A reckoning is coming for cash-strapped biotechs

The biotech sector is more than 40 percent down from its high last February, while the major pharmaceutical firms are flush with cash. That sounds like the ideal condition for dealmaking. But what if biotech boards and shareholders want takeover bids at yesterday's sky-high prices?

A 2020 study by JP Morgan Chase & Co. analysts found that when markets fall, a takeover target's one-year share-price high is a stubborn benchmark for pricing a deal. So it can take more than a year from a market correction until buyers and sellers align. Those dynamics may now be at work.

The first year of the pandemic saw a surge in stock-market enthusiasm for biotechnology as investors correctly bet that science would lead the world out of the pandemic. Moderna Inc.'s vaccine provided vindication. But the sector has now given up all its outperformance, and the market is looking beyond Covid-related breakthroughs. Bloomberg Intelligence analysts also point to concerns about drug-pricing pressure as well as a string of regulatory setbacks as factors damaging sentiment.

Could the global mergers and acquisitions (M&A) boom bail out biotech investors with some juicy takeover offers? So far, M&A has benefited health-care investors pretty selectively. Last year saw a surge in deals for firms involved in medical equipment and services — diagnostics, face masks, hospitals and health insurance. One deal, the $34 billion leveraged buyout of family-owned Medline Industries Inc., represented a big chunk of the total. At the weekend, it emerged that Unilever Plc wants to buy GlaxoSmithKline Plc's consumer-healthcare business to get hold of brands like Sensodyne toothpaste.

The absence of a single really big transaction in pharmaceuticals and biotech in 2021 has created the impression of a lull when it comes to M&A in actual drug discovery. By contrast, the 2019 deal data in pharma and biotech were boosted by the $84 billion purchase of Allergan Ltd. and the $88 billion acquisition of Celgene Corp. In 2020, biotech Alexion Pharmaceuticals Inc. agreed to be bought for $39 billion. And 2018 saw the $81 billion bid for Shire Plc.

In reality, recent deal flow is stronger than it seems: The number of transactions over $1 billion has been pretty steady in pharma in recent years and has been growing in biotech. The question is whether biotech M&A could now markedly accelerate.

Falling share prices should tempt bargain hunters and deals are certainly affordable. Swiss drugmaker Novartis AG is looking for purchases up to around $10 billion. Pfizer Inc. is enjoying the revenue boost from its Covid vaccine. Sanofi has traditionally been a busy acquirer.

But biotech investors should temper their optimism. The message telegraphed by potential acquirers at JP Morgan Chase's annual healthcare conference last week was that buyers and sellers were some way apart on price.

That's more than just talking about their own book. Buyers can afford to be picky. After a deluge of recent listings, it's far from clear that biotechs can now raise capital in public or private markets so easily. Those that need cash face a reckoning. Buddying up with big pharma may be the only way to fund their ongoing R&D. Elsewhere, acquisitive bosses may find decent opportunities among unlisted biotechs that may now struggle to do an initial public offering or blank-check merger. After all, without a quoted share, they are less likely to be hostage to an unrealistic anchor price.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication.