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Rising M&A activity has livened up the biotech sector

18.08.2022 - Daniel Koller

The driving force for many new therapeutic approaches for drugs, yet with low stock market valuations – the biotech industry is going through a paradoxical development phase. This in turn is bringing it back on the radar of big pharma players with an eye for a takeover.

Viewed in fundamental terms, the biotech industry has never looked so well-positioned. According to a study published by the IQVIA Institute for Human Data Science, 65% all clinical studies underway in 2021 were conducted by smaller biotech companies, which IQVIA itself describes as «emerging». These are defined as companies with annual sales of below USD 500 mn that invest less than USD 200 mn annually in their research and development pipeline.

What’s more, there are plenty of signs that these companies are delivering the necessary price-driving news flow – a large number of clinical study results and approval decisions are expected this year, above all in the fields of cancer medicine, neurology and genetic disorders. The number of patients enrolled in studies is once again higher than it was prior to the coronavirus pandemic. The number of new study applications submitted to the US supervisory agency (Food and Drug Administration, FDA) has also risen further.

At the same time, the pressure is rising on pharma multinationals to generate new growth drivers. -Big Pharma will have to come up with solutions over the coming years in order to avoid a slump in revenues: according to the FDA, blockbuster drugs with total sales of more than USD 250 bn will lose their patent protection over the coming decade.

After two relatively quiet years, the M&A carousel is starting to spin again. The pharma company that has made the most is Pfizer. Pfizer paid USD 6.7 bn to buy the US biotech company Arena Pharma in a deal announced back in December. Arena Pharma’s most advanced product candidate is a treatment for the chronic inflammatory bowel disease ulcerative colitis. In May it announced the acquisition of Biohaven for USD 11.6 bn, a premium of 80% on its closing price before the takeover bid was issued. This deal gives Pfizer a migraine drug with a new efficacy profile that regulators in the US approved in 2021 and that was recently approved in Europe too. Pfizer’s most recent takeover was Global Blood Therapeutics for USD 5.4 bn, including debt and net of cash acquired. This US company is focused on rare hematology and is a leader in sickle cell disease treatment, an inherited disorder that affects the shape of red blood cells. Pfizer has accumulated a huge pile of cash that it can spend on takeovers, mainly from the billions in revenues it has earned from the COVID-19 vaccine Comirnaty. In June, Bristol-Myers Squibb announced it had agreed to buy Turning Point Therapeutics for USD 4 bn, a premium of 120%. This deal gives the US pharmaceutical company a novel lung cancer drug that is expected to receive regulatory approval in 2023.

In addition to the pharmaceutical companies, the major biotech companies are also going on a buying spree. Gilead Sciences, for example, acquired MiroBio for USD 450 mn in cash. MiroBio is a private British company, a spin-off of Oxford University, that is researching a novel approach to the treatment of inflammatory diseases. The company's proprietary discovery platform can be used to develop antibodies  that target immune-inhibitory receptors. MiroBio thus fits well into Gilead's strategy of establishing a third therapeutic area of focus, inflammatory diseases, alongside oncology and virology. Amgen, in turn, acquired the US company ChemoCentryx for USD 4 bn, which represents a premium of more than 100% over the closing share price prior to the announcement of the takeover bid. ChemoCentryx already has a product on the market, Tavneos, for the treatment of vasculitis, a rare disorder characterized by inflammation of the blood vessel walls. According to industry experts, Tavneos will generate annual peak sales of more than USD 1 bn.

A company in BB Biotech’s portfolio was also a takeover target. Radius Health, which has a product in the market for the treatment of postmenopausal women with osteoporosis and high fracture risk, was bought out by two investment companies, Gurnet Point Capital, LLC and Patient Square Capital, at the end of June.

In view of the still low valuations that many biotech companies are trading on, it is certainly possible that more double-digit billion-dollar transactions could be announced before the year is over, targeting companies that already have products with blockbuster potential in the market. Pharma companies can be expected to focus above all on biotech firms that have received – or are about to receive – market approval for their initial products based on ground-breaking technologies. Among other things, this includes gene editing, where specific faulty gene segments in DNA strands are cut out and modified. Genes can be added, removed or disconnected with this technology, which has the potential to deliver complete and lasting solutions to various genetic disorders. In the second half of this year, Crispr Therapeutics and Vertex Pharma will unveil the first approval-relevant data in gene editing for the treatment of two genetically induced blood cell formation disorders. As the treatment costs of this as yet untreatable condition are very high, Crispr and Vertex would appear to have very high price-setting power. It is perfectly conceivable that Vertex, which is already a profitable biotech heavyweight, will attract a takeover offer given that its future potential revenues could run into billions of dollars.

RNA-based therapies such as siRNA and AOs (antisense oligonucleotides), which have received market approval for drugs in connection with niche indications, represent another commercially attractive area for prospective corporate buyers. Alnylam and Ionis Pharma are two good examples of companies in this area that look to have takeover appeal in light of their first product authorizations and mature technology platforms. In the field of oncology, this is even more true of biotechs that play a pioneering role in the area of immuno-oncology – particularly if they possess products capable of activating the body’s immune defences against tumor cells even better than combination therapies.

By contrast, for small biotech companies with promising technologies but as yet no active agents capable of demonstrating clinical effectiveness, there is still a huge discrepancy between the amount companies believe they are worth for takeover purposes and the price buyers are willing to pay. The equities of these companies have suffered the greatest price declines since 2021, and their corporate value has decreased accordingly. In order to secure financing for their most important clinical projects, these companies will have to enter into traditional development partnerships with Big Pharma which involve upfront payments and performance-linked milestone payments. If they turn out to be successful, these partnerships could then lead to takeover offers.

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