CONTRIBUTORS
Evan McCulloch, CFA
Portfolio Manager
Franklin Equity Group
United States
In 2023, the biotechnology and pharmaceutical industries began to stabilize, despite continuing to face business and economic challenges that started in 2022. The uptick in merger and acquisition (M&A) activity could act as a tailwind as capital constraints put pressure on smaller or early-stage companies and intensifying drug reimbursement pressures and patent losses impact larger commercial enterprises. We anticipate an industry consolidation-driven inflection point resulting from these pressures. These and other market volatility factors hold the potential to increase the cost required to develop new products and could have significant implications for commercial and portfolio strategies going forward.
The COVID-19 pandemic brought an unprecedented amount of emerging biotechnology to the initial public offering (IPO) stage, but 2023 told a different story that could continue to unfold in 2024. Investors remain cautious in what could be the slowest year for biotech IPOs since 2018. In conjunction with the March 10 collapse of Silicon Valley Bank and already-depressed private equity and venture capital funding, biotech remains in a rough patch as investors are holding out for more proof-of-concept and clinical trial results. We believe these capital constraints are leading small and start-up companies to seek funding and growth opportunities through other avenues, such as M&A activity with larger firms.
Simultaneously, big drugmakers want to deepen their product pipelines as the approaching “patent cliff” and the Inflation Reduction Act (IRA) threaten future revenue, with an estimated US$200 billion in annual patent-related revenue at risk through 2030.1 The Medicare Drug Price Negotiation Program2 embedded in IRA legislation could cause a big drop in the prices at which drugs are reimbursed, creating a “functional” patent expiration. These dynamics are increasingly driving the large pharma companies’ ambitions to fill the looming revenue holes through bolt-on acquisitions of late-stage drug developers and commercial biotechs.
M&A activity across the sector began increasing in 2023 (Exhibit 1) as industry leaders Pfizer and Amgen—both anticipating loss of exclusivity for several key drugs—sought acquisition opportunities during the year. However, the firm hand of regulators was felt during these large acquisitions as the Federal Trade Commission (FTC) initially blocked Amgen’s acquisition of Horizon Therapeutics. Though it was ultimately resolved and the deal closed in October,3 we recognize the regulatory pressures and uncertainty the sector continues to face. To avoid regulatory scrutiny, we may see a shift away from blockbuster (US$10 billion+) deals involving larger commercial-stage targets with meaningful product sales in favor of smaller but later-stage, clinically de-risked names.
Exhibit 1: Reinvigoration of M&A Activity within Biotech
2018–2023
Source: BioPharma Dive Biotech M&A Tracker, as of 30 November 2023. Deals represented have a minimum of US$50 million of upfront payment.
The road ahead for biotechnology and pharmaceuticals may be different from that of prior years, but as we move into the post-pandemic era, the industry is not lacking innovation prospects despite potential consolidation. We are enthusiastic about progress in the areas of radiopharmaceuticals and antibody drug conjugates (ADCs), which were highlighted by Pfizer’s acquisition of Seagen4 and its ADC expertise, and Eli Lilly’s acquisition of POINT Biopharma5 and its radiopharmaceutical focus. We also see how further progress in the fields of cell therapy, gene therapy and gene editing can allow the industry to address diseases in areas of significant unmet medical need. GLP-1s and weight loss treatments are another area of interest as the fervor around these drugs rapidly expanded the market in 2023. Lastly, we see the potential for the application of artificial intelligence in the drug discovery process to shorten drug development times and, hopefully, improve probabilities of success.
Endnotes
- Source: Gardner, Jonathan. “Big Pharma’s Looming Threat: A Patent Cliff of ‘Tectonic Magnitude.’” BioPharma Dive. February 21, 2023.
- The Negotiation Program, central to achieving the IRA's goal of lowering drug costs, gives the federal government the ability to negotiate drug prices for certain high-expenditure Medicare Part D drugs, and eventually Part B drugs.
- Source: “Amgen Completes Acquisition of Horizon Therapeutics Plc.” Amgen. 2023.
- Source: “Pfizer Invests $43 Billion to Battle Cancer”. Pfizer Press Release, 2023.
- Source: “Lilly to Acquire POINT BIOPHARMA to Expand Oncology Capabilities into Next-Generation Radioligand Therapies.” POINT Biopharma, 2023.
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