European biotech enjoys a burst of dealmaking activity

The first quarter saw a string of transactions after a punishing year for the sector

European biotech just enjoyed its most abundant quarter in nearly two years in a tentative sign of a renaissance in the sector. There were 46 deals in Q1 2023, the second biggest year for deals in the region on Mergermarket record.

Activity was collectively valued at US$5.6 billion. Only two other quarters in the past four years have beaten this: Q2 and Q4 in 2021, which saw US$5.8 billion and US$9.1 billion worth of transactions, respectively.

Like tech at large, biotech asset valuations fell victim to the market shift to risk-off last year. Biotech companies are typically early-stage, often with unproven products and uncertain revenue streams. This makes them more vulnerable to changes in macro and market conditions, such as those seen since late 2021, with stubborn inflation, rising interest rates and slowing economic growth.

This was evident in the recent market downturn. Biotech stocks were among the worst-performing sectors in 2022. The STOXX Europe Total Market Biotechnology Index, which tracks the largest companies in the region, returned  -24% last year, while the Nasdaq Biotechnology Index in the US similarly underperformed the broader market. 

A paradigm shift 

Genetic medicine is a dynamic field in which companies are actively seeking capital from investors eager to capitalize on advances in gene editing, mRNA therapy, and sRNA therapy. Many new firms are focused on novel drug delivery technologies using adeno-associated virus vectors that can carry therapeutic payloads to replace or alter genes at a molecular level, potentially revolutionizing the way diseases are treated. As an increasing number of cell and gene therapy programs move through clinical development, more viral vectors are needed to introduce specific DNA sequences to encode genes.

In March, German life sciences company Sartorius paid US$2.6 billion for Polyplus, a French company developing viral vectors for cell and gene therapies, in what was the largest deal in the sector so far this year. Its products are used to deliver genetic material into cells, which can be used to treat a variety of diseases, including cancer, sickle cell disease and hemophilia. Post-acquisition, Sartorius, which provides tools and services for biopharma manufacturing, will be able to offer a complete suite of solutions for cell and gene therapy developers.

Rare cases

It is not only paradigm-shifting technologies with widespread potential that are motivating buyers. Irish biotech company Amryt Pharma was the subject of a US$1.5 billion acquisition by Chiesi Farmaceutici in Italy in January. Amryt Pharma is focused on developing and commercializing innovative drugs for rare diseases. The company's products include Mycapssa, Juxtapid, Myalept and Filsuvez, which was granted orphan drug status in Europe and the US for the treatment of Epidermolysis Bullosa, a genetic skin disorder.

Rare diseases are a hidden challenge, leaving countless individuals without any approved treatments for over 7,000 conditions, according to the National Institutes of Health. Despite affecting a small number of people, the cost of treatment is typically higher and there is less competition, presenting a unique opportunity. By acquiring biotech firms dedicated to rare disease treatment, pharma companies gain access to new patient populations and an entirely fresh range of products. 

Smaller plays 

Polyplus and Amryt are the only US$1 billion-plus European biotech deals made so far this year. All other transactions were significantly smaller. The third largest was valued at US$211 million and saw Rhythm Pharmaceuticals buy Dutch company Xinvento in a transaction that includes up to US$50 million in regulatory approval payments, and up to US$150 million in commercial net sales milestones.

Xinvento is a clinical-stage biotech company developing therapies for congenital hyperinsulinism (CHI), a rare genetic disease that causes newborns and children to produce too much insulin. CHI can lead to hypoglycemia, which can cause seizures, comas and brain damage. The acquisition of Xinvento is a strategic fit for Rhythm, which is focused on developing treatments for rare endocrine diseases. The deal will expand Rhythm's pipeline and give the company access to Xinvento's lead drug candidate for the treatment of CHI, which is currently in the pre-clinical phase.

Rising demand and costs 

Pharma companies are using M&A as a tool to address the increasing prevalence of chronic diseases, the rise of personalized medicine, and gene-based treatment approaches, circumventing the need to develop in these areas via research and development (R&D) budgets. This can often prove to be a faster and more cost-effective way to enter a new market than developing the product or technology in-house. Deloitte recently found that the projected ROI in pharma R&D in 2022 has fallen to 1.2%, the lowest in more than a decade. Rising development cycles made the average cost of developing a new drug climb by US$298 million to US$2.3 billion in 2022.

These rising costs are a major incentive for M&A and with the recent recalibration of valuations, there is a major buying opportunity for acquirers. However, biotech is not without its challenges. Venture capital funds are more discerning today. Early-stage investment has pulled back sharply since 2021 and many startups that raised Series A rounds swiftly when money was cheap and plentiful may struggle to secure follow-on funding. This clearly has major implications for future M&A activity. For the time being, though, European biotech deals have been making a comeback.

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