Money, Markets and M&A

Stock Market Performance

A bounce back in closely followed biotech stock indices in the final weeks of 2023 has raised hopes for a sustained recovery next year.

The XBI, an exchange traded fund that tracks a large group of Nasdaq-listed biotechnology groups, surged 25% through November and early December, after plunging to an almost seven-year low in late October.

The upturn came as a huge relief to investors who, throughout the summer and into autumn, had witnessed biotech substantially underperform other high-risk industries. However, few expect to see a dramatic U-turn in the negative sentiment that has pervaded biotech in 2023. Any recovery is likely to be slow, with bumps along the way, investors believe. Interest rates and inflation might be moving in more favourable directions, but the world’s post-pandemic economies remain vulnerable to shocks, and that never provides a strong backdrop for biotech.

Political events in the US are always influential on sentiment toward the pharma sector, and investors will be watching two of these themes next year. Firstly, the presidential election, and secondly the progress of several lawsuits that are challenging the Inflation Reduction Act. Alleging unconstitutionality, companies including Merck & Co and Bristol Myers Squibb are seeking to stymie the IRA, while warning about the act’s negative impacts.

One major complaint is that small molecules will attract less investment than biologics, because of certain patent advantages. This has yet to show up in one measure of early-stage capital allocation, shown in the second graph here. This tracks the technologies being pursued by recent IPOs, which could arguably be seen as a proxy for venture funding flows.

Biotech Underperforms

Note: This chart shows the relative performance of three equal weighted exchange traded funds that track US listed companies. XBI includes biotech stocks from across the market cap spectrum. XLV includes pharmaceutical companies, healthcare equipment and medtech. RSP includes all stocks in the S&P 500. Source: Yahoo Finance.

Tracking the impact of the IRA: IPOs by company technology

Note: IPOs of pure-play drug developers on Western exchanges only. Source: Evaluate Pharma.

IPOs

The IPO market is an important measure of the biopharma sector’s health, and there are reasons to believe that certain vital signs here are improving.

One, for instance, is the return of crossover investors – public investors that help groups float by backing large, late private financing rounds. They were largely absent from the IPO market throughout the downturn.

Most of 2023’s biggest flotations, including Acelyrin, Cargo Therapeutics and RayzeBio, featured crossover investors. All operate in hot fields – inflammatory disease, Car-T and radiopharmaceuticals respectively. That said, the failure of Acelyrin’s lead project four months after the group floated, and the resulting share price crash, was not great news for a sector trying to tempt back more of these cash-rich investors.

Metabolic disease researcher Carmot had also received substantial crossover backing, though Roche swooped in with a $2.7bn buyout weeks before its late 2023 IPO. This shows how these investors are limiting their support to relatively “safe” bets for now, the Acelyrin blow-up notwithstanding.

It seems likely that 2024 will see this trend continue, with the IPO scene dominated by large, well supported offerings. Relatively de-risked mechanisms or projects will be favoured. It is notable that only two sub-$50m IPOs happened in 2023.

Many venture firms are known to be in urgent need of liquidity. And with a huge bolus of IPO-ready developers waiting in the wings, pent up pressure could quickly push the window open, as soon as glimmers of demand emerge.

Still, investor enthusiasm is likely to remain low for smaller offerings that involve early stage or unvalidated science. The financing climate is likely to remain tough next year for those on the fringes of the sector.

On the up? Annual biopharma IPOs

Note: IPOs of pure-play drug developers on Western exchanges only. 2023 to end-November. Source: Evaluate Pharma.

Venture Funding

Sector venture funding has been falling since 2021’s pandemic peak, and 2023 is likely to see annual totals drop again.

Evaluate’s latest report on sector financing showed a dip in venture cash raised in the third quarter of 2023 on the second quarter, and the final three months of the years tend to be the quietest.

There are reasons to believe that 2024 could see an uptick, however. Should IPOs recover, the return of crossover funds and the large rounds that they back could swell the total venture pot.

There are also signs that venture firms are becoming more comfortable taking on new investments. The first graph here shows that in the second half of 2022 almost 80% of venture cash raised went to previously supported portfolio companies, the highest proportion in at least five years. In 2023, that proportion has started to return towards more typical levels.

Then again, there are other measures that suggest that life for many young start-ups is likely to remain tough for some time. Backers are forcing their portfolio companies to make their money last as long as possible, with the second chart here showing the average time between fundraisings hitting a five year high in 2023.

It should not be forgotten that the bigger picture here is encouraging. The volume of private money being raised each year, by both biotech-focused venture funds and their portfolio companies, remains at historically healthy levels. But with much of the cash flowing towards “safer” ideas, next year could see capital further concentrated into fewer hands.

% of venture rounds where company had prior funding

Note: All data concerns venture cash raised by developers of therapeutics; medtech and diagnostics excluded. 2023 to mid-November.

Mean time to last funding round

M&A

Biopharma dealmaking picked up in 2023 versus 2022, and further acceleration is expected next year.

Annual takeover spend reached $127bn by mid-November 2023, Evaluate Pharma calculates, a number that excludes a handful of notable December deals.

These include Abbvie’s $10.1bn bid for the ADC developer Immunogen, underscoring this technology’s popularity. Elsewhere, Roche’s new chief executive continued to make good on his pledge to restock the group’s pipeline, buying obesity play Carmot for $2.7bn up front, weeks after splashing out $7.1bn on Roivant’s inflammatory bowel disease asset.

These deals show that the sector’s largest developers are willing to pay handsomely for desired assets, particularly those perceived to be relatively de-risked. This stance is unlikely to change in the coming years, given the substantial firepower at these firms’ disposal.

This picture of healthy deal flow also suggests that the US Federal Trade Commission’s attempts to clamp down on sector consolidation has not had the desired effect. True, many believe that the anti-trust watchdog’s overtures are forcing management teams to think more carefully before launching a move, as well as extending buyout timelines.

Another huge M&A driver is patent expiry, a theme that is likely to build as the decade progresses. 2024 is relatively quiet on this front, with only a handful of notable expiries. These include Bristol Myers’ leukaemia blockbuster Sprycel and Johnson & Johnson’s rheumatoid arthritis agent Simponi.

Annual announced M&A deals

Note: Biopharma targets only, excludes sectors like medtech or consumer health. 2023 to mid-November. Source: Evaluate Pharma.