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In early 2024, Optimism is back Into biotech: Investor money flows into drug companies and initial public offerings, a barometer of the industry’s health. picked up This is a sign of a strengthening market.
But IPOs have since slowed, at least for now. Expected to be roughly the same Number of priced offers in each of the past two years. The recession of the past two years Rather than a resurgence, they have been replaced by acquisitions by private biotech companies, a phenomenon industry watchers say is due to a plethora of mature, but not yet public, pharmaceutical start-ups.
“There’s actually a lot of late-stage pipeline that remains private because companies aren’t publicly trading at a time when they would normally go public,” said Naveed Siddiqui, a senior partner at Novo Holdings, the parent company of Novo Nordisk, which manages the venture investment portfolio.
As of mid-July, 13 of the 26 acquisitions worth more than $50 million this year were by private biotech companies, outpacing the pace of the past six years. According to data from BioPharma DiveThe percentage of acquisitions involving startups is by far the highest since 2015, analysts at investment bank Jefferies said in a research note last month.
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M&A is a key part of the biotech ecosystem. Acquisitions help build pharmaceutical pipelines and provide biotech companies and their backers with a financial return on their investment. Typically, most deals involve publicly traded companies that have made enough progress to prove that their science has real value. Top deals in 2023 included Bristol-Myers Squibb’s acquisition of a schizophrenia drug maker. Karuna Therapeutics Merck’s acquisition of immunology drug developer Prometheus BiosciencesBoth stocks had been traded on the public market for several years.
But recently, pharmaceutical companies have been turning increasingly to private biotechnology companies.
According to a report released last week, HSBC Innovation BankingThe shift began in the second half of last year, when the majority of private M&A deals took place in 2023. This change in pattern signals a “valuation capitulation” by private biotech companies and their investors, which has set the stage for increased startup M&A, the report said.
Not only are the pace of these deals increasing, but so are their size: Seven of the deals had a total value of more than $1 billion, and the median upfront payment was more than triple the average of the past six years, according to the report.
John Norris, managing director of HSBC Innovation Banking, said such premiums give companies a “tremendous advantage” at a “volatile” IPO market. Most of the 2024 IPO class is trading well below its opening price, and good news often isn’t accompanied by higher share prices, he said.
Would it be better to “go public, get more clinical data (some good, some bad) and wait for a tipping point in value”? Norris said. “It could be a big change, but the average return on IPOs this year is negative.”
Pharmaceutical companies have a strong incentive to find new drugs this decade. Many of the industry’s best-selling drugs are Losing patent protectionLooming “Patent Cliff” Speculation is rife that a significant increase in trading will occur.
Public companies are typically the first to be acquired. But a slowdown in IPOs in the sector over the past few years has created a plethora of biotech companies that have yet to list on Wall Street. These companies “are still private, waiting for the right opportunity to go public,” Jefferies analysts said last month, “which explains why so many M&A deals are taking place in the private sector.”
The types of startups being acquired today support that theory: At the time of their acquisition, most had drug candidates in clinical trials, seven were in or nearing Phase 2 trials, and eight were in Immunology,Research field is Growing investor interest recently.
Hi-Bio is Sold to Biogen for $1.15 billion The company, which was founded in May, was built around two drugs to treat immune disorders. Licensed from biotechnology company MorphoSysThe company is moving both into clinical trials, announcing success in two trials earlier this year. Phase 2 the studyBoth remain confidential.
As those programs progressed, Hi-Bio began considering its options, according to CEO Travis Murdoch. But an IPO was not the company’s “primary consideration.” Plus, funding multiple Phase 3 trials and building out commercial infrastructure required a very large capital raise. The company had to balance what was best for shareholders, employees and the future of pharmaceutical research.
“It’s a complex decision,” Murdoch said, but said getting the second-stage data is a “very natural tipping point” after which “an acquisition often follows.”
Other biotech companies may be making similar decisions to improve the chances that experimental drugs will be commercialized, he said. Celsius Therapeutics initially Build independentlyBut after running into problems with funding, the company closed its doors last year as it pursued research and Cutting most of the staff. that Sold to AbbVie The Phase 1 trial was completed in June.
Investors backing private biotech companies may also be more open to acquisitions. Limited partners backing venture funds “are looking for liquidity,” said Novo Holdings’ Mr. Siddiqui. With the outlook for IPOs uncertain, M&A deals give investment firms another way to generate revenue.
Still, he said he is “willing to listen, but not willing to trade at any value.”
At the same time, the pharmaceutical industry is feeling more comfortable going to the private markets for deals. Big pharma is learning about emerging biotech companies sooner than in the past, and “they’re better positioned to get in on the M&A action when the time is right,” said Michael Cohen, co-leader of the venture capital group at law firm Brown Rudnick.
On the private side, more advanced drug candidates may be cheaper than if they were owned by a public company, and better deals may also be struck.
“If their assets are in a public company that’s worth $10 billion in M&A, pharma companies will have to jump through a lot more hoops to justify the acquisition price,” said Carolyn Ng, partner and managing director at TPG Life Sciences Innovations.
For example, AstraZeneca Acquires privately held company Amorit Pharma It was acquired in March for $800 million, one of the largest startup acquisitions this year, though it’s still far below recent multi-billion dollar deals. Morphic Holding and Alpine Immune SciencesLike those companies, Amorit has drugs in advanced testing.
“If things had gone differently, Amorit would have been a public company,” said Novo Holdings’ Siddiqui, who invested in the company. “Because the markets are closed, there are a lot of late-stage companies that are still private,” he added.
They can now have the best of both worlds by “eating their cake a little late.”
