BJC bioCapital Connections
periodic musings about the biopharma industry
BJC bioCapital Connections
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3/21/2023 0 Comments Changing Perception of R&D Spend Reflected in a Comparison of Market PerformanceThe ongoing shift over the last decade towards biopharma as the primary originator of industry innovation, and the disproportionate value it generated, is perhaps best reflected in the market performance of the biopharma sector when compared to that of traditional pharmaceutical companies. As is noted in the chart presented below, over the last decade, the cumulative advance of biopharma, in particular the increase in the XBI index of earlier-stage biopharma companies, far outpaced the gains achieved by the traditional pharmaceutical industry. Remarkably, the spread in cumulative market appreciation between the XBI and traditional pharma approached an astounding 300% at its peak in early 2021.  That contrast in market appreciation, achieved over a nearly ten-year period, quickly vanished in the year that followed. The perception of R&D as a key valuation driver during a time of relatively inexpensive money, appears to have quickly reversed itself, with the cumulative gains of a decade evaporating virtually overnight. Perhaps in anticipation of the higher interest rate environment that we now find ourselves in, sentiment began to shift even before the first interest rate hike. This valuation reset has reduced the aggregate returns of the XBI to below those of traditional pharma for the first time in ten+ years. While the implications of that reset are likely to reverberate until further economic clarity is achieved, interest rate stability may usher in renewed sector advance.
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3/9/2023 0 Comments The Disaggregation of the Pharmaceutical Value Chain and its Innovation Implications.The evolution of the pharmaceutical industry has witnessed the continued disaggregation of the industry value chain. This disaggregation has resulted in larger, more established companies increasingly focused on downstream competencies in such areas as regulatory affairs and product commercialization with earlier-stage sector participants asserting themselves as the primary engines of industry innovation. As a result, today’s biopharmaceutical industry may arguably be considered largely an outsourced R&D function and feeder system for the commercial infrastructure of big pharma.  While the migration of the industry towards this functional segregation is not a new phenomenon, what is striking is the degree of the shift. As is illustrated in the chart presented below, as recently as ten years ago some 60% of novel drug approvals were tied to companies whose origins could be traced to the traditional pharmaceutical industry. Within the last handful of years, however, that percentage has dropped to as low as 20%. Even this percentage may be an overstatement of the actual figure after factoring in the acquisition appetite of big pharma for its smaller biotech peers. The implications of this shift on market performance, a topic to be explored in an upcoming blog post, is notable.  The IPO torrent of 2020 and 2021, during which time some 170 new issues came to market came to a screeching halt in 2022. Only 11 IPOs of any real size priced in 2022, four of them in the first two months of the year and prior to Russia’s invasion of Ukraine. That dearth in IPO activity has continued into 2023 with only two meaningful new issues, Structure Therapeutics and Mineralys Therapeutics, coming to market. Even if the economic uncertainties that have clouded the market picture were to somehow resolve themselves, it seems unlikely that investors will regain enthusiasm for the sector any time soon with the XBI down more than 50% from its February 2021 high water mark. With biopharma currently out of public market favor and with valuations substantially discounted relative to their 2021 levels, many industry participants believe the pace of mergers and acquisition activity is bound to accelerate, as strategic acquirors step in to bolster pipelines with promising clinical candidates at depressed prices. Evidence does not seem to support this position. As seen in the chart below, measured by number of announced life science transactions, while M&A activity did not follow IPOs off a cliff last year, the level of activity did pull back quite considerably, down nearly 37% year-over-year. This decline in dealmaking suggests that despite what may be considered a buyer’s market, the appetite of large pharmaceutical companies to expand their cash burn rates is limited especially for assets whose payback is often many years off, if then.  Not surprisingly and not unlike other industry sectors, M&A interest in times of economic uncertainty in the pharma industry appears to be more narrowly focused on smaller, complementary “bolt-on” acquisitions rather than bold, transformational moves. This deal bias is perhaps best reflected in the aggregate dollar volume of transactions announced in 2022, the $101 billion total the lowest in a decade while the number of announced transactions displayed a slight uptick over the years immediately pre-pandemic. The 35% decline from 2021 in the number of billion-dollar deals is further indication of this more conservative M&A mindset. Hence while industry lore may have us believe interest in strategic M&A increased with public market downturns, actual transaction data is evidence of quite the opposite.  |
About the AuthorBen Conway is a long-tenured investment banker with a primary focus on the biopharmaceutical sector. In addition to investment banking, his experience includes positions in large pharma as well as with smaller emerging biotech platforms. Archives |
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