Biotech deals tumble to lowest in a decade over regulatory fears

Biotech companies have lost their allure as takeover targets, with the threat of tougher regulation sending dealmaking in a sector long regarded as a hotbed of mergers and acquisitions to the lowest level in more than a decade.

The sector has seen just 116 deals this year, according to Evaluate Pharma, a data group for the industry, down 18 per cent from 2020 and just over fifth lower than the average of the past ten years. The total value of deals struck this year hit $81bn, a third lower than in 2020.

The reversal for the biotech sector comes despite the wider M&A market enjoying a banner year, underlining the chilling effect that the prospect of regulators taking a stricter line on deals has already had.

The industry was put on notice in March when the US Federal Trade Commission and its counterparts in the EU, UK and Canada said they would tighten scrutiny of the wider pharma sector, noting the high volume of recent deals and skyrocketing drug prices.

Pharma executives said new regulation would risk throttling the ecosystem behind biotechs, which are backed by venture capital firms when they are sometimes little more than an idea before being bought by larger drugmakers.

“It’s been very disappointing because M&A’s always a huge catalyst for our sector,” said Brad Loncar, a biotech investor. “The possibility of an acquisition is always a call option that is baked into the valuation of biotech companies. And if you take that call option away, it would be devastating for our industry.”

Part of the headache for the sector, Loncar added, was whether regulators are just setting their sights on megadeals between large groups or the acquisition of smaller biotech companies.

Big pharma companies have historically outsourced much of the research and development of new drugs to smaller companies, often start-ups, which are faster and more agile in making cutting-edge medical breakthroughs.

The sharp slowdown in biotech deals is also in stark contrast to the rest of the healthcare sector. The value of deals in the sector, which includes diagnostic equipment and technology, medical technology and devices, hit almost $300bn, up roughly 40 per cent from 2020 and the second highest level in two decades, according to data from Refinitiv.

Even with that, pharma companies are still sitting on billions of dollars of cash “because they’ve been some of the winners of the pandemic,” said James Langston, a partner at law firm Cleary Gottlieb.

While the industry has experienced “extraordinary consolidation in the past decade”, this year many pharma companies have focused on the pandemic, as well as dealing with supply chain difficulties, he added.

Investment bank SVB Leerink forecasts big US and European pharma groups could have $500bn to deploy on acquisitions, with Pfizer, Novartis and Johnson & Johnson having the firepower to spend up $150bn, using cash and debt.

With the boost from Covid-19 revenues likely to subside in coming years, many pharma groups will need to find new engines of growth by 2025, forcing them to hunt for deals, according to the investment bank.

But this depends on the approach regulators ultimately adopt towards dealmaking, with Pfizer’s $6.7bn takeover of Arena Pharmaceutical, which was announced earlier this month, set to become a test case.

There is a significant overlap between both companies’ drug portfolios targeting inflammatory bowel diseases, which could raise competition concerns, noted Andrew Baum, an analyst at Citi.

“The key issue is whether the newly muscular FTC headed by Lina Khan will allow it to proceed,” he added.