Funding remains a challenge in the biopharma space.
Key takeaways
The public markets have shown signs of opening up, but volume has been far less than expected.
Licensing deals and M&A may increase in the sector as revenues decline due to the IRA and patent cliff.
According to Bloomberg data, there were only 18 initial public offerings in the biopharma space during 2023, the lowest year for IPOs in the past decade; however, beginning in the fourth quarter of 2023, many in the biopharma sector expressed optimism around potential momentum for initial public offerings.
Confidence among biopharma firms and investors was high coming out of January’s J.P. Morgan Healthcare Conference, arguably the largest and most prominent gathering of life sciences and health care investors, with many predicting a record year for biotech IPOs. Year to date through May 31, nine IPOs closed, which is a major improvement from 2023, but not the splash many had expected at the beginning of the year.
Additionally, of the nine 2024 IPOs, six were trading below their offering price as of May 31. One bright spot is a clinical stage oncology company that closed its IPO in January 2024 and was trading 75% above its IPO price as of May 31, per Bloomberg data.
A decline in share price immediately following the close of an offering is not unusual. However, the volume and magnitude of these declines could lead investors, investment banks and other IPO candidates to delay their plans while they continue to watch the performance of these companies and any additional near-term offerings.
The third quarter is usually slow for IPOs, as investment banks typically avoid road shows and pricing during July and August amid waning investor attention. In addition, companies are likely to avoid closing an IPO in close proximity to the November U.S. presidential election.
As a result, we are unlikely to see the volume many expected, even though 2024 is currently trending stronger for biopharma IPOs compared to the last two years. But with the market clearly beginning to view biotech more favorably, potential IPO candidates should continue readiness processes to go public.
The M&A and licensing landscape
Separate from the IPO market, we expect continued activity in mergers and acquisitions and drug licensing, albeit slower than expected.
We have tracked M&A and licensing activity since 2018, focusing in particular on indications garnering the largest deal volume and value. As expected, according to Evaluate Pharma data, oncology leads the way in both categories, representing 37% of deal volume and 50% of deal value. The central nervous system category captured the next-largest piece of market share, with 13% in both categories.
We also have explored which types of technology have seen the most activity in these areas. Small molecule chemistry and monoclonal antibody technology were the most prevalent by far. Small molecule chemistry accounted for 34% of deal value and 48% of volume from 2018 to 2024 and monoclonal antibody technology represented 29% and 19% of those categories, respectively. The next most prevalent technology category is DNA and RNA therapeutics, with 9% and 5%, respectively.
More recently, monoclonal antibody therapies have surpassed small molecule chemistry in deal value. For the Jan. 1, 2022, through May 31, 2024, period, monoclonal antibody represented 35% of deal value compared to small molecule chemistry’s 28% share.
This climate suggests an increased focus on biologics, which is expected to become more pronounced over the next several years. Several factors are driving this shift.
TAX TREND: M&A due diligence
Buyers and their advisors that target biotech companies should evaluate how the required tax treatment of research and development costs affects the target’s tax posture. The law change in 2022 commonly has negative effects and could subject the buyer to unwelcome tax costs and consequences. Consider historical exposures, purchase agreement negotiations and tax projections as part of updated tax diligence processes.
First, biologics is a new technology area, and as such will continue to gain traction against traditional small molecule chemistry. Additionally, biologic drugs enjoy a longer exemption period of 13 years before they become eligible for the Inflation Reduction Act’s Medicare price negotiation provisions, compared to nine years for small molecule drugs. And finally, the first wave of biologic patent expirations is upon us and many large pharmaceutical companies will see revenue decline as patents expire on major commercial biologics. Consequently, biopharmas will look to rebuild their pipeline through M&A and licensing deals.
As such, middle market biotech companies should be aware that potential suitors could aggressively seek opportunities to acquire or partner with them, and they should position themselves for such an exit if that is their desired outcome.
CONSULTING INSIGHT: Financial due diligence
Every M&A transaction presents opportunities and risks that only due diligence can reveal. A failure to uncover this information puts both a potential deal and investors at risk.
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