What's holding back biotech M&A? SVB tracks a trend and calls a comeback
The dealmakers in biopharma have had some extra time on their hands in the first half of 2017. M&A has slowed considerably, but one prominent player in the field is keeping the faith that H2 will make up for the lag.
Silicon Valley Bank has put out its report on the first half of the year, and you can see from the chart below — which combines biotech IPOs and M&A — what I mean by a slowdown.
IPOs continue to chug along, with 15 in the first half and a queue that will probably continue to deliver at a rate that will end up slightly higher than 2016, says SVB. That’s not a 2014-style boom, but it’s a nice, steady pace that is continuing to pump hundreds of millions of dollars into the industry. But with seven M&A deals to consider in H1, buyers are going to have to double down in the second half to make up the shortfall.
I talked about the deal pace with SVB’s Jon Norris at a biotech panel I moderated in San Francisco a few months ago. And I asked him to add his thoughts on what’s driving the slowdown in M&A and why he thinks there will be a bump in deals in the six months to come.
Bottom line: More money coming through VCs and IPOs continues to provide the best payback for investors. Norris notes:
Yes, M&A is behind in the first half of 2017 but we do hear significant chatter about in-progress deal discussions and think that year-end 2017 numbers will end up around 20. So pent up demand is one answer — big biopharma has not changed its outsourcing of research to venture-backed companies. They will continue to buy these companies to add to their pipeline.
One theory around why M&A is low in the first half relates to liquidity and public market access. First, we have seen a change in financing over the last few years, with round sizes that are historically high (many $50M+ tranched financings), and designed to last longer (3-4 years). The current crop of these companies has significant dry powder to develop their technology and advance clinical trials. Second, the IPO window continues to stay open and crossovers prefer IPO to M&A. Crossover investors have made a significant number of investments in these private companies. Crossovers prefer to take companies public (so they can double down on their initial investment), so many of these companies are pushing towards IPOs. Thus, with significant dry powder from these large private financings and expectations to IPO, these companies can afford to be patient. That said — we do, however, expect exits to increase in the second half.
Answering a query on valuations in biotech, Norris also says he’s seeing a shift toward somewhat later-stage exits in the months to come.
Regardless of the valuation, the historical multiple on invested capital expectations for exiting on Pre-Clinical data doesn’t match companies who have raised a large financing round. As an example, the fifteen venture-backed pre-clinical exits since 2014 had a median up-front deal value of $180m with a median invested capital at $30 and median up-front multiple on capital-invested of 7.3X. The big $50M+ financings make it harder to accept early offers, but on the other hand these companies have enough capital to get further down the development path. That is why we are seeing slightly later stage exits in 2017, and think that trend will continue.
The other point that I want to highlight is where the deals are being made in the industry. As I noted in Tuesday’s report, oncology has emerged as clearly the hottest research field, way ahead of the rest of the pack as immuno-oncology continues to drive billions in new investments. So it’s no great surprise to see cancer leading the pack of indications on M&A and IPOs over the last 2.5 years. Neuro and orphan/rare diseases come in tied for second place. Aesthetics/derm, cardiovascular and metabolics round out the pack.