Biopharmaceutical Sector Update:
Evolving Financing and Deal Environment
January 20, 2022
In this report, we examine the biopharma sector as we start off 2022 and are almost two years into the ongoing COVID-19 pandemic.
Start of 2022 and the JPM Healthcare Conference
This is not a normal year. If you asked around in Q4 last year, most observers would forecast a strong kick to start this year, highlighted by plentiful M&A. In fact, thus far in 2022 there have been zero M&A deals on the tape for $100mm or more. Pharma balance sheets are generally quite strong. Why the paucity of M&A? Conversations we have had with big pharma reveal an obvious truth. The valuations of targets are falling quickly and, in general, companies are seen as still very richly valued.
The year has seen poor returns in meme stocks, biotech and SPAC stocks. Biotech, is now down 15% for the last month while diagnostics, CDMO’s and tools aren’t doing much better. We view the current downdraft in biotech, diagnostics, CROs etc. as substantially linked to investor redemptions from healthcare hedge funds that underperformed in the second half of 2021.
Biopharma public issuance has been slow with three IPO’s in the U.S. so far this year and far slower follow-on equity volume than a year ago. One interesting metric to follow is the trailing ratio of four weeks equity privates volume in biopharma to four week’s public follow-on volume.
Traditionally, the ratio would be well under one as public company’s tend to use up and command much more capital than privates. Last week this ratio was above three.
Uncharacteristically, four of the largest financing transactions announced last week involved investments from strategics (SK, Roche, BMS and Sanofi). The equity privates market is seeing crossovers fade away while strategic investors are stepping up.
Jamie Dimon, CEO of JP Morgan, tells participants that 2022 will be a huge year for healthcare. He also talks on CNBC about the importance of managing healthcare costs.
Biotech Market Condition
We have taken a close look at the biotech market given how challenging the environment has been in the last two months.
We find that the Bear Market has been indiscriminate. Both large cap and small cap biotechs have been hit hard. Over 85% of biotechs traded down last week and more than two thirds are down over the last two months. The companies that have done best have been in markets that have been unreachable by beleaguered hedge funds such as China.
When we drilled down by subfield we found that gene editing companies have done well while most of the rest of the market has been savaged by the market downdraft.
Particularly hard hit have been some of the more fashionable parts of the market including AI, precision oncology, radiopharmaceuticals, biologic antibodies, cell therapy and virology companies.
On a more positive note, biotech balance sheets have never been stronger. The median net cash position of a top 500 biotech company in the world is $137 million.
We cannot say if the market will rapidly bounce back or not but we think it is most likely that the biotech sector will largely stay down given the ongoing redemptions of capital from the sector. Historically, capital tends to exit fast and filter in slowly.
This is obviously an important year for biotech companies to deliver meaningful clinical data and innovations. Given equity market weakness, this is going to be an important year for partnering, M&A and other nondilutive capital raising mechanisms including royalty financings, project financings and debt issuance.
Torreya’s Ten Themes to Watch in 2022
We asked around our own firm and identified ten themes that our bankers expect to see play out in 2022:
- ADC’s were huge in 2021 and are going to be even bigger in 2022. These drugs work really well.
- High tech merged with biotech in the last two years. All of a sudden, our industry has gone from hoping to find drugs through screening and luck to an engineering challenge. We will see huge progress on drug design using new methods in the next decade.
- A big trend in 2021 was the primacy of primary care. We have been in a rare disease / oncology focused biotech world for so long. The two largest value gainers last year were Novo and Lilly. We expect to see increased success from investment in common diseases. The FDA wants this to happen.
- There are a lot of interesting companies out there right now. Our favorite company to watch is Eikon.
- Watch innovation from China. China has gone from copying Western generic medicines to developing their own innovative drugs in five short years.
- Real businesses are back. We expect to see more investment returns from companies that actually have profits including pharma services.
- Along these lines we expect to see increasing consolidation among mid-cap and specialty pharma worldwide.
- We see huge breakthroughs coming in proteomics. The findings from high-throughput mass proteomics from groups like Amgen & Somalogic have the promise to transform medicine and are just starting to be felt.
- Digital therapeutics will start to get real respect. We see 2022 as the year when digital therapeutics from companies like Pear, MEDRhythms and Luminopia get real reimbursement and go mainstream.
- Virtual care, ePharmacy and eDispensing of medicines continue to grow exponentially.
Please contact Torreya if you have any questions or comments: