MORF - What is behind biotech M&A resurgence?

2023-04-23 12:00:00 ET

Biotech deal-making is on a roll, with more than $12B worth of transactions announced over the past week alone, and, according to industry observers, the trend is expected to continue in 2023, supported by macro and certain industry-specific factors.

Days after Merck ( NYSE: MRK ) agreed to acquire immunology-focused Prometheus Biosciences ( RXDX ) for ~$11B last week, British pharma giant GSK ( GSK ) inked a ~$2B deal to scoop up Canadian biotech Bellus Health ( BLU ).

The acquisitions implied nearly 75% and 103% premiums, over their pre-announcement prices, respectively, far ahead of the 33% premium Pfizer ( NYSE: PFE ) offered for cancer drug maker Seagen ( SGEN ) in its $43B buyout deal last month.

In Q1 2023, total M&A in healthcare and life sciences reached ~$71B, more than double the value of $28B deals inked during the prior-year period, according to KPMG. That contrasts with a sharp decline in total U.S. M&A activity this year as deals dropped to ~$300B in Q1 compared to ~$400B in the corresponding period last year amid concerns over rising interest rates and a waning profit outlook in a slowing economy.

"We are entering a period of what I would call smart optimism in healthcare and life sciences," argued Kristin Pothier, KPMG's healthcare and life sciences deal advisory and strategy leader.

According to Moody's Investor Services, pharma giants such as Bristol-Myers Squibb ( BMY ), Royalty Pharma ( RPRX ), AbbVie ( NYSE: ABBV ), Biogen ( BIIB ), Gilead Sciences ( NASDAQ: GILD ), Pfizer ( PFE ) and Viatris ( VTRS ) are on the lookout for substantial acquisitions in the near term.

A favorable financing outlook for big pharma supports current biotech deal-making activity as the Federal Reserve becomes less hawkish in raising interest rates, Seeking Alpha analyst BiotechValley Insights argues.

In the face of upcoming patent cliffs for the likes of Pfizer ( PFE ), Merck ( MRK ), Novartis ( NVS ), GSK ( GSK ), and AbbVie ( ABBV ), "the $1.4 trillion in dry powder on biopharma balance sheets at 2021's end presents an unparalleled opportunity for M&A activity to thrive," the SA author added.

Meanwhile, Jefferies strategist Will Sevush contends that acquirers, thanks in part to recent data readouts that help determine M&A decisions, have gained a better understanding of potential buyout candidates after a wave of new company formations over the past few years.

"There's an increased amount of clarity on first-in-class, best-in-class assets," and buyers are ready to dole out attractive offers for companies with scarcity value, Sevush said, referring to Pfizer ( PFE ) – Seagen ( SGEN ) deal.

As for individual stocks, Jefferies placed BioMarin ( BMRN ), Alnylam ( ALNY ), Madrigal ( MDGL ), and Cytokinetics ( CYTK ) as biotechs with a high deal probability. The list, based on a buy-side survey conducted by Sevush, previously included Prometheus ( RXDX ).

Citing the company's validated RNAi therapeutics platform, $1B topline, and five approved therapies, RBC Capital Markets also considers Alnylam Pharmaceuticals ( ALNY ) a potential buyout target.

“Takeouts should once again be on investors’ minds,” the analysts wrote, highlighting 89Bio ( ETNB ), Intra-Cellular Therapies ( ITCI ), Karuna Therapeutics ( KRTX ), Pliant Therapeutics ( PLRX ), Xenon Pharma ( XENE ), Arrowhead Pharma ( ARWR ), Morphic ( MORF ), Ideaya Biosciences ( IDYA ) and Verrica Pharma ( VRCA ) as other potential buyout candidates in their coverage.

“Sellers are more willing to sell because they know there is not a supportive capital markets environment for every single biotech going forward,” Bloomberg quoted Jefferies’ Sevush as saying during an interview.

Seeking Alpha’s BiotechValley Insights shares similar views, arguing that the financial difficulties faced by small and mid-sized biotechs have made them ideal takeout targets amid a plunge in valuations.

The SPDR S&P Biotech ETF ( XBI ) has lost more than 50% from its Feb. 2021 peak, while the broader healthcare sector represented by Health Care Select Sector SPDR Fund ETF ( XLV ) has added ~16%, as indicated in this graph.

“The accelerating M&A fervor in the biotech sector presents a prime opportunity for investors to profit from the increasing valuations of small and mid-cap biotechs,” BiotechValley Insights wrote, citing XBI as their preferred method to benefit from the trend.

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