Joe Coletti
Welcome to the Pathfinders, a podcast series from RBC Capital Markets, where we explore the dynamic world of biotech and healthcare. I am your host, Joe Coletti.
In today’s episode, we continue our conversation with RBC’s Biotech investment banking team. We’re joined again by Managing Directors, Alex Lim and Richard Hseih as well as Director Tim Chung.
As part of our discussion, we’ll explore the recent surge in biotech deal activity and look ahead at sector’s prospects – including how big pharma players are seeking long-term value, how biotechs are positioning themselves for sale or IPO, and more.
Welcome everyone. Great to have you here. Let’s dive in.
Tim Chung
Great to be here, Joe.
Alex Lim
Thanks, Joe.
Richard Hseih
Thanks for having us.
Joe Coletti
Alex, how do you expect deals to come together in the second half of the year? What kind of activity are you seeing now? You know, what are you learning from your conversations with clients?
Alex Lim
I think the theme has been over the last six months to a year, really, you know, big pharma looking for late stage commercial assets to acquire from biotech. And I think there's been a significant run of those, end of the year and beginning of this year, I think we're switching to a little bit of a different kind of mood in that, you know, pharma companies and big biotech companies really thinking about how to build for long term and not necessarily fill, you know, revenue gaps, right? You're, you're seeing this play out in themes like obesity, where, sure Novo and Lilly have done a lot to build their business and kind of become leaders there. But you're seeing a lot of pharma companies do deals around this area to try to catch up to try to go at it with different mechanisms and modalities and, and so that's exciting to see. And I think that it impacts the whole ecosystem, because they're not just looking at near term kind of revenue, but they're looking at fundamental science and how it might actually impact the broader patient treatment experience over decades, right? And I think that bodes well for our clients who are spending time looking for innovative ways to address this really important disease area.
Richard Hseih
Yeah, Alex, I think you bring up a good point. And if as we look over the course of the last year or two, a lot of the acquisitions have been much more asset centric as particularly large pharma has had been looking to feel a fill their pipeline and for some of their near term patent expirations. So they're looking at either late stage or commercial stage products. We will hopefully actually see a little bit of a shift now though, as some of these pipelines are being filled on the back end, for them to start to look at earlier stage companies now to fill some of the earlier stage pipeline. So we might see a shift over the next couple of years towards earlier stage acquisitions. And also to that end, you know, there are some large pharma companies that are better positioned already, to the likes of Novo and Lilly, who do have foreseeable revenue with some of their obesity franchises. So I could easily see them focusing more on filling other therapeutic areas or earlier stage pipelines and making acquisitions on that front. We're also seeing large pharma branch out and acquiring platforms that are not preexisting within your portfolio. We saw Bristol Myers acquiring Karuna. And then we also saw the likes of Lilly last year acquiring Point Biopharma and adding radiopharma capabilities into their portfolio as well. So we might be seeing more of that play out over the next couple of years.
Tim Chung
And obviously a lot of excitement in M&A coming back in a more so in the sub $10 billion valuation range takeouts and you know, with, with strong M&A, generally strong capital markets as, as the beltex (inaudible) generally strong clinical data, there's more and more interest for large pharma to take out these companies and, and what that's going to be, you know, return on capital to these investors and, and obviously, redeployment back into the space, so, you know, M&A, and capital markets all working well, together is obviously great for the biotech markets.
Joe Coletti
So want to shift gears again, to the private markets. Can you talk a little bit about what your what activity are we seeing in terms of funding rounds? You know what is the sort of state of play right now?
Tim Chung
So we obviously talked about the IPO markets, we're talking about the private markets. So there's the sub 10 IPOs, that went out this year, definitely a healthy start, you know, probably see 30 to 40 IPOs, for 2024. Performance have been mixed, obviously, you're still in the early days, but we should expect to see the pace pickup, especially given we're in an election year, generally, you know, a lot of these deals will be compressed to call it the January to September timeframe, versus the full 12 months that we typically have in a non-election year. However, you know, we're seeing companies get flat rounds to up rounds now. And so companies are extending cash runways and, you know, being judicious about their spending, getting more data with less proceeds, we're also seeing company's top of the balance sheet, from prior years where they couldn't extend the runways, and now they're thinking about tapping the IPO markets much earlier than they would have. So it's, it's a great start. For the year for the for profit companies.
Alex Lim
I've been really impressed with many of our clients, but also, you know, other companies, other private companies that have really spent the last couple of years kind of taking the lessons of kind of really financial discipline, and really planning their business well, you know, to kind of maximize the funding they've received, and to deliver on milestones, so that they can, you know, look for their next financing. It's been really impressive to see kind of the whole industry really kind of focus and maximize the, you know, their ability to stretch every dollar so, so I think you're going to find private companies have more options. So because they're delivering on, you know, more important milestones, and so, they're gonna have the ability to raise money, and they're gonna have the ability to look at the IPO markets, they're gonna have the ability to, you know, sell their companies or your partner out, you know, assets and get non-dilutive capital. Given some of the things that have happened, you know, the challenging times that have happened in the last couple years, I feel like most of our clients are better prepared to address kind of whatever this upcoming mark is going to look like.
Tim Chung
And Alex, we're seeing that dual track IPO M&A processes come back, a lot of these companies are doing this in parallel. And seeing you know what value they can ultimately get from large pharma. And sometimes, you know, the offer is too good to pass up. And management teams ultimately end up selling their company prior to going public. And, you know, forfeiting the dream of running a public biotech company. But, you know, as we've all seen, you know, markets change on a dime. And sometimes it's not all that glamorous as it is, and, you know, just saying, Hey, this is good, this offer is great. And we're going to take this and call it a day.
Joe Coletti
So Richard, let’s turn to you for a second, let's just talk about valuations for a moment. How are the clients? I think also and investors kind of looking at valuations and biotech right now, you know, are they? Are they too low? Are they too high? Like, you know, are people kind of in a wait and see kind of mode? What's your, what's your take on it now?
Richard Hsieh
I would definitely argue as massive value dislocation within the biotech market. What I would say though, and now in 2024, the markets been much more constructive. I think valuations have improved over the last few months, buoyed by a number of tailwinds that we've already mentioned, the strong M&A, some good clinical data that's been reading out across biotech. So, I would say that sentiment and valuations have improved, and the XBI particularly as hit sort of a two year high, not long ago. So, you know, I would say that valuations are improving, but I would still say that there's more room to go to be fully valued here. I think that private company valuations are still, you know, particularly kind of re-rating as the public markets are settling. So we're optimistic that valuations will continue to improve over the course of ’24.
Tim Chung
And to add to that point, you know, we are also seeing a lot of momentum plays happening in autoimmune, right? Its allogeneic CART T-cell engagers. Saying that a company is going to target an XYZ with an autoimmune stock, we're seeing stocks go as high as 100 plus percent or even doubling. So we are seeing a lot of tailwinds. And also an ADC space. Everyone wants to have an ADC program. So you know, this all to say that the markets becoming healthier and having more momentum into these earlier stage companies.
Joe Coletti
So Rich, what about partnerships or joint ventures in place of M&A for example? What? What kind of conversations, are people still thinking about this? Is this still something that is, you know, a viable option, you know, in some instances?
Richard Hsieh
Well, mid cap biotech is always looking to partner with fluid large cap, to advance, you know, maybe certain programs in their pipeline that aren't necessarily a priority, or is just outside the scope of what US mid cap biotech can do, you know, some of their programs can be addressing, you know, larger patient populations and require more capital to be able to run the trials. So they need those partnerships with large pharma. And large pharma is certainly looking for, to expand their own pipelines as well as on the earlier side. So, you know, absolutely, I think that we're seeing a lot of partnerships and collaborations still occurring in the market, it's a cost effective method, and to drive innovation.
Alex Lim
And I think, investors, we've seen, you know, really appreciate what the pharma companies, how they validated some of some of these biotechs, and kind of how they followed those investments with their own money. So, we've seen deals being catalyzed in the market, by, you know, big pharma stepping in with partnerships or investments in companies, which then in turn, are going to provide an opportunity for investors to say, ‘you know, okay, you know, we see, you know, the pharma companies believing in the technology, you know, we're happy to follow suit and put our money in to support, you know, these companies as well.’ So, pretty interesting change, kind of subtle, but definitely has been, a part of the theme here, as we're the sectors are covering.
Joe Coletti
I want to close by taking a quick look ahead, Alex, maybe we'll start with you. So thinking ahead, what are you going to be watching most closely for the rest of the year?
Alex Lim
Yeah, you know, I'm really excited about our sector. You know, obviously, I don't, I'm not in the business of predicting, you know, what the markets will do, and how all the macro factors going to impact us. But I'm really just excited about the fundamentals of the business. And I think one of the things that has been, in my mind for the last few weeks has been this kind of return of capital from all the M&A that's been executed over the last, you know, three, four quarters. So I think the number the last I heard was about $30 billion, that's kind of gonna get recycled back into the market. So I think it's a real accelerant to what is happening in our sector.
Tim Chung
I completely agree. You know, the more the more money that investors have to redeploy in the space. It says more shots on goal for companies to potentially come out with best in class drugs.
Richard Hsieh
I think that 2024 bodes extremely well for biotech. We're excited to see all the sort of the clinical developments that companies are making. And as such, I think with the positive developments, hopefully more capital flows into the sector and continues to trend well, so it's very, very optimistic time for biotech.
Joe Coletti
Tim, Alex. Richard, thanks so much for joining us again today. It’s clear we all have a lot to be excited about when we look at the forward outlook for the sector and what we can expect from the deal market over the course of this year. Appreciate you all being here.
Alex Lim
Thanks for having us, Joe.
Tim Chung
Thanks a lot, Joe.
Richard Hsieh
Thanks for having us, Joe.
Joe Coletti
Well, that's it for our conversation today. Thanks again for listening to Pathfinders in Biopharma brought to you by RBC Capital Markets. Please remember to subscribe to get more great content and be alerted about future episodes. This episode was recorded on March 15, 2024. If you'd like to learn more or continue the conversation, please visit rbccm.com/biopharma. See you next time