Biotalk Episode 3: 2023 Q1 Report: Global Trends in Biopharma Transactions

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This episode of Biotalk is focused on Locust Walk’s 2023 First Quarter Market Conditions Report, in which we apply the latest data to analyze current activities in the life sciences deal landscape. Each quarter, Locust Walk’s deal team compiles key statistics and trends showcasing what is happening in the global private and public capital markets and strategic partnering and M&A activity.

To download this report, please go to locustwalk.com and go to our “Insights” page.  As always Locust Walk is happy to speak with you further if you have any questions about our views or if we can be helpful to guide your organization through the current market environment.

Timestamps:

Deal Context: 1:14

Future Outlook: 5:23

Our Best Advice for the Current Market: 8:53

Transcription:

Welcome to Biotalk. My name is Geoff Meyerson, CEO and Co-founder of Locust Walk, and you are listening to Biotalk, our new podcast for biotech deal makers.

This episode of Biotalk is focused on Locust Walk’s 2023 First Quarter market conditions Report, in which we apply the latest data to analyze current activities in the life sciences deal landscape. Each quarter, Locust Walk’s deal team compiles key statistics and trends showcasing what is happening in the global private and public capital markets and strategic partnering and M&A activity.

Our report covers key takeaways for the sector across US, Europe and Asia geographies for a comprehensive view of biotech deal making. We invite you to review our report and hope you will find it useful in your business. To download this report, please go to locustwalk.com and go to our “Insights” page. As always Locust Walk is happy to speak with you further if you have any questions about our views or if we can be helpful to guide your organization through the current market environment. Locust Walk is happy to speak with you to review our quarterly findings in more depth or otherwise provide guidance for your organization through the current challenging environment to achieve its business objectives.

Deal Context, Quarter Highlights and Key Takeaways, and Future Outlook

In the next few minutes, I will provide deal making context, highlight events that have made a critical impact on the biotech industry, and provide our outlook for the future and our best advice on how you can survive as a biotech deal maker.

To provide deal context (Jumping right in)

• Prevailing market trends from 2022 continued into the first quarter of 2023 as the context for deal making, which maintains unfortunately the correction for the frothy and capital-saturated biotech market of the COVID era.
• My view is that valuation data that is publicly available does not accurately reflect the reality of the current financing landscape.
• Insider led rounds are anecdotally being done at down round valuations and that isn’t reflected in the overall data and some insider led rounds have artificial valuations to avoid righting down their portfolios.
• In contrast, outsider led rounds have been able to command step ups that are flat to 20% vs the 2x they would have received in a more favorable market. These deals are taking much longer to close with many more investors required to be called per dollar committed.
• The list of 200+ companies trading below cash speaks to the need for strategic alternatives. Many of these companies have not decided that doing a strategic deal is their best outcome but more of them have been choosing that path than before. Some have had negative data forcing this path but others recognize that if they enter into discussions with more cash in the bank, they will have more strategic options available to them.
• We have seen more public companies throwing in the towel recognizing that they cannot finance and need to find a home for their programs.
• This capitulation will lead to deals later this year and thus there will be a lag in getting deals done.
• But as the year goes on we will see more of these deals transact.
• Our prediction accordingly for the year around strategic deal making was that more small companies will either go out of business unfortunately or start to merge together. We stand by that prediction and foresee an acceleration of the trend as the financing environment remains constrained and companies decide to explore their options either publicly or behind closed doors.
• Big companies however with strong balance sheets like their investor counterparts are choosing to be highly selective. This is certainly a buyer’s market for both financing and strategic partnership with supply far outstripping demand. That type of information does not show up in statistics.
• When pharma is choosing to transact, strategic partners are choosing to buy innovation on the cheap and mostly acquiring later stage/ commercial programs to fill near term pipeline and revenue gaps. Based on conversations with strategics, we see no reason for that trend to change in the near-term.
• There have been some surprises on the transaction front
  • On the private or early-stage transaction side, buyer receptivity to full platform IP acquisition has been higher than expected vs previously just doing a platform license.
  • More companies that want to retain US rights are now open to entertaining a whole company sale. Previously maintaining US rights was the goal of a going concern but with the difficulty of raising capital for phase 3 development, we are seeing more companies open to M&A.
• Primarily, however, we are seeing expected market behavior
  • We are in an uncertain financing environment so deals that people feel most comfortable working on right now are those with bolt on capabilities, and those on the financing side with clinical stage assets. Strategics adding assets not only based on the short term cost of acquisition but closely calculating the cash necessary for post-close execution is critical. Even if you get an asset for free, the development spend might be more than a company is willing to accept
  • So if you are on the sell side, one consideration is to be honest with yourself in terms of running a quick process vs understanding or expecting something that is drawn out and requires more data than originally anticipated.
• One thing we’re not talking about is the loss of a key venture debt provider will also have consequences on the cost and availability of debt capital and the resulting incremental equity required to fill that gap.

Future Outlook

• So, what does all this mean and what is the outlook. My view is that we are in this for at least another year. Things likely will not get better until the second half of ’24 and potentially even ’25. There’s always the potential for an exogenous event like what happened with SVB. I wouldn’t be surprised to see something like that. I don’t think the other shoe has yet fallen, we don’t see a recovery of the market starting until the second half of 2024.
• However, quarterly deal data and conversations with Locust Walk’s clients suggest the market is at least moving in the direction of the signals needed for market recovery
  • Interestingly, valuations are not down which contradicts what we’ve heard anecdotally.
  • A higher bar for public and private financings has forced companies to focus efforts on their most promising programs, which should ultimately position surviving companies for success.
    • Lecembi’s approval for Alzheimer’s disease is a positive signal that despite the market hardships, the industry retains its power to deliver therapies to patients even in challenging indications.
    • Specifically Alzheimer’s specifically is a graveyard of drug failures whose progress was stagnant at best during the capital-saturated COVID era of biotech (controversial Aduhelm approval), showing that market highs do not necessarily correlate to industry progress by metrics of drug approval. As long as we see continued approvals of important drugs for devastating conditions, we will see progress in the industry. One thing to think about there is the impact of pricing and reimbursement which is also not fully covered but is having an increasingly important impact on the business.
  • M&A by deal value this quarter increased dramatically however that was skewed materially by the Seagen-Pfizer transaction. Further signals of growing deal size and breadth of participation in strategic transactions should occur before declaring this a catalyst of market recovery.
  • Unfortunately there will be continued layoffs, public companies trading below cash and down rounds in later stage financings
    • Turnover in pharma R&D and BD teams also is a challenge when companies are undergoing restructuring and that changes priorities and ultimately slows down needed deal making.
    • While these are painful and negative over the short run, they should lead to a leaner set of survivor companies that are attractive to investors and strategics and make for a healthier ecosystem.
  • The big driver of the industry remains interest rate policy which is really hard to handicap, especially when you have things like SVB happen and we can’t influence or predict it. Ultimately we are still a slave to interest rates. We have to unfortunately go through a recession which is still pending, it hasn’t happened yet, and once we get closer to the other side, we’ll start to see the recovery in sight.
• The European market and deal making trends largely reflected US trends with some signs of further distress, namely high discrepancy between current and historical levels of deal activity.
• Signs of a suppressed market in Japan include flat performance of biopharma market indices despite positive clinical trial readouts, strong revenue performance of Japanese large pharma and government policy to encourage new drug discovery.

Our Best Advice for the Current Market

• So, what is our advice for what to do in the current market? Without repeating things we’ve said in prior quarters, we have a few additions. Asian partnerships, particularly in Japan for clinical stage assets has to be considered more now than when equity was cheap. At Locust Walk we have a robust business in Asia which from the 2018 to 2021 time frame, was surprising slow because equity was so easy to find. With equity more challenging, we’re finding a significant uptick in requests for finding partnerships in Asia, specifically in Japan.
• It’s about clinical trial enrollment and reducing costs of getting to data as well
  • The counterbalance for this is that there are companies with open trials for more than a year who have not recruited a single patient.
  • Even though Asia deals may be lower costs you have to be able to get recruitment done to add value.
• The other thing to consider is to start processes early, be open to all possibilities around products, territories, and rights, because you don’t know what will resonate with any of the various counterparties.
• Assume you need to contact more partners and investors to get a deal done.
• You can survive in other ways by:
  • Leveraging the data and successes of other companies around you. If you are the only player in a space, it actually might be more challenging than if there was competition and the competition had some good data or a good deal, or some success.
    • People are looking for de-risked assets in this environment. One way to de-risk your asset is if someone who is ahead of you has good data.
  • Waiting for data can be a double-edged sword: Maintain some amount of cash runway so you’re not pigeonholed when it comes time to getting the deal you want done. You don’t want to have good data and no cash.

In conclusion, I want to thank everyone for listening to this episode of Biotalk. Please let us know what you thought and feel free to suggest potential topics for future episodes.  We look forward to a productive dialog and hope you tune in to our next podcast.  Please share with all of your friends and colleagues so we can grow the audience.  This is Geoff Meyerson for Biotalk signing off.