Joe Coletti
Hello and welcome to another edition of Pathfinders, the podcast series from RBC Capital Markets that explores the fast moving world of biotech, and healthcare. I'm your host, Joe Coletti. And I'm here today with RBC Capital Markets biotechnology analyst Gregory Renza to talk about the exciting spate of M&A activity that we're seeing in the space and what it might mean for valuations and the sector in the next 12 months. Greg, great to have you here today.
Greg Renza
Thanks, Joe, for having me.
Joe Coletti
So I want to start with an easy one. I want I want you to give our listeners a little bit more a sense of your own kind of background, where you're coming from and maybe, maybe talk a little bit about your coverage of the sector.
Greg Renza
That sounds great. And it's great to be here. Joe, we appreciate you having us today. Yeah, before we before we get started, so we are part of a nicely established and growing biotechnology equity research platform here at RBC Capital Markets. We cover a vast array of stocks, companies and stories from large all the way down to smid cap companies. I've been, I've been part of equity research for just about 10 years now and prior to my involvement in equities, I have experience in corporate development, management consulting, as well as healthcare science and medicine. It's a nice intersection to look at innovation, and finance.
Joe Coletti
And I think that that's really one of the important things to underscores is the type of background you have and other members of the team have is pretty critical. You know, particularly as the space has grown and matured and changed, you know, over the last decade plus and, and it's something that we've talked about with many of our other guests on here.
Joe Coletti
So let's dive right into the M&A discussion. We've seen a number of big M&A announcements in the biopharma space. We saw some last year Pfizer GBT Amgen Horizon what we've seen a lot so far in the first half of this year, from GSK and Bellis to Merck and Prometheus, even Sanofi and prevention and Pfizer and CGN what's driving this latest wave of M&A?
Greg Renza
Yeah, absolutely. And it's certainly coming into 2023. Investors have been bullish on M&A and have viewed this as one of the biggest tailwinds over this year. And we're starting to see that play out.
Greg Renza
So we continue to hold an optimistic stance on M&A over 2023.
Greg Renza
As large biopharma does sit on all time high balance sheets, those patent cliffs that have bloomed, those have not gone away. And actually, the policy clarity has improved. So we have believed that this could help expand that momentum into this mid cap space more broadly. And some recent trends certainly speak to that. Now, we've certainly seen this M&A appetite among these large Pharmas. And we think this will help to start getting better pulled through from companies who are also advancing their programs and even reporting positive trial results.
Joe Coletti
So we know that not all deals are created equal. And there's a lot of unique, you know, reasons for some of these deals, but I wanted to focus in on, you know, a couple of the really massive deals in the space. You know, for example, the announcement by Pfizer of their $43 billion acquisition of CGN, and Amgen $27.8 billion acquisition of horizon are we going to see more of these real big ticket acquisitions in the next you know, six to 18 months?
Greg Renza
Yeah, it's a great point in in some cases, we focus on deal volume as well as deal size and it's not necessarily about the about that price tag. It can more be about the technology and the strategy and how it feeds into the broader players and competition across the sector. So yes, Big Pharma is looking to bolt on new innovations to existing treatment areas, also looking to expand into new areas by targeting acquisitions that may not actually fit or be more of a logical choice. So this creates actually a landscape of competition. And a landscape of great interest that can drive sort of a rising tide lifts all boats. We viewed the past transactions, whether they're large or small, as validation not just for those individual company efforts that are being acquired, or that are advancing assets and portfolios, but also as validation across the sector. So several other peers across therapeutic areas across interesting or comparable stages, as well as assets that show signals of strategic or blockbuster potential. And I think given the compelling character, and competitiveness of the narratives that we read, not just when deals happen, but as we understand how deals come together, there's actually a potential for more players through partnership and purchase that make these activities far more interesting. And as a result, we do see more strong and sustainable read throughs to the sector, again, not just for specific companies or peers, but also, for the larger subset of companies in general.
Joe Coletti
So you made a lot of really important points there. And maybe, you know, to dovetail off of that, may we look a little bit more at the Pfizer / CGN deal, you know, which, which I know was a particularly eventful acquisition may offer a bit more of a view into sort of the portfolio opportunity and platform value of c Gen itself. How do you think investors and sort of the broader market at large are reacting to that announced deal?
Greg Renza
Yeah, it's been an interesting development over the last year, certainly some ups and downs not just for the CGN specifically, but also for the sector, we've digested some proceedings of interest, some discussions on price and value for assets. And certainly the ability for folks to pull a trigger in the backdrop of not just the fundamentals of the sector themselves, but also a more uncertain macro environment. Whether it actually is in consideration of every turn to normalcy post COVID, or an understanding of how new policy and pricing measures that are coming down from the government could actually affect out your views on drugs and innovation. And think that at the end of the day, we do recognize that there is a scarcity of high quality assets that have been proven and tested similar to GGNs technologies. That tells a nice story for not just the acquirers who are looking but also for those who have comparable technologies, as well as those that have adjacent ones.
Greg Renza
Also, the acquisition interest that came not just from other players, aside from Pfizer did show that strategic collaboration is also an important precursor to when it comes to outright ownership of assets and companies. Essentially, the back and forth, the interplay between the competitors vying for assets does actually suggest that when one is the ultimate winner, and is able to actually acquire the company, there are others who are who are around the hoop. I also think that there are large ambitions for innovators to tackle massive health issues. That is the battle against cancer, its complexity and heterogeneity, maybe a company that wants to help and find representation of key treatments for rare diseases or underserved diseases. There's certainly a high appetite for managing chronic diseases, and also providing prevention for chronic diseases. And this can all sort of help to, to understand the value of not just what needs to be addressed today in the healthcare system, but also in the future.
Joe Coletti
So much of what you said in your answer really speaks to the drive for innovation in the space and how that drive is going to continue to evolve year over year
Joe Coletti
Continuing on the on this thread on M&A If we think about sort of GSKs is acquisition of Bellus, for example, I realize it's not as large as some of the other deals that we mentioned earlier. But what's unique about this one, what do you think was kind of driving this deal?
Greg Renza
Yeah, I think what's interesting about the GSK Bella's tie up in GSK is acquisition for Bellus. Recently and earlier this year, is really about the attractiveness of a market that has yet to be defined. chronic cough is an unproven market. And while we've seen appetite for M&A and strategic interest from players around rare disease in small markets, or interest in larger markets, commercial portfolios, even in the development stages, what's unique about this acquisition is certainly the market has yet to be defined and well Bellis did provide and this will be supplying GSK with a late stage asset. We're talking about one that still needs some work and still needs to be built. And I think that that bodes well for the innovation that we look for, not just with existing and diseases that we understand, but also with new approaches and finding areas of unmet need, where we're where the infrastructure is not established. But the data is there. The other interesting piece about the GSK acquisition – it certainly adds some competitive jockeying between now GSK and Merck now Merck in this chronic cough space. And with respect to Bellus, despite several setbacks on their program over the last several years, we actually have seen some smart drug development, their ability to actually realize value and provide attractiveness not just for the end markets with patients, ultimately, but also with strategic acquirers. I also think there's a there's a narrative occurring certainly in the US, but also ex-US the strategy for European big farmers to grab smaller firms such as with what AstraZeneca did with Syncore, as well as Sanofi with PreventionBio. And I think GSK strategy in the last few years, has been well focused on late stage programs that are close to market. So we're seeing some narratives play out here.
Joe Coletti
So if we, you know, take a step back, look across this landscape, and we look at all these types of deals, do you have a good sense or a read on the types of companies that you think maybe, you know, are more attractive targets, you know, going forward? Or, you know, how large Pharmas might be what they might be looking for, but more specifically in sort of a next wave of potential acquisitions?
Greg Renza
Yeah, there are so many areas of interest from investors, so many areas of interest for large biopharma. And I think some of those areas are, are established in the companies that that we and others track for sure. The areas of complexity and within oncology, I think, continue to remain interesting. And while we saw CGEN certainly represent that with an established portfolio as well as their pipeline, I think there's more room to run there. Also, the greater understanding of our immune system is also driving this. So what we have acquirer interest on many of these settings and environments, we also have to respect the pace of innovation on our understanding of the human body, pathophysiology, as well as targets and differences that some of these drugs can make. In addition, as we focus on some psychosocial factors in society, and to think about the wave of innovation across neurology may be some environmental factors when it comes to cardio metabolic areas that have been drawing interest. And just let's not forget the other factors of the industry when it comes to reasonable policy when it comes to flexible regulatory proceedings. All of those really help and point to synergizing across not just a pace of drug development, but a pace of drug development to get to a point where value can be extracted and also accelerated from some of the strategic activity
Joe Coletti
So staying at this sort of this broader view on the impact of M&A for a second, how do you see it impacting valuations? I guess more specifically, are you seeing a change now? Do you think that may shift or change more as we get into sort of the second half of the year?
Greg Renza
Yeah, it's difficult to say and I think the question always becomes have we reached a tipping point for M&A. And with respect to the perceptions on smid cap biotech we tend to think about the strategic activity as a pendulum, and certainly that that momentum can swing back and forth. And in many respects, the investor does not want to miss when it's heating up, nor do they want to do they want to chase as well, when it's slowing down. So that momentum, and that pendulum can really dictate how one feels about the activity. However, as the actual deals play out, as the strategic interactions come to bear, it's important to sort to ride that wave and be opportunistic. There may still be a number though of riskier early stage stories that have gone public in recent years that have had some setbacks that could have weighed on the XBI. But also, what makes it interesting is their programs continue to advance as they look for funds and put their funds to work. So there could be other inflection points on the horizon that help to attract this interest. And it's not just about data deserts, it's not just about lulls in data activity, we're starting to see more readouts. And the markets maybe behave more fundamentally, that is good data can be getting rewarded. And on the flip side data that might be mixed or uncertain or even negative, we will be seeing funds steer away from those because they're just not providing that, that conviction. I think there have been enough positive catalysts and M&A activity of late that should help smid caps appreciate and bring biopharma to the forefront of investors’ minds. I also think that we're in a fortunate position where these large global players are also well organized around these therapeutic areas. And around these innovations. They are staying attuned to this evolving landscape in such a way that when science and value are proven, they're ready to step up, deploy their resources and help to potentiate that opportunity.
Joe Coletti
So final question on the M&A front. And maybe this is, you know, you've talked a little bit about looking forward. Is there anything else that you want to touch on about what we can expect from M&A moving forward, and whether, you know, it will also continue or pick up from its current pace?
Greg Renza
Yeah, that's the billion dollar question. And deal making has always been intrinsic in drug development. And in some ways, these deals are as important as the scientific breakthroughs and bringing drugs to market. It's difficult to predict, however, because as the state of innovation remains strong, over this year, through the decade and beyond, we do know that an intrinsic part of value creation in the sector remains that M&A activity in addition to compelling data and the ability to make a difference for patients. So this need for strategic activity, whether it's through partnerships, mergers or acquisitions across the sector, does help to define that understanding that we are making the right decisions with how we deploy funds and capital. Big Pharma does have the clout to get drug drugs through approval and onto market. While small pharma does have that nimble nature and an innovative culture that helps them focus on new avenues of research. And while 2021 and early ‘22 were perhaps quieter on the M&A front, we do see hints of this starting to change. And there are a great deal of potentials and there are several potential mid cap and small cap biotechs out there.
Joe Coletti
Thank you, Greg, this has been a really excellent conversation around M&A, which, as I said, is certainly one of our favorite topics on the podcast and a popular one with our listeners. Before I let you go, I want to mention one more thing. RBC Capital Markets does have its Global Healthcare Conference coming up Nay 16, and 17th. And I know that the M&A conversation is going to continue with you on a special panel we have this year, could you maybe just give us a little bit of a teaser on who we've got on the docket?
Greg Renza
Absolutely. And once again, we're really excited to have a panel that essentially drives that these topics that we've discussed today, Joe. Really about the strategic activity, not just going forward in the sector, but also looking back on what's gotten done. And we're going to have a chance to speak with those who've been on the front lines. So we're going to hear from executives from Global Blood therapeutics from Biohaven, from SynCore, and even from Nimbus, to talk about what it took to actually create that value that we've been talking about today. So we really look forward to that time. It's a timely and high interest topic.
Joe Coletti
And I look forward to being there in person and we're going to be recording some podcasts in person during the conference as well. So stay tuned for that. So Greg, really appreciate your time and thanks for being here again today.
Greg Renza
Thanks, Joe. It's been a pleasure.
Joe Coletti
Thank you for listening to another episode of Pathfinders and biopharma, brought to you by RBC Capital Markets. This episode was recorded on May 4, 2023. If you'd like to learn more, or continue the conversation, please contact us directly or visit rbccm.com/biopharma. If you're enjoying Pathfinders in Biopharma don't miss an episode, subscribe to us on Apple, Spotify or wherever you listen to your podcasts. See you all next time.