Biopharma's green shoots thriving in summer sun as deal activity returns

The Fed has paused rate hikes and the major indices are starting to see a bull again. Could the summer sun finally be returning to shine on the biotech industry?

That’s what William Blair’s investment banking team thinks, according to a new quarterly review of U.S. biopharma. After hitting near rock bottom in the summer of 2022, sentiment is now improving across the sector. The second quarter saw "meaningful M&A"—16 transactions totaling $29.1 billion in deal value. Highlights include Eli Lilly’s two deals for Sigilon Therapeutics and Dice Therapeutics for $35 million and $2.4 billion, respectively, and GSK’s $2 billion purchase of Bellus Health.

The defining feature of these deals was later-stage assets that pharma companies can bring on to patch up losses from the expected end of patent exclusivity for key drugs. De-risked transactions for phase 2 or higher biopharmas made up 92% of public acquisitions. Smaller companies also took reverse mergers as a way to the public markets.

Back in the first quarter, just 10 deals were executed, including Pfizer’s high-profile Seagen buy for $43 billion, with a total value of $52.5 billion.

While it may seem like biotech partnering has been going at a steady clip, William Blair reports that activity has actually slowed down slightly with just 30 deals announced in the second quarter, compared to 42 in the first quarter. For comparison, the total for the first quarter of 2022 was even higher at 51. But valuations were up in the second quarter of this year, with a total of $25.3 billion offered in total deal value, compared to $2 billion for the previous quarter.

The sector largely shrugged off Silicon Valley Bank’s March collapse during the second quarter. Initially, fear of contagion spread but that panic has since subsided.

Private financings continued to lag with just 58 in the second quarter for a total of $4.8 billion. Extension rounds jumped to 19% in the first half of 2023, compared to 7% in both 2021 and 2022. Over on the public markets, de-risked, clinical-stage offerings were again the primary focus, with all secondary offerings for clinical-stage companies.

So what does this all mean for the rest of the year?

“The green shoots seen in Q1 2023 grew longer in the second quarter, thanks to a resilient U.S. economy and a reset of earnings expectations, prompting greater optimism for the remainder of the year,” William Blair’s team wrote.

Volatility in the markets will continue; however, concerns over a broader recession seem overblown. The biotech XBI has lagged other major indices, suggesting a difficult environment for investors to fundraise, William Blair said. But generalists have become interested in biopharma again thanks to the larger, headline-making M&A deals.

Reverse mergers are expected to continue, while the IPO market is slowly coming back, with a busier public offering schedule anticipated in the second half. Just this week two companies, Apogee Therapeutics and Sagimet Biosciences, priced their public offerings

“With major indices entering ‘bull market’ territory and the Fed pausing on rate hikes after a historic tightening campaign, sentiment in the biopharma market improved during the second quarter suggesting we may finally be out of the doldrums,” the report said.