- Sector Lead, Biotech Private Investments
United States, Intermediary
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We are optimistic that the biotech market will continue to recover, supported by an improving macroeconomic environment, continued M&A activity, and improved fundamentals for the sector. Positive signals underpinning our optimism began to flash in 2023 and we believe the momentum will continue to accelerate this year. These signals include:
- Historically high levels of innovation and productivity
- Robust M&A activity, which hit record levels last year
- Willingness of public investors to fund companies advancing their programs, as reflected by healthy deal activity
- Ability of private companies with high-quality de-risked assets to successfully access the public market, despite an otherwise muted IPO environment
A new era of innovation
As we highlighted in our 2023 midyear commentary, Biotech for the next decade: Private market innovations, impressive innovations are fueling breakthroughs across the sector, and we believe private companies are at the forefront of this progress. Biotech has had a productive year: 55 new drugs were approved by the US Food and Drug Administration (FDA) in 2023, the second-highest count of the past 30 years (Figure 1). We think this achievement reflects a robust pipeline coupled with a highly cooperative regulatory environment that will continue to drive biotech advances for the next decade and beyond.
For a recent in-depth discussion, please see our focused piece, Private biotech: Immunology and inflammation.
Figure 1
M&A momentum should continue
M&A activity hit record levels in 2023, beginning with the US$43B acquisition of Seagen by Pfizer (Pfizer Completes Acquisition of Seagen | Pfizer) and culminating in a new all-time high for a total deal count of 36 (besting the previous record of 28 in 2020), according to TD Cowen; the number of deals over US$1B (23 vs previous record of 12 in 2021, as seen in Figure 2); the volume of dollars returned to investors ($150B); and M&A premium (~70% on average). Most deals continued to target late-stage assets or commercial products, which can drive near-term revenue contributions as well as long-term growth for the acquirers. We think this trend will continue and we expect the M&A momentum to also increasingly benefit small- to mid-cap companies that are advancing earlier-stage assets that have produced promising data.
Figure 2
Possible rebound in IPO issuance and performance
Despite the high overall M&A activity in 2023, private companies were a minority of the acquisitions and, as such, public listings still constitute their main path to liquidity. IPO activity remained muted last year — not only relative to the record 2020–2021 levels, but also pre-2020 activity (Figure 3). Deal dynamics have improved though, as almost half of the 2023 IPOs priced at the high end of the range were able to raise outsized amounts at healthy valuations (1.4x median step-up vs 1.2x in 2022) and have enjoyed solid after-market performance so far. These pricing and performance dynamics are significantly better than the 2022 class of IPOs and appear to be sticking in early 2024. We are optimistic that this momentum will continue to build through the year.
Figure 3
The phenotype of companies that successfully complete public offerings has shifted, with investor appetite gravitating towards more de-risked clinical-stage assets in areas such as oncology, cardiometabolic, neuro, and immunology diseases. Together, these constitute larger patient populations and commercialization opportunities. We expect 2024 issuance to continue along similar lines.
Looking forward
In our view, the current biotech landscape is supported by stabilized macroeconomic factors and multiple signals of an acceleration in capital market activity. While the public biotech market has lagged this recovery to date, early signs of improvement are evident. In this discerning IPO environment, we continue to believe that investing in high-quality biotech firms with differentiated assets, scientific merit, and measured valuations is more important than ever for success and over the long term.
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