Published February 17, 2021 | 5 min read
Key Points
- Biotech companies continue to outperform – the S&P Biotech Index is up 18% already this year. IPOs have been incredibly well received YTD, alongside a significant uptick in SPACs as a means of going public.
- In the current climate, many firms are choosing to IPO well ahead of significant clinical and regulatory catalysts so that they can benefit from valuation ‘pop’ as a public company.
- Healthcare M&A activity is also resurging and remains an important tool to enhance R&D pipelines for mid- and large-cap pharma companies with strong balance sheets.
- Many large-cap pharma companies have made big bets on select therapeutic areas and will continue to aggressively pursue M&A opportunities to develop real leadership positions in these areas.
- Whether it’s a merger, an IPO, a SPAC or a sale to a strategic, companies should aim to keep as many options open as possible to maximize value.
The dynamics shaping deal-making across the biotech sector are rapidly changing. Companies from all areas of the industry are starting 2021 with attractive valuations and have the full attention of both specialist and generalist investors.
With expectations running high, how can companies plan the right path forward? RBC Capital Markets’ fast-growing healthcare team shares its unique vantage point on the ever-evolving landscape.
Strength in numbers
“We saw some startling capital formation in 2020,” says Andrew Callaway, Global Head of Healthcare Investment Banking. “There were 76 biotech IPOs in 2020 across biotech, raising a total of $17 bn. We saw 74% of these IPOs price at the top or above the top end of their pricing range. Amazingly, the 2020 IPO class is up 66%.”
“We’ve also seen an explosion in the amount of SPAC capital raised, with $69bn in 2020 compared to $43bn over the prior 10 years. A record 86 SPACs came to market during January raising $23 billion, so the significant momentum in this asset class continues. Across the life sciences sector, we’ve seen 34 SPACs go public over the last 12 months, raising approximately $4.5bn. 30 of those are actively seeking investment opportunities at the moment, so we can expect more activity in the years to come.”
“We’ve seen an explosion in the amount of SPAC capital raised, with $69bn in 2020 compared to $43bn over the last 10 years. A record 86 SPACs came to market during January raising $23 billion, so the significant momentum in this asset class continues.”
Andrew ‘Cal’ Callaway, Global Head of Healthcare Investment Banking, RBC Capital Markets
Biotech IPOs reach fever pitch
IPOs are also booming in biotech. “The IPO market performed exceptionally well in 2020, up 66% on the year,” says Jason Levitz, Managing Director, Healthcare Equity Capital Markets. “That’s a staggering statistic. But what’s also remarkable is that 42 companies from that biotech class of 2020 now have market caps greater than $1bn. Half of those have market caps greater than $2bn. Clearly, this is a sector that’s commanding a lot of investor attention right now.”
So, in the current climate, when does an IPO make the most sense? For Noël Brown, Managing Director and Head, US Biotechnology Investment Banking, it comes down to the interplay of several inflection points.
“The first is when a company’s capital needs go beyond what can be met from any kind of a private capital raise,” says Noël. “The second is when private investors push for a more liquid-traded security. IPOs don’t necessarily provide immediate liquidity for those investors, but it does put them on a path towards it. The third is that you can’t always realize the same valuation bump following positive clinical data as a private company. Public companies get a better lift on achieving important clinical data.”
Healthcare IT joins the IPO boom
The healthcare IT (HCIT) sector also witnessed a significant spike in IPO activity in 2020, which Howard Dingle, Managing Director, Healthcare Investment Banking, expects to continue in the year ahead. “We’re seeing companies across several HCIT sub-verticals, whether that’s telehealth, tech-enabled providersor payer solutions, achieving pretty robust values in the public markets.”
“There’s still an accelerated need for HCIT solutions to help providers reduce costs, improve consumer engagement or manage patient data. The capital raising requirements to address those needs presents further opportunities for growth, so the public markets are going to continue to be an attractive option for companies and investors.”
The rise of the SPAC
2020 also saw a significant number of companies turning to SPACs as a non-traditional means of going public. But what exactly is a SPAC and what’s really required to get it over the finish line?
“At its core, a SPAC (or a Special Purpose Acquisition Company) is a listed vehicle created for the express purpose of identifying an acquisition target and effecting what’s called an initial business combination,” explains Jason Levitz. “So the SPAC completes an IPO, lists on a major exchange, and holds the cash in trust for up to two years until it finds a merger partner.”
So why have SPACs suddenly become so popular? “One thing that’s really helped the proliferation of SPACs is that the structure now facilitates a greater certainty of deal closure, which is very appealing to corporates and investors wanting to avoid market risk, even in biotech where the investor universe is a lot narrower and more specizlized.”
What considerations should a company keep in mind when evaluating SPAC opportunities? According to Noël Brown, “The optimal biotech SPAC target is a pre-crossover private company with an emerging product pipeline that’s going to have significant and steady clinical news-flow over a three-year period. In that respect, the profile of the company shouldn’t be that different from one planning a successful IPO.”
“Another consideration,” says Noël, “is the level of sensitivity to the two-step dilution of a crossover and an IPO. If you or your investors are dilution sensitive, SPACs may be a solution. There’s also the potential to avoid the risk of market volatility, because you’re in direct negotiation with the sponsor of the SPAC as opposed to the scrutiny of public market investors on an IPO roadshow.”
M&A picks up pace
The second half of 2020 also saw a resurgence in M&A activity, with a significant uptick in biotech deals. “Most of the M&A activity in the healthcare sector continues to center around biotech, with over $150bn of M&A deals in biotech last year,” affirms Ahmed Attia, Head of of Healthcare M&A.
“There are three key drivers behind this activity,” says Ahmed. “The first is the need for continued innovation. For many mid- and large-cap pharma companies, M&A remains a primary route to achieving an edge in innovation and R&D. The second is that the top 15 large-cap pharma companies have over $150bn of cash on their balance sheet that they may need to deploy to fill gaps in their future revenue.”
“The third is a renewed focus on specialization and divestitures. Many large-caps have taken big bets on select therapeutic areas, so we’ll see continued investment in the areas they decide to specialize in.”
M&A activity in HCIT has also been incredibly active given the themes around technology convergence and the overall macro environment.
“For many mid- and large-cap pharma companies, M&A remains a primary route to achieving an edge on innovation and R&D.”
Ahmed Attia, Head of Healthcare M&A, RBC Capital Markets
Deal or no deal: making the right decision
Clearly, the market is changing rapidly with robust IPO activity, a dramatic increase in SPAC capital formation, and a need for M&A to enhance growth prospects and replace revenues at risk from near term patent expirations.
Which option is best? And what can management teams do to be prepared to make the right choice when the time is right?
For Ahmed Attia, the key is to keep as many options open as possible. “I think you need to make sure that you’re ready to navigate various strategic alternatives,” says Ahmed. “I encourage clients to think through all the pros and cons, whether it’s a merger, an IPO pathway, a SPAC or a sale to a strategic, so that a client is positioned for for success for whatever pathway presents itself.”
“Right now, there are several viable options. Equity capital markets are robust. M&A activity is strong. Ultimately, you should think about your value inflection points, with respect to your upcoming clinical trials and data, and try to have as many opportunities to maximize value as possible.”
