The biopharma bear market has ended the financing boom of recent years and led the valuations of companies to plunge after years of soaring—conditions that may compel smaller biotechs to pursue merger-and-acquisition (M&A) deals with pharma giants, according to a recently released report.

The challenges to valuations and access to capital come as the industry and the rest of the world move beyond the COVID-19 pandemic, EY, the professional services firm formerly known as Ernst & Young, observed in the 32nd annual edition of its “Beyond Borders” report.

However, EY also found that the overall biopharma industry remained strong based on a promising outlook for revenues, record-high investments already made in research and development (R&D), and what the firm asserted was a “massive tide” of dollars waiting in the wings for future attractive investments.

“With the pandemic boom in the rear-view mirror, flush balance sheets and a huge correction in deals targeting development-stage biotechs, now is an opportune time for big pharma to deploy its firepower to acquire biotech innovation,” Arda Ural, PhD, EY Americas industry markets leader, health sciences and wellness, said in a statement.

Ural said the innovation wrought by COVID-19 and other areas of research will serve as a major driver of pharma revenues, resulting in balance sheets flush enough with 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.

Pharma giants are in a strong position to use that cash to fund M&A deals, collaborations, and partnerships, according to EY. It added that such activity will be critical to those companies achieving growth goals in the face of continuing “patent-cliff” loss-of-exclusivity as several longtime top-selling drugs face the end of patent protection, and face increasing competition from biosimilars.

Last year the value of M&A deals reached $65.9 billion, down 46% from 2020—the second straight annual decline, and down from the record $164.3 billion in 2019 and $119.2 billion in 2020. The largest M&A deal of 2021 was Merck & Co.’s $11.5 billion acquisition of Acceleron.

Companies recently have been much more inclined to deploy capital expanding pipelines and building up their businesses through collaborations than through M&A, EY concluded in January in its 2022 M&A Firepower Report, released in January.

$4.9B in first-quarter M&A

M&A continued to fall during the first quarter of 2022, with EY recording only eight deals of $100 million or more, generating just $4.9 billion.

“If that trend continues, 2022 would be the lowest M&A value year since 2010,” EY observed. “However, the industry’s need to secure access to innovations and the falling valuations of biotechs may converge to reinvigorate dealmaking over the remainder of 2022.”

Also in 2021, financings reached $115.3 billion, the second-highest total ever recorded and just 4% short of the record-breaking performance in 2020. However, just $16.3 billion was raised during the first quarter, less than half of what the industry had raised quarterly over the previous two years.

As for valuations, market capitalization rates rose in 2021 to just under $1.6 trillion, up about 2% year-over-year. But that number represented a sharp drop from the 39% market cap growth in 2020, presaging the huge fall that began late in 2021, after valuations climbed to all-time highs in February of last year.

The drop in valuations has hobbled the market for initial public offerings (IPOs) by companies trading their first public shares. Last year, a record 143 biotech IPOs occurred in the United States and Europe generating a combined $19.3 billion, 72% higher than the existing record set only the previous year. Of these IPOs, 30 were funded via special-purpose acquisition companies (SPACs), another record.

During Q1 of this year, however, 10 biotechs went public on Western exchanges, raising a total $790 million, versus $4.87 billion raised by 31 companies, according to data from Evaluate.

“While the biotech industry has experienced a substantial correction, the industry’s fundamentals remain strong, and there is still a lot of firepower to invest in innovation and underpin growth strategies,” Ural said. “While some biotechs may struggle with reduced access to the public markets, the sector as a whole will continue to flourish as long as companies work to innovate to help address unmet medical needs of the future.”