complete rebound this year.
There are potential obstacles, however. Young biotechs are having an easy time raising cash, and so may not be as open to deals with big pharma companies, many of which are in need of new products.
Political and regulatory headwinds could come into play as well. Stuart Cable, global chair of M&A at the law firm Goodwin, said he'll be keeping a close eye on antitrust issues like the ones Roche ran into while acquiring the gene therapy developer Spark Therapeutics.
"The trend I'm most concerned about for 2021 is less about whether big pharma is buying, and more about whether we're going to get these deals approved," Cable said.
Below are five more trends experts think will shape biotech and pharma company dealmaking in the months to come.
Private equity adds competition
Large pharmaceutical companies are used to vying against each other to buy or work with exciting young biotechs. But looking ahead, they may find more competition from private equity firms.
These investors have, over the past decade, shown a greater interest in healthcare. In one of the more recent and high-profile examples, reports surfaced KKR had formally approached Walgreens Boots Alliance with what could have been the largest leveraged buyout in history.
Drug development has come up on their radar as well. Last April, Blackstone made one of the biggest private financings of a biotech company, with a $2 billion investment in Alnylam Pharmaceuticals. Then in July, the firm secured $4.6 billion in what it claims to be the largest-ever private equity fund for life sciences investing.
"Big private equity like KKR, Bain, they are all entering this industry with some force," Cable said.
Cable doesn't think private equity is likely to place massive bets on biotech just yet. But for deals valued in the range of $2 billion or less, he expects "an increasing trend of private equity competing with big pharma, particularly for late-stage companies and commercial companies."
To that latter point, Amag Pharmaceuticals, a women's health company with three marketed products, was in October bought out for roughly $650 million by a specialty pharmaceuticals company with ties to the private equity firm Apollo Global Management.
Big pharmas refine their pitches
Private equity isn't the only potential roadblock for big pharma buyers.
Biotech companies have been raising exceptionally large amounts of money from both venture capitalists and public investors. Data from Pitchbook and SVB Leerink show that venture deals in this space came close to $25 billion last year, an increase of more than 50% from 2019. Biotechs also conducted a record-breaking number of initial public offerings in 2020, with at least 31 raking in $200 million or more, according to data compiled by BioPharma Dive.
While the influx of cash does create new biotechs, and consequently more targets, it can also allow these companies to operate longer without needing to entertain a deal with a larger drug company.
"The principal argument that big pharma makes is: 'We'll give you plenty of money to develop your drug.' Well, guess what, there's plenty of money elsewhere," Cable said.
"Their competition," Cable added, "for the most part is not necessarily one another. It's not like it's Pfizer against Bristol Myers Squibb, or Merck against Sanofi. Their competition is continuing independence."
Buyers therefore may have to adjust how they work with and court biotechs.
That was the case for Gilead, which last year deployed tens of billions of dollars in pursuit of becoming a leader in cancer drug development. Gilead's chief financial officer recently detailed to BioPharma Dive how, to get certain deals done, his team had to be open to less conventional terms.
In the race for innovative drugs, buyers will need to "get in very early to make some strategic bets and stay ahead of potential competition or disruption," said Varun Budhiraja, a principal in the M&A practice at Deloitte.
"A lot of those bear hugs are converting into deals over time," he added.
Premiums stay sky-high
An added consequence of stiff competition and well-funded biotechs is having to shell out larger sums of money to lock down deals.
Last year alone saw Portola Pharmaceuticals, Aimmune Therapeutics and Immunomedics each sell at more than double their respective market values. According to EY, publicly traded biopharmas bought at a 74% premium, on average, in 2020.
"It's a great time to sell," noted Arda Ural, EY's Health Sciences and Wellness leader for the American markets.
Big pharmas, with their internal research and development lagging, have grown accustomed to paying these steep premiums to access new drugs and technologies. However, that doesn't mean price can't complicate deals.
"Boards get uncomfortable if premiums are too low; buyers get uncomfortable if premiums are too high, because of criticisms," said Borden from Cooley. "So it can have a psychological impact on whether people are willing to transact or not."
Still, for the largest drugmakers, price doesn't seem to be standing in the way if the deal is right.
"I don't have an upper bound," Pfizer CEO Albert Bourla told investors Tuesday at the J.P. Morgan Healthcare Conference. "We have the ability to basically do everything that exists out there, if we wanted to."
Neuroscience commands more attention
For years, the attention of biopharma dealmakers has centered on a select few areas of drug development — cancer, rare and immune diseases, as well as technologies like cell and gene therapy. Now, another area is gaining traction.
Big pharma had largely pulled back from research into the brain and central nervous system because so many drugs ended in failure. But in recent years, a better understanding of these systems has brought reasons for optimism in diseases like ALS, depression and movement disorders, in turn reigniting the interest of acquirers.
"The shift that I'm seeing the most is that more companies are going into CNS," said Marya Postner, head of the life sciences partnering practice at Cooley.
Postner said companies fighting neurodegenerative conditions such as Parkinson's disease and Alzheimer's disease are especially in demand. Indeed, last summer saw Biogen wager $560 million up front and potentially more than $1 billion total on some experimental treatments for Parkinson's. Then, in December, Eli Lilly agreed to spend nearly $900 million to buy Prevail Therapeutics, a gene therapy company with clinical-stage programs targeting inherited forms of Parkinson's and dementia.
Public and private investments are giving rise to more of these brain-focused biotechs, too. Just this week, Atalanta Therapeutics, a company trying to treat neurodegenerative disorders by silencing genes, launched with $110 million in funding from the venture capital firm F-Prime Capital. Atalanta already has collaborations in place with Biogen and Roche.
Blank-check companies stick around
Another neuroscience biotech that recently made headlines was Cerevel Therapeutics, a spin out from Pfizer and Bain Capital.
Like many biotechs, Cereval hit the public markets last year. But it did so in an unusual way. Rather than go through the typically arduous process of running an initial public offering, Cerevel merged with a blank-check company — more formally known as a SPAC, or special purpose acquisition company.
SPACs are essentially shell companies with one main purpose: to raise lots of money through an IPO, then use that money to merge with a promising company in a particular industry. In Cerevel's case, it raised $445 million in net proceeds by combining with Arya Sciences Acquisition Corp II, a SPAC sponsored by Perceptive Advisors.
Cerevel wasn't alone, either. In October, Panacea Acquisition announced a merger with the cancer drug startup Nuvation Bio. And this month, the Celgene spin out Celularity raised $372 million by combining with GX Acquisition.
Several other SPACs are still out there, looking for biotechs to merge with. And they typically have a two-year lifespan, meaning they will likely stick around as a vehicle for biotechs to go public at least through 2021, according to Ural from EY.
"We expect SPACs to continue to be on fire," said Lisa Haddad, co-chair of the public M&A and corporate governance practice at Goodwin.