When it comes to biopharma deals, 2022 has picked up where 2021 left off in one key respect: Companies are much more inclined to deploy capital expanding pipelines and building up their businesses through collaborations than through mergers and acquisitions (M&A).
While the first few weeks of 2022 have seen dozens of strategic partnership announcements by companies committing up to $1 billion-plus, the new year has seen only a handful of acquisition deals to date.
Among them: UCB agreed to shell out up to $1.9 billion for rare disease drug developer Zogenix on January 19. A day earlier, Sema4 said it will acquire from OPKO Health its GeneDx subsidiary, which focuses on genomic testing and analysis, for approximately $623 million. And earlier this month, Merck KGaA, Darmstadt, Germany, agreed to buy the contract development and manufacturing organization (CDMO) Exelead for approximately $780 million.
In a recent report, EY (the professional services firm originally known as Ernst & Young) noted that 2021 saw the second-lowest total value of biopharma M&A since 2014—a combined $108 billion last year. That’s down 16% from $128 billion in pandemic-wracked 2020, and a 59% drop from the record-high $261 billion in 2019.
However, the volume of M&A deals rose to 90 in 2021 from 66 in 2020, four more than in 2019, a year in which biopharma deals totaled a record-high $261 billion. EY reported the data in its 2022 M&A Firepower Report, whose publication was timed to coincide with the recent virtual J.P. Morgan 40th Healthcare Conference.
Subin Baral, EY Global Life Sciences Deals Leader and a co-author of the report, gave GEN Edge three reasons to explain biopharma gravitating more towards collaborations than M&A:
- Valuations for potential takeover targets have remained high enough to steer companies toward partnering with rather than buying.
- Those high valuations have prompted companies to pursue scientifically de-risked assets of interest, such as later-stage drug candidates that have generated positive clinical data.
- The speed of innovation for biotechs continues to accelerate, which is driving partnership activity.
“We should expect higher deal volumes in 2022 because of multiple collaborations with new technologies, and the pace of innovation is so fast. These buy-versus-build decisions are becoming increasingly hard for companies,” Baral said, “People are constantly looking to de-risk some of these collaborations to get the optimal outcome. I think that is where, even though it’s a seller’s market, we are seeing less M&A than what we had in 2019.”
Hurtling toward patent cliff
Another driver of collaborations, he said, is the loss of exclusivity that 25 biopharma giants are facing as several longtime top-selling drugs face the end of patent protection.
Among drugs hurtling toward the proverbial “patent cliff” by 2023 are blood thinner Xarelto® (rivaroxaban), co-marketed by Bayer and Johnson & Johnson; and Eylea® (aflibercept), co-marketed by Bayer and Regeneron Pharmaceuticals for wet age-related macular degeneration (AMD) and other eye disorders. Last year, Bayer projected a resulting “low- to mid-single digit percentage decline” in 2024 pharma sales, to be followed in 2025 by a return to sustainable growth.
As a result of the patent cliff, EY has projected that the compound annual growth rate for those larger biopharmas will drop by half in 2024 to 2.6% from 5.2% the previous year, compared with an expected 7.5% growth rate for the entire biopharma industry.
“With the patent cliff, there is increasing pressure for the large biopharma companies to look for external innovation. So, this is why we are seeing companies active on collaboration and partnership, to be able to gain access to these newer technologies, new modalities, new therapeutic areas and what-have-you,” Baral said.
The new collaborations, he added, offer the potential for additional M&A activity this year and beyond “because you at least have access. You have a seat on the board. You understand the company better.”
Over the next five years, he predicted, innovations that fuel biopharma growth are expected to come from outside of established market leaders and established classes of biopharmaceutical products that have historically driven growth.
These include what the report defines as “new modalities” outside of conventional small molecule drugs and biologics. They include next-generation antibodies, cell and gene therapies, DNA- and RNA-based therapeutics, oncolytic viruses, bioengineered vaccines, gene-edited medicines or molecules, and next-generation biologics.
Such “new modality” drugs are expected to account for 17% of sales by 2026, with biologics continuing to command the largest share (43%), followed closely by conventional therapy (40%).
“We expect a lot of activity and some of what we are seeing more is companies are forced to look at external innovation than just having to build that internally,” Baral explained. “The question remains, because of the higher valuation and execution risks would we see the level of straight out M&A or collaboration?
He added: “Our view is the companies have invested more in alliances and partnerships than in straight M&A. That trend will continue into 2022.”
Baral offered two additional reasons for projecting an uptick in collaborations. One is the continued availability and flow of capital for deals. During 2021 (as of November 30), according to EY, biopharmas raised more than $80 billion in combined follow-on financing, venture capital funding, and initial public offerings (IPOs), second only to the $90 billion raised in 2020. Last year, 77 biotech companies priced shares in traditional IPOs during 2021, compared with 88 in 2020, according to IPOScoop.com.
That does not include additional capital for early- and growth-stage companies generated through special purpose acquisition companies (SPACs). There were 17 biotech SPACs in 2021, including the $17.5 billion SPAC merger completed in September by Ginkgo Bioworks, and the $500 million SPAC merger of Sema4.
In 2020, former Pfizer CEO Ian Read and Clive Meanwell, MBChB, founder of The Medicines Company (now part of Novartis) co-founded Population Health Investment Co., a SPAC that raised $150 million by going public in 2020, with the goal of pursuing a business combination focused on therapeutics.
“What this is saying is there are critical people who are coming with a management team that know how to do deals, and people would be looking at them as an option,” Baral observed. “Having that said, there are also a lot of SPACs that are not so structured in a meaningful way, and we see them leveling off over a period of time. But in general, SPACs will be a genuine option for companies from a funding perspective.”
The other reason Baral said the uptick of biopharma collaborations is expected to continue this year is ongoing interest by companies in focusing their pipelines more narrowly among a handful of therapeutic areas where they can emerge as leaders.
Last year, an EY survey of 1,040 global corporate executives and 27 global activist investors showed 76% saying that the continued effects of the COVID-19 pandemic would accelerate their divestment plans, with 56% planning to initiate their next divestment within two years. The total value of divestitures last year (through November 24) was just $11 billion—a sum EY says is low enough to present opportunities for future growth as companies “divest to invest.”
“Just because you’re in one therapeutic area] doesn’t necessarily mean that you are focused. You are redefining what are your focus areas, so it could be more than two, more than three areas of focus, but it is not going to be as broad as we had seen in the past, where you were pretty much getting access to everywhere,” Baral said.
Key areas of focus for biopharmas, he said, will include platforms for new modality drugs, as well as subspecialties in major therapy areas, which EY identified as:
- Oncology—set to double in sales to $320 billion in 2026, from $156 billion in 2020.
- Central Nervous System (CNS)—set to grow 73%, to $145 billion from $84 billion.
- Anti-infectives—set to rise 51%, to $140 billion from $93 billion.
“We could expect some activity in those particular crowded therapeutic areas to rationalize and have some dealmaking, which could mean partnerships, which could mean larger [biopharmas] as well,” Baral said.
“We would expect to see high emphasis on bolt-ons and partnerships, so 2022 would be another year of high deal volume and lower total deal value,” he added.
“Bolt-on” deals are small to medium-sized acquisitions accounting for less than 25% of a buyer’s market capitalization.
The pace of collaboration and partnership activity has continued in the first few weeks of 2022. Pfizer and Beam Therapeutics have launched an up-to-$1.35 billion collaboration designed to apply Beam’s in vivo delivery technologies toward base editing programs to develop three undisclosed targets for rare genetic diseases of the liver, muscle, and central nervous system. The technologies are intended to deliver base editors to target organs using mRNA and lipid nanoparticles.
Also this month, Selecta Biosciences and Ginkgo began developing next-generation gene therapy viral capsids through a collaboration that could generate more than $1 billion in royalties for Ginkgo, while Mammoth Biosciences could generate more than $1 billion through an alliance with Bayer to develop in vivo gene-editing therapies using Mammoth’s CRISPR systems.
Among the busiest pharmas in January has been Eli Lilly. On January 18, it inked an up-to-$1 billion partnership with Evotec to discover drugs for metabolic diseases focused on diabetes and kidney disease. Lilly also launched collaborations of up to $400 million with Entos Pharmaceuticals to use its Fusogenix nucleic acid delivery technology to develop nucleic acid products targeting the central and peripheral nervous system; and up to $258 million with Abbisko Therapeutics to develop novel molecules against an undisclosed target for cardiometabolic diseases.
In 2021, according to EY, 88% of the 90 M&A deals were bolt-ons, even if their value ran into the billions of dollars. Last year saw 11 M&A deals exceeding $1.9 billion ($54.81 billion in total), led by CSL’s $11.7 billion buyout of Vifor Pharma, the largest deal announced in 2021.
“Just because it’s got the billion-dollar price tag on it doesn’t mean that it’s a transformational deal or a megamerger,” Baral said.
EY defines megamergers as acquisitions with valuations of roughly $40 billion in biopharma and $10 billion in “medtech”, which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.
Last year’s biopharma M&A trailed the $111 billion combined value of 64 mergers and acquisitions generated by medtech companies. Medtech numbers jumped from 27 deals valued at a total $34 billion in 2020.
The gap between biopharma and medtech M&A came despite biopharmas enjoying near-record levels of “firepower,” which EY defines as a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals.
As of December 15, 2021, biopharmas had a combined $1.17 billion in firepower available for M&A, up 14% from a year earlier and just shy of the record high $1.22 billion in 2014. The companies deployed only 9% of their firepower on M&A in 2021, down from 12% in 2020 and 25% in 2019—and 13% on collaborations, down from 16% in 2020 but up from 9% in 2019. (Medtechs used only 16% of their M&A firepower, which stood at a record $600 billion).
Since the beginning of 2020, EY found, the 25 major biopharmas had deployed roughly 1.5 times more firepower on collaborations than M&A. In 2020, biopharmas signed 38 alliances with upfront deal values greater than $100 million, including four alliance that exceeded $1 billion. In contrast, last year, only 31 partnerships entailed more than $100 million in upfront cash, of which none exceeded $1 billion.
Biopharmas spent a combined $11.5 billion upfront on 273 partnerships in 2021, versus $19 billion on 296 the previous year.
“We expect that valuations will continue to stay strong, clearly for the good companies, good assets, good technology, good management,” Baral said. “I think the pressure is on the buyers to also show the value creation opportunities that they provide to the seller, but also, given the high execution and business case risks on the buyer side, it is also requiring the sellers to be really prepared so that the buyers feel comfortable with the business case and the value proposition. So, we don’t see the valuations dropping in the near term.”