Pathfinders Podcast

The M&A Pool Set to Accelerate Biotech Innovation

Q1 2024 saw a handful of IPOs in the biotech sector, and mounting excitement over novel treatments. But there are less obvious trends in play, including a shift in focus by potential buyers in pharma. RBC’s biotech investment banking team analyzes deal activity in the year to date and what it signals for the sector’s future.

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By Hosted by Joseph Coletti
Featuring Timothy Chung, Richard Hsieh & Alex Lim

Published April 8, 2024 | 2 min read
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Key Points

  • Major pharma players are now looking to buy earlier-stage biotechs in search of long-term value.
  • Many biotechs are well placed for sale or IPO after focusing on efficiency and delivery.
  • Valuations are settling while innovations are driving momentum in early-stage companies.
  • Collaborations between big and mid-cap players are creating confidence for outside investment.

M&A: the giants turn to long-term investments

2023 saw big pharma players focus on acquiring late-stage commercial assets in biotech. Now that trend is shifting.

Rather than simply fill revenue gaps, major companies are looking to the long-term, observes Alex Lim, Managing Director of Biopharmaceuticals. He points to pharma companies seeking acquisitions in the obesity field, with the aim of catching up with market leaders Novo Nordisk and Eli Lilly.

“They’re not just looking at near-term revenue, but at fundamental science and how it might impact the broader patient treatment experience over decades,” he says.

“I think that bodes well for our clients who are looking for innovative ways to address this really  important disease area.”

Richard Hseih, Managing Director for Biopharmaceuticals, agrees: “We might see a shift over the next couple of years towards earlier stage acquisitions.”

He also highlights big pharma’s recent purchase of platforms in areas new to them, such as Bristol Myer’s acquisition of Karuna Therapeutics and its experimental schizophrenia treatment, and Lilly’s step into radiopharma via Point Biopharma.

“We might see a shift over the next couple of years towards earlier stage acquisitions”

Richard Hseih, Managing Director, Biopharma Investment Banking

 

Financial discipline tees up potential IPOs

The first quarter of 2024 has seen a handful of biotech IPOs. Tim Chung, Director of Biotech Investment Banking, says companies are finally able to extend their cash runways: “Private companies are able to top up the balance sheet from prior years when they couldn’t extend runways.”

Chung predicts there will be 30 to 40 IPOs over the full year, with the US election compressing activity into the first nine months.

After a challenging couple of years, financial discipline and good planning have paid off for biotech companies, says Lim. “It’s been really impressive to see the whole industry focus and maximize their ability to stretch every dollar. Because they’re delivering on important milestones, they’re going to have the ability to raise money and look at the IPO markets.”

Chung notes the return of dual-track IPO/M&A processes, as companies consider these options in parallel: “Sometimes, the offer from big pharma is too good to pass up, and management teams end up selling their company, and forfeiting the dream of running a public biotech company.”

“It’s been really impressive to see the whole industry focus and maximize their ability to stretch every dollar”

Alex Lim, Managing Director, Biotech Investment Banking

 

Valuations improve, momentum builds

The team sees signs that the biotech valuation gap of recent years is starting to close. Hsieh notes that the S&P Biotech Index (XBI) recently hit a two-year high.

“Private company valuations are still re-rating, as public markets are settling,” he says. “We’re optimistic that valuations will continue to improve over the course of ’24.”

Chung notes particular continued activity in the autoimmune sector, driven by allogenic CAR-T and T cell engagers.

Antibody-drug conjugates are also creating excitement: “Everybody wants to have an ADC program.” These developments are helping build momentum in early-stage companies, he says.

 

Partnerships inspire investors to pitch in

Collaborations remain popular too, as a cost-effective way for companies to drive innovation.

Mid-cap biotechs often look to larger partners to gain the capital required to run big trials, says Hsieh. “They need these partnerships with large pharma, and large pharma is certainly looking to expand its own pipelines on the earlier side,” he says.

This type of deal has a knock-on effect for further investment, says Lim, providing the confidence investors need. “Big pharma stepping in with partnerships or investments in companies in turn provides an opportunity for investors to follow suit,” he explains.

“Big pharma stepping in with partnerships or investments in companies provides an opportunity for investors to follow suit”

Alex Lim, Managing Director, Biotech Investment Banking

 

M&A cash set to accelerate innovation

Lim puts the return of capital of M&A executed in the sector over the past year at around $30 billion. “That’s going to get recycled back into the market. I think it’s a real accelerant to what is happening in our sector,” he says.

Chung agrees: “The more money that investors have redeploy in the space, the more shots for companies to potentially come out with best-in-class drugs.”

Overall, the team is positive for a continuing flow of capital into the sector through the coming year. Hsieh concludes: “We’re excited to see all the clinical developments companies are making. I think 2024 bodes extremely well for biotech.”


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