Rising costs and an uncertain global economy have left many potential buyers sitting on their hands — or partnering instead.
Credit: Zerilli Media / Alamy Stock Photo
With public markets in freefall, biotech companies running short of cash hoped that pharma might pick up the slack. “The biggest factor that could turn the sector around is mergers and acquisitions,” said one biotech CEO at the start of 2022.
It hasn’t happened. At its current pace, 2022 is set to be the slowest year for mergers and acquisitions (M&A) since 2018. By the end of August, the combined value of 2022’s acquisitions barely scraped half those seen in 2021 — itself muted relative to 2020 and 2019 (Fig. 1). Total deal value through August 2022 was $41.5 billion, compared with almost $97 billion in 2021 and over $140 billion in 2020, according to BioCentury BCIQ. Deal numbers, if extrapolated out to full year, have fallen less sharply, however, indicating smaller deal sizes (Fig. 1). Pfizer’s $11.6 billion acquisition of Biohaven Pharmaceuticals in May is the high point so far in 2022, marking a flurry of mid-year deals each worth over $1 billion (Table 1).
Average deal size has been falling. *Through August. (Source: BioCentury BCIQ).
On paper, record big pharma cash reserves, a steep, fast-approaching patent cliff and low public biotech valuations should equal frenzied buying. Mega-blockbusters set to lose exclusivity over next six year represent the biggest threat to sales in decades. Three drugs alone — AbbVie’s Humira (adalimumab), Merck’s Keytruda (pembrolizumab) and Bristol Myers Squibb (BMS)’s Opdivo (nivolumab) — represent over $45 billion in annual sales. Several big pharma CEOs talked bullishly about deal making during quarterly earnings announcements in early 2022.
But in practice, rising costs, an uncertain macroeconomic climate and a less predictable US Food and Drug Administration (FDA) have given potential buyers pause. “There’s no sense of urgency on big pharma’s side,” says one public market investor. Most of those that are shopping are buying marketed or close-to-market assets that immediately fill revenue gaps. Anything earlier isn’t worth the risk or additional R&D cost. Big pharma’s patent cliff “won’t be solved by buying a phase 2 company,” sums up Gil Bar-Nahum, managing director at Jefferies’ global healthcare investment banking group in London.
The upshot for pre-revenue biotechs: knuckle down, generate strong data and opt for partnerships instead. The risk-off mood “means pharma has flipped [from M&A] into licensing,” says Joe Anderson, a London-based partner at venture capital firm Sofinnova.
Risk and cash burn? No thanks
Half of the top ten biggest deals so far in 2022 involve marketed products that provide their buyers with immediate risk-free revenue. Pfizer, flush with COVID-19 cash, wanted Biohaven’s migraine drug Nurtec ODT (rimegepant), a small-molecule calcitonin gene-related peptide (CGRP) receptor antagonist approved for both prevention and treatment in an increasingly competitive marketplace. It also liked Biohaven’s strong phase 3 cohort, including a back-up intranasal ‘gepant’ plus three further programs for rare disease indications. Pfizer’s August 2022 purchase of Global Blood Therapeutics came with the approved sickle cell disease treatment Oxbryta (voxelotor), though the jewel asset is in phase 2/3. GBT601, a next-generation sickle hemoglobin polymerization inhibitor, could provide something close to a cure for the inherited blood disorder, characterized by misshapen and dysfunctional red blood cells. Another phase 3 candidate, inclacumab, targets P-selectin protein and may reduce frequency of painful vaso-occlusive crises associated with sickle cell disease, along with resulting hospital admissions.
Rare diseases are also the focus of Amgen’s $3.7 billion August purchase of ChemoCentryx. Tavneos (avacopan) is an oral selective complement 5a receptor inhibitor approved in October 2021 as an adjunctive treatment for patients with severe forms of a rare autoimmune condition called active anti-neutrophil cytoplasmic autoantibody-associated vasculitis.
Despite big pharma holding an estimated $350 billion combined cash (and up to half a trillion available to spend), according to SVB Securities, some appear hesitant to take on earlier-stage programs whose funding requirements will eat into their profits during acutely uncertain times with double-digit inflation, fragile supply chains, and expensive talent. Many would rather “pay $5 billion for something certain than take a bet at $500 million,” says Jefferies’ Bar-Nahum.
That may be true unless you’re Roche, which in early September paid $250 million up front for US-based Good Therapeutics and its PD-1-regulated interleukin (IL)-2 receptor agonist platform. Designed to avoid systemic immune activation seen with unfettered IL-2 receptor agonists like Proleukin (aldesleukin), the technology complements Roche’s in-house phase 1 program combining an anti-PD-1 antibody with an IL-2 variant. Good Therapeutics’ program is still preclinical.
Most of the $26 billion that Pfizer has spent on acquisitions over the last 12 months went to revenue-generating companies, but the figure (which is still less than its expected 2022 COVID-19 vaccine revenues) also included phase 1/2 cancer company Trillium Therapeutics ($2.2 billion) and ReViral ($525 million), which has a phase 2 respiratory syncytial virus vaccine candidate.
What to buy?
So risk, although out of fashion, isn’t entirely off the table if it comes with strong signs of efficacy and good strategic fit. BMS in June paid $4.1 billion for Turning Point Therapeutics, which expects to file lung cancer drug repotrectinib later this year for potential approval in 2023. Repotrectinib adds a competitive precision oncology asset to BMS’s existing franchise: the tyrosine kinase inhibitor targets ROS1 and NTRK mutations, complementing BMS’s non-small-cell lung cancer stable including Opdivo (nivolumab), Yervoy (ipilimumab) and Opdualag (nivolumab and relatlimab). A longer response duration may give repotrectinib an edge over Roche’s Rozlytrek (entrectinib), approved in 2019 for cancers harboring the same mutations.
GlaxoSmithKline’s (GSK) vaccine-franchise-boosting $2.1 billion acquisition of Affinivax comes with a pneumococcal vaccine candidate that is still in phase 2, but that has breakthrough designation and includes more pneumococcal serotypes than approved vaccines. The British-based pharma also spent $1.9 billion on Sierra Oncology as it rebuilds an oncology franchise discarded almost a decade ago. Sierra’s lead myelofibrosis candidate momelotinib — since submitted to FDA for myelofibrosis with anemia — inhibits activin A receptor, type I (ACVR1), Janus kinase (JAK) 1 and JAK2. It would complement GSK’s Blenrep (belantamab mafodotin) for relapsed or refractory multiple myeloma.
For a few big pharmas, determining what to buy could be another source of delay. Once-hot areas like gene and cell therapy have stumbled clinically and commercially (Box 1), while new US drug pricing rules may change the arithmetic on some mainstream treatments (Box 2). Pharma management may be asking, “Do we want to be in the same franchises as before, or make a big, bold new bet — and if so, where?”, suggests one investment banker.
Regulatory uncertainty may be another headwind. New FDA drug approvals are the slowest they have been for three years, and the number of complete response letters — rejections — is up. “There’s criticism about what FDA is thinking, and how it’s thinking,” says Nooman Haque, managing director, life sciences and healthcare at Silicon Valley Bank for EMEA. Observers point to a recent turnaround on Amylyx Pharmaceuticals’ amyotrophic lateral sclerosis drug Relyvrio (sodium phenylbutyrate and taurursodiol), approved by the FDA months after an initial rejection, plus the controversial approval of Biogen’s Aduhelm (aducanumab) in 2021, as evidence of less predictable regulator.
Against this backdrop, robust data — or an approval stamp — matter more than ever. “Whatever the modality, if a product is approved, everyone will look at it,” says Bar-Nahum.
Partnerships preferred
If they like it, they will partner. “Often big pharma seems to prefer to invest in just the asset, rather than take on an entire company,” with associated staff and R&D costs, says Stephanie Léouzon, partner and head of Europe at Torreya. Biopharma and diagnostics partnership deals around preclinical assets are trending higher than in previous years, while the number of clinical-stage partnerships is down about 30% (Fig. 2a). More than 30 pre-approval licensing deals so far this year have involved up-front payments greater than $50 million, though the proportion of those that are preclinical (41%) is higher than it has been in any of the last five years (Fig. 2b).
a, Preclinical deals outpace clinical-stage deals. b, Deals with greater than $50 million up-front cash. Percentages are calculated of ‘all deals’, which include clinical, registrational and postapproval (the last two not shown). (Source: BioCentury BCIQ).
One of the largest partnerships so far this year saw Merck pay $290 million up front to license Orion’s phase 2 prostate cancer drug targeting CYP11A1 and take it through costly pivotal trials — just as the Espoo, Finland-based biotech was moving into cash-preservation mode. The small molecule blocks steroid hormones and their precursors, dampening supply to the hormone-dependent cancer. Gilead forked out $300 million up front for Dragonfly Therapeutics’ IND (investigational new drug)-stage natural killer cell (NK) engager DF7001 and options on other NK programs to potentiate cancer immunotherapy (Table 2).
Pharma risk appetite is much healthier when it comes to partnerships. Roche’s August tie-up with Poseida Therapeutics, worth $110 million up front with equal near-term milestones, makes a bet on allogeneic CAR-T cell therapies against targets in B cell lymphomas, multiple myeloma and other blood cancers — the most advanced of which is in phase 1. In October, Pfizer ponied up $300 million up front to collaborate on base editing solutions for rare diseases with Beam Therapeutics. “It’s not that pharma won’t take on risk, but they are looking for things that are novel and fit a real need,” says Torreya’s Léouzon.
Pharma’s flip to partnering is good news for biotechs seeking to hang on to R&D programs for longer. It can also help with fundraising. After Shionogi of Osaka, Japan in May paid $100 million up front for European and Asian rights to Manchester, UK-based F2G’s phase 3 antifungal olorofim, which treats invasive aspergillosis, the private biotech was able to secure a $70 million round, led by new investors Forbion and Sofinnova, for US late-stage development and commercialization of the product.
The record-breaking sums raised by life sciences venture capital in 2020 and 2021 — totaling almost $60 billion, according to Torreya and CapitalIQ — plus growing interest in biotech from large private equity groups, have prompted a flurry of growth and cross-over funds to support late-stage biotechs. These options, alongside royalties and debt financing, provide biotech with alternatives to initial public offerings or sales to pharma as those traditional routes get tougher. “These much deeper capital pools allow biotechs to take their products further,” says Anderson.
Fundraise on good data
Good data still open the funding taps — even for public biotechs.
Alnylam raised almost $1 billion just weeks after presenting positive data for Onpattro (patisiran) in transthyretin-mediated amyloidosis (ATTR) with cardiomyopathy. (The drug is already approved for the hereditary form of the rare heart condition.) Alnylam offered $900 million of convertible senior notes (short-term debt that converts into equity). UK-based, Nasdaq-listed Verona Pharma in mid-August raised $150 million in a public share offering after announcing positive topline results from the first of two phase 3 studies of its chronic obstructive pulmonary disease drug ensifentrine. The inhaled dual phosphodiesterase (PDE) 3 and PDE4 inhibitor met its primary and some secondary endpoints, showing improved lung function and reduced exacerbations.
Canada’s Xenon Pharmaceuticals, based in Burnaby, British Columbia, raised $287 million in a public offering after positive phase 2b open-label expansion study data from its daily epilepsy pill XEN1101, a selective Kv7.2 and Kv7.3 potassium channel opener.
Biotechs that aren’t quite at data readout should focus their efforts and funds on getting there — and avoid overpromising in the meantime. Even if big pharma isn’t buying avidly now, “they’ll look back in two years’ time at what you say now and see if it was realistic,” says Bar-Nahum.
Biotechs with insufficient cash to get to the next milestone have few choices. Record numbers of biotechs are exploring ‘strategic options’, according to Torreya, noting in an August 2022 report that “countless boards are effectively volunteering to pull out of the marketplace.”
Yet while Torreya and other banking or advisory firms predict a more active M&A spree this autumn as a result, venture capital investors are preparing for the market gloom to last. They’re putting three or four years’ worth of cash into their portfolio companies, rather than one or two, to ensure they reach the next data point, says Sofinnova’s Anderson.
A single, high-profile deal or data read-out may help trigger action. Merck reportedly tried to buy Seagen earlier this year in a deal claimed to be worth up to $40 billion. Talks apparently stalled, but if a deal had been signed, Seagen investors’ cash windfall could have been recycled back into the sector, driving up valuations and building confidence, suggests Bar-Nahum (Box 3). Top-line data for Biogen and Eisai’s Alzheimer’s candidate lecanemab in late September lifted both companies’ share prices, along with those of close competitors Roche (with gantenerumab) and Eli Lilly (with donanemab). It also boosted valuations at other, earlier-stage companies working in the field, but hasn’t (yet) unleashed a dealmaking frenzy.
Buyers can afford to soft-pedal. Big pharma needs to do more to fill pipelines and revenue gaps. But for now, many are thinking, “Let these companies finance themselves, and we’ll pay more for them later,” says Geraldine O’Keeffe, partner at EQT Life Sciences in Amsterdam.
