The Investment Climate
Picking ripe apples: a sweet spot for M&As
The capital bonanza seen in 2021 and early 2022 (before the Ukraine war) waned in the second part of the year, yet this did not deter R&D investment among the largest pharma players. Roche, Pfizer, J&J, Novartis, and Merck all saw increases in their R&D budgets, as these oscillated between 11%-23% of the percentage of total revenue in 2022. Yet, the steepest bull market in pharma’s recent history is over, and several factors – from geopolitical tensions and macroeconomic uncertainty, to patent cliffs – will continue to trouble board meetings throughout 2023.
The prospects of a recession, rising interest rates in the US, and a global slowdown in the economy have altered VC funding, and recent banking turmoil will likely cause a slowdown in funding at least until the end of Q2 2023. In 2022, both M&A and venture deal-making in life sciences declined, with overall M&A deal value down over 40% year-on-year to US$158.5 billion, according to PwC. Yet, VC funding in 2023 is still on track to exceed pre-pandemic levels by 20% according to data from CBRE, and NIH grants and funds were on the rise in 2022.
Indeed, with big pharma surfing on bumper sales from vaccines and pandemic-recovery cancer treatments, and with biotechs juggling higher interest rates and lower valuations, early 2023 saw a much-anticipated uptick in M&A activity. J&J announced the merger with Abiomed, Amgen secured the US$28.3 billion acquisition of Horizon, and Pfizer snapped up cancer-focused Seagen for US$43 billion. With most of the drug discovery in the hands of smaller biotechs, the top pharma firms are looking to bolster their pipelines. With a cumulated US$1.4 trillion war chest in capital to deploy toward inorganic growth, 2023 is shaping up as a bullish year for large pharma to go shopping for pre-revenue companies to bolster its pipelines and increase revenue – thus for M&A.

“The market likely has hit its bottom, but I do not think we are ready to rebound to the levels of 2019 and 2020. I do not expect a strong growth period for the sector to begin until 2024, at the earliest.”
Chris Garabedian, Chairman and CEO, Xontogeny, and Portfolio Manager, Perceptive Xontogeny Venture (PXV) Fund
Beyond M&A, conditions also seem ripe for reverse mergers. With financing options limited due to the aftermath of the geopolitical turmoil, the state of the economy, and dormant transactions in the mid-range due to limited SPACs in recent years, investors are in the driving seat in terms of valuation and structure, but life sciences firms must remain creative regarding financing techniques. As forecasted by John Pennett, partner-in-charge of the national technology and life sciences group at EisnerAmper: “We see this as an exciting time to be investing in record-high levels of innovation at very attractive valuations. Companies are looking for public vehicles, and we may see some reverse mergers into some of these fallen angels over the next year.”
These comments were seconded by Chris Garabedian, chairman and CEO of Xontogeny, and portfolio manager of the Perceptive Xontogeny Venture (PXV) Fund, who explained: “A slowdown in the IPO window means crossover investors have focused more on their public equity investments as opposed to private equity. Consequently, there are more opportunities for firms that cannot go public in this environment but that still need private equity.”
The prospect of a patent cliff for pharma looms ahead. Evaluate Pharma forecasts that US$258 billion are at risk as firms’ leading products face competition from lower-priced generic and biosimilar challengers. In that sense, acquiring fast-growing and de-risked biotechs is a clear strategy for pharma firms with deep pockets to battle revenue erosion. BMS, Amgen and Pfizer have acted upon it, as they will lose exclusivity on some of their best-selling drugs in the short term. Cures for unmet needs are also attracting industry giants. Tyrone Brewer, president, US oncology, Janssen, shared: “My assessment is that unmet needs will bolster deal-making and be a driver for acquisitions. Our focus is to follow the science and put the strongest R&D team in the industry together to help expedite the development of these opportunities.”
Standing out from the pack
The plunge in IPO numbers in 2022 left most biotechs unable to raise capital from public offerings. In 2022, 47 biotech IPOs raised US$4 billion. A far cry from the US$25 billion raised by the 152 offerings in 2021. From West to East Coast (the San Francisco/Bay Area led VC funding with over US$12 billion, seconded by the Boston area with US$8 billion), cash-strapped firms at the end of their runway are presented with closed public markets and a highly competitive environment in which to attract capital, almost enforcing deal-making as the only recourse to bring their candidates over the finished line.
Raising money will remain a challenge for early-stage firms with no late-stage clinical assets. Indeed, in this macroeconomic environment, investors have shifted their stance towards de-risked assets as opposed to a trend observed pre-pandemic of capitalizing on technologies before significant value inflection points. As initial seed and Series A investment dollars become a sought-after commodity, generating data and reaching milestones in the clinic and with the FDA will be crucial for firms seeking venture capital. Tellus Therapeutics, a neonatal care company focusing on the development of treatments for the unmet needs of newborns, secured a US$35 million Series A investment in December 2022. CEO Jason Kralic detailed what prompted Xontogeny Perceptive Venture Fund to pull the trigger: “The financing was triggered by reaching nonclinical development and regulatory milestones that increased our confidence in the clinical development path for the treatment of pre-term infants.”
Many of the inexperienced investors that tagged along during the pandemic have now turned around and fled, thus dropping share prices for publicly traded companies. That cycle damaged a lot of relatively low-cap, publicly traded biotech companies, which saw their promising technologies falling out of favor. As specialist funds regain most demand for shares, capital allocation will become ever so selective, according to James Gale, founding partner, and managing director at Signet Healthcare Partners: “There is sufficient capital capacity among venture firms but there may be a slowdown in future commitments to these funds in the mid-term. New capital will be infused selectively and could reflect tightening capital market conditions.”
The year ahead: health equity, clinical data, and RWE
For revenue-generating firms, ESG and health equity are no longer merely buzzwords. For the life sciences industry, incorporating ESG strategies starts with health equity and patient access to healthcare. The past years have shown that ESG is gradually being embedded in business operations and more central in the context of third-party engagement, which is vital in reinforcing the improving public perception of the industry, as mistrust remains a growth challenge for pharma. Detailing J&J’s “Our Race to Health Equity” initiative – put in place to address access to care and quality of outcomes to everyone – Tyrone Brewer explained: “I would be shocked if you could pick up any corporate report that does not talk about an ESG commitment. It is all about increasing awareness in education and access to clinical trials for underrepresented ethnic communities.”
Early-stage firms seeking investment will have to face increased due diligence from VCs after the “sugar high” experienced in 2020-2021, when several companies went public too soon and without a well-thought-out strategy. Today these firms must focus on finding partners to develop their assets or find them a different home. This makes life harder for pre-revenue life sciences firms that do not yet have clinical data. Christina Bardon, co-managing partner at MPM | BioImpact Capital explained: “In 2020, several companies invested in platforms without necessarily paying attention to reaching clinical milestones. Investors are now more parsimonious and looking for clinical-stage assets and tangible value creation. 2023 is a time to focus on clinical data.”
With unique access to the biotech ecosystem in Massachusetts, Kendalle O'Connell, CEO and president at MassBio, shared investors’ analysis: “Companies will have to be able to give more clinical data to investors to create confidence in their ideas and raise funding in future rounds.”
Indeed, for biotech companies running out of cash, the silver lining could be pushing to that later stage onto their next clinical data readout. Firms that can provide real-world evidence (the combination of real-world data and analytics) will have a competitive edge moving forward. The FDA uses RWE (Real World Evidence) to make regulatory decisions, and the latter is being used to strengthen clinical trial designs and observational studies to create new treatment options for patients. This impacts FDA approvals and accelerates the drug development process, which saves late-stage firms and drugmakers time and cash. Denise Juliano, who leads the life sciences division at Premier Inc., a leading healthcare improvement company, said: “The RWD (Real World Data) and RWE market is expected to reach US$2.3 billion by 2026, up from US$1.2 billion in 2021. RWE is the future.”
The life sciences story in 2023 should unfold with a stronger investor appetite, particularly for de-risked projects. Emerging technologies and early-stage firms will likely continue to face headwinds to prove the long-term value of their candidates in a market where de-risking is key, while steady valuations for companies that are well established are likely. Both public and capital markets will likely continue to reward firms that survived the translational gap (or “valley of death”) stage from discovery to translation into effective proof-of-concept, (including Phase 2 clinical development), pushing more firms to be in the clinic before their IPO.
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