Which Way to the Exits for Biotech?

With 58 U.S. biopharma IPOs in 2018, the biotech industry entered the new year with confidence. By all appearances, the longest and largest biotech IPO window in history was not going to close anytime soon. But it was biotech dealmaking that took center stage at the annual J.P. Morgan Healthcare Conference at the beginning of 2019.

On the opening day of the annual confab in San Francisco, Bristol-Myers Squibb and Eli Lilly and Company both announced blockbuster deals — strengthening the case that M&A would likely be the exit of choice. Many IPO candidates may be reluctant to pursue a public offering, given lingering political and market uncertainty in the first part of the year.

After announcing Lilly’s deal to acquire Loxo Oncology, David Ricks, the company’s chairman and CEO, assured analysts that he expects there will be an increase in M&A activity in the year to come. Lilly’s CFO and SVP Joshua Smiley, added that the company could continue doing deals throughout the year. (Fenwick represented Loxo Oncology in the $8 billion deal)

Ernst & Young Report

Smiley is not alone. According to EY’s M&A Firepower report, in 2018 life sciences companies deployed only 16 percent of their available resources for acquisitions, a relatively low percentage by historical standards.

Depending on who is doing the counting, life sciences M&A deals in 2018 totaled anywhere from $136.5 billion (EvaluatePharma) to $198 billion (EY) to as much as $265 billion (Informa Pharma Intelligence).

For its part, EY does not expect total deal value for 2019 to top $200 billion, but it doesn’t anticipate a significant drop either. By EY’s calculation, the sector has more than $1.2 trillion in “firepower” (the firm’s calculation of capital available for M&A) as well as an increasingly critical need to address three burning issues:

  • First, biopharma companies need to scale up in key therapeutic areas, particularly oncology.
  • Secondly, they need to partner with healthcare providers and payers to gain access to data that can improve outcomes.
  • And finally, they need to acquire or partner with companies with data and technology expertise to improve the efficiency of their R&D, efforts as well as validate the effectiveness of marketed products.

EY notes that in 2018, 81 percent of deals were smaller, bolt-on acquisitions accounting for 43 percent of total deal value. In a survey the firm conducted of biopharmaceutical dealmakers, more than 60 percent cited high asset prices and geopolitical uncertainty as factors that deterred them from doing more deals.

Silicon Valley Bank Report

In its report on healthcare investments and exits, Silicon Valley Bank (SVB) also noted a prevalence of early-stage biotech M&A deals in 2018. Of the deals the bank examined, the median time-to-exit was only 2.9 years.

On the device side, SVB noted an increase in the number of deals done in 2018 over 2017, but the combined value of the deals was relatively stable, increasing only slightly over the prior year.

SVB predicts that biotech M&A activity should increase in 2019 since, despite a strong pipeline, market uncertainty could cap the number of IPOs for the year at 30 to 35. Device M&A should remain stable, while diagnostic and tools companies may find new suitors among technology companies.

Disruptor Firepower

Finally, EY points out that 10 technology and consumer companies that could potentially disrupt the healthcare sector are sitting on nearly trillion dollars of dry powder. That effectively doubles the amount of acquisition capital available.

For these reasons and more, we expect 2019 to be a strong year for dealmaking. But that’s not to count out IPOs. The political and market issues that are currently disrupting the public market could very well fade by the second half of the year, and at that time, the strong pipeline of companies will be on the ready.

Originally published March 28, 2019 on Fenwick's Life Sciences Legal Insights blog.