The recent decline in U.S. GDP and the risk of recession are significant factors affecting the biopharma sector. The capital markets for biopharma assets are challenging, with difficulties in valuations, accessing the IPO market, and raising new capital. The closing data for 2022 is mixed, indicating stress in the sector. The IRA (Inflation Reduction Act) and its provisions, such as the corporate minimum tax, out-of-pocket caps on prescriptions, and the negotiation of drug prices by Medicare, will significantly impact large pharma companies and have a more negligible impact on the middle market. A marked contrast to 2020 and 2021, when liquidity was ample, the year 2022 was inconsistent with inflation in the wake of the Covid, increased uncertainty from the Russia-Ukraine war, fluctuations in exchange rates, and cross-border regulatory issues. Despite external pressures, major pharma deals still happened, which some experts say could indicate better business in 2023.
IPO Trends And Its Prospective Future
So far, in 2022, there have been 20 IPOs in Global Healthcare and Life Sciences. The total number of IPOs in 2020 and 2021 was much higher than in the previous four years. However, there has been a decrease in 2022 compared to the high number of IPOs in 2020 and 2021. The number of IPOs declined in 2017 but finally surpassed the 2014 high point in 2018.
An 84% decrease in IPOs from year to year is massive. So, what has happened? According to Forbes, the leading cause for the IPO low is that the U.S. Federal Reserve raised interest rates to fight a four-decade high in inflation. Higher interest rates mean less cheap money and fewer investments from retail and institutional investors. Quite a few greatly anticipated IPOs were canceled within the last quarter of 2022. And not just one specific industry that got affected; the scale is even in all sectors. Besides the impressive IPO low, there’s something else that’s not very encouraging for those who want to invest in a potential IPO. Some of the most promising IPO stocks of 2021 now have a lower valuation than their estimated IPO valuation. So far, only five of the topmost lucrative deals are something to get a note of optimism.
5 Biggest IPO Deals Of 2022 in All Healthcare Subsectors
- Amylyx Pharmaceuticals – Estimated market cap $2.49 billion
- Arcellx Inc. – Estimated market cap of $1.66 billion
- CinCor Pharma – Estimated market cap $1.12 billion
- Belite Bio – Estimated market cap of $760 million
- HilleVax Inc. – Estimated market cap of $705 million
M&A Decline But Mega Deals Ahead
M&A activity has declined during the pandemic, with a slowdown in 2020 and a pick-up in 2021, but it’s still below average compared to prior years. There have been 292 completed M&A transactions in 2022 compared to 521 in 2021, with a lower average deal size of $932 million in 2022 compared to $1.118 billion in 2021. The average value of M&A deals in 2022 is the lowest in the last six years. The 30 largest biopharma companies currently hold $87 billion in cash, which may lead to a potential increase in M&A activity in the future.
Mergers and acquisitions were widely expected to be a key theme in the biopharmaceutical in 2022. Several big pharma companies were flush with cash leading into the year, thanks to their top-selling COVID-19 products, innovative branded medications, and high-value divestitures. The winners in all healthcare subsectors of M&A are the following five.
- Amgen to pay $27.8 billion for Horizon Therapeutics
- Pfizer acquired Biohaven Pharmaceuticals for $11.6 billion
- Pfizer purchased Global Blood Therapeutics for $5.4 billion
- BMS picked up Turning Point Therapeutics for $4.1 billion
- Amgen bought ChemoCentrix for $3.7 billion
For 2022, the average among the five most significant healthcare subsector deals presently stands at $10.5 billion. By contrast, in 2018, Pharma’s average large deal came in at $7.8 billion. In short, this year’s pharma M&A activity was characterized by a sizable uptick in the number of buyouts and a modest increase in the average deal size on the top end of the spectrum. Large-cap Pharma is focused on acquiring revenue to target biotech companies with Phase III assets. They are less likely to acquire companies with Phases I & II but will monitor early-stage companies through partnership deals with the potential for future acquisition. This creates a “barbell-shaped” market with a mix of safe and risky assets.
Biopharmaceutical – Preferred R&D Partnership Models
Biopharma deals were down in 2022 compared to the last three years’ average. Now, the industry is back to its longstanding disease areas after focusing intensely on COVID-19 in 2020. In 2022, $167.4 billion was raised through transactions across venture rounds and IPOs, deals, and M&A in the healthcare and life sciences sector 2022, compared to $172.2 billion in 2021.
Global healthcare and life sciences R&D partnerships worth $167.4 billion have been signed to date, down from $172.2 billion in 2021, which included deals for COVID-19 therapeutics, vaccines, and diagnostics across MedTech, manufacturing, supply, and other contract services. Venture rounds amounted to $44.9 Billion completed in 2022 in the sector, almost half of what was ventured in 2021. Geopolitical and economic instability continues to blot global IPO market soppiness. The number of deals globally decreased by 26%, whereas the number of funds raised decreased by 44% in 2022.
A change is occurring in the life sciences industry as stakeholders move from traditional asset-based partnerships to collaborative, non-asset-based R&D partnerships. These new partnerships involve multiple parties, including life sciences companies, academia, non-profits, and government entities, focusing on expanding knowledge and understanding in a particular area. They feature shared control and decision-making, distributing both risks and rewards.
Biopharma Ventures & Dealmaking
Healthcare trends indicate global healthcare V.C. investment was healthy in 2022 despite an economic downturn. There is plenty of dry powder to deploy; however, investments and exits are slowing due to the volatile market. A decline of 26% in the number of rounds and 44% in the total amount raised compared to 2021. All that money spawned hundreds of new healthcare and life sciences companies a year. At the peak, 1169 were funded in 2022, up from 858 in 2018 in venture fundraising globally. Such exuberance spread to the stock market, where more than 100 biopharma went public in 2022 alone, including companies selling investors on a dream rather than data.
Healthcare V.C. fundraising hit $45 billion in 2022, third only to the record set in 2021, with an unprecedented amount raised in the first half of 2022. As most firms recently raised new funds, venture fundraising is predicted to decline to about $15 billion in 2023. We also expect investor deal pace to be slower than in 2022, leading to a longer time between new fundraises. Although there’s still much dry powder to invest, investors will first go to existing portfolio companies and be more cautious of new platforms. Substantial investment in Q1 2022 was followed by drops in Q2 and again in Q3, falling below average dollars raised per quarter in 2020, while Q4 was down only slightly, bolstered by a bounce-back in biopharma and dx/tools. This year’s investment drop-off resulted from later-stage investors pausing new deal activity and investors dedicating more time and capital to supporting existing portfolio companies.
The healthcare industry is facing challenges post-pandemic and due to macroeconomic stress, leading to changes in investment, funding levels, and prices. Inflationary pressures are expected to persist in the U.S., while Europe and Asia are expected to recover faster, leading to the need for budget adaptation and stretching, especially for early-stage companies. Investor confidence is expected to slowly improve, with a positive reception for biotech by retail investors in 2021, followed by a retreat, causing public equities to drop.
2023 Industry & Future Outlook
Investment in the biotech industry has shifted to early-stage preclinical companies, while Pharma focuses on Phase III-ready assets for pipeline filling and revenue generation through co-development deals. Despite a challenging economic outlook for 2023, private equity firms have a large amount of cash ready for deployment and an appetite to invest in innovative science. The biopharma industry faces challenges as it returns to a new normal post-Covid-19. Despite growth in pharmaceutical revenue, the U.S. Inflation Reduction Act, high inflation, and a closed IPO market are causing difficulties for smaller companies. Additionally, the first-time negotiation of prices in Medicare and geopolitical uncertainty in the East add to the challenges. However, changes such as increased diversity in clinical trials and a return to normal levels of trials are being made. The global pharma and MedTech industries may face difficulties before reaching their full potential.