By Marek Poszepczynski and Ailsa Craig, co-investment managers of the International Biotechnology Trust
Last year was a year of two halves for biotechnology investors. On the back of breakthrough vaccine announcements, 2021 began with sky-high valuations and IPOs in volumes not seen since the dotcom era. This frothiness, combined with the impracticality of face-to-face interactions, saw sizeable M&A deals grind to a halt. Inflation concerns also materialised, as global supply chains failed to keep pace with the global economic recovery.
In the second half of 2021, sentiment cooled off and biotech indices retrenched considerably. This correction created opportunity, as exciting innovators returned to attractive valuations. In addition, momentum started mounting for major M&A deals in the closing months of the year, including Acceleron Pharma being acquired by Merck, Vifor Pharma by CSL Pharma and Arena Pharmaceuticals by Pfizer.
Looking ahead, we are confident the sector is on solid footing to maintain this impetus through 2022 and beyond, driven by the following five sector tailwinds.
Return to normal (really)
While Covid-19 may continue to dominate the news agenda this year, we are confident 2022 will usher in the end of the pandemic. We are hopeful the Omicron variant will raise immunity throughout the world, without a corresponding rise in severe symptoms and deaths.
Increased global resilience to the virus, in combination with ongoing vaccination programmes and improved treatment options delivered by the biotech sector, should lead to a reduction in Covid-related restrictions across the world. This will act as a boon to the biotechnology space, as companies will benefit from the resumption of standard medical activities. Increased face-to-face interactions should also permit greater deal execution in the sector.
M&A on the rebound
Following a flurry of deals towards the end of 2021, we are confident of a resurgence in biotech M&A this year. Strong takeover activity is crucial for the biotechnology space, as it relies on mergers and acquisitions to propel innovation and disseminate drugs to those most in need. Takeovers permit an efficient division of labour, whereby nimble companies and universities specialise in innovation and are acquired by larger players, while the bigger players utilise their scale to deliver optimised drug manufacturing, distribution and marketing.
Big Pharma names are particularly well placed to take advantage of the normalisation in valuations and relaxation of pandemic restrictions, as they can use their strong cash balances to replenish product pipelines. This is crucial for dominant biotechnology players, which face constant pressure to acquire new technologies and products before the patent protections on existing drugs expire. In addition, industry leaders will be looking to keep up with the increasing demands of an ageing global population.