Could big pharma buy out much of the biotech industry? Yes, according to analysts. But that’s not likely to happen anytime soon.
Could big pharma buy out much of the biotech industry? Yes, according to analysts. But that’s not likely to happen anytime soon, despite declining biotech stocks and big pharma’s deep pockets.
Citing a note from Jefferies analyst Michael Yee, Barron’s reported that big pharma has enough cash available to it to “more or less” buy every small-to-mid-cap biotech company. That might sound odd but according to Yee’s analysis, the financials are heavily in favor of the top biopharma companies.
Yee suggested the combined market capitalization of all biotech stocks that are valued at under $5 billion is approximately $350 billion, quite a chunk of change. At the same time, Yee said the cash balance of the top 20 big pharma companies alone is more than $300 billion, Barron’s said.
In his note, Yee explained that M&A right now is tough to accomplish with falling markets. Biotech stocks are down approximately 60% from a peak high in February 2021. Since the beginning of 2022, the S&P Biotech Select Industry Index has fallen 41.66%. Over the same period, the Nasdaq Biotechnology Index (NBI) is down about 26%.
This echoes what Lance Minor, principal and national co-leader of BDO Life Sciences, told BioSpace last month. He noted that 20% of companies on the NBI saw their market capitalization fall below $200 million, which is the threshold required to be listed on that index. Minor said the drop in biotech stocks is due, in part to a myriad of economic factors, including supply chain challenges, rising interest rates and declining investor confidence.
“When looking at the biotech market specifically, we’re seeing more money move into venture capital and private equity as opposed to the stock market,” Minor told BioSpace. He noted that private equity and venture capital funds have increased by 113%.
In BDO’s winter report, it was reported that about one-third of life sciences leadership teams were interested in pursuing M&A this year. But, like what Yees was saying, that has not yet materialized.
Although it seems the time is ripe for those deep-pocket big pharma companies to flex their M&A muscles and snap up some of the companies to bolster their own pipelines, that just hasn’t happened. Calling it a “healthcare paradox,” Barron’s noted that its own predictions of a wave of M&A activity this year have fallen short, to say the least. That predicted wave hasn’t even amounted to a ripple, Barron’s said.
For sure, there have been some M&A deals made between big pharma and biotech this year, such as GlaxoSmithKline’s $1.9 billion deal for rare cancer company Sierra Oncology, or Pfizer’s $525 million buy of North Carolina-based ReViral, a privately-held biotech focused on developing novel antiviral therapeutics that target respiratory syncytial virus (RSV).
Why haven’t there been more deals such as Barron’s predicted? The publication cites Merck Chief Financial Officer Caroline Litchfield for a potential answer, and it may be surprising. Litchfield said biotech executives seem to be in denial about how much their companies are worth.
“We’ve yet to see the seller change their mindset on what the value of their company is,” Litchfield said. “I think the world lives in hope right? …And if you’re sitting in the biotech, you’re waiting to understand, is this permanent, or is it temporary? And that’s where I think they are.”
If Litchfield’s view is correct and those biotech executives come to an understanding of the current value of their companies, Yee predicts big pharma will open its wallet and flex that M&A muscle as initially predicted. That will also indicate a stabilization of the biotech market and prevent, or at least a slow, the current decline of the market.
