Biopharma Financing Environment at Record Level

Nasdaq Biotech Index hits an all-time record this month consistent with massive reallocation into innovative life sciences investments

Private Venture Financing Market Hits an All Time High in the Middle of the COVID-19 Pandemic.

Market for Equity Follow-Ons in May 2020 Second Strongest on Record Since early 1990s

M&A market quiet but picking up in May 2020

Private debt markets are soft but have picked up significantly in the last two weeks

Download the Torreya report on the deal and financing environment

Torreya has updated its April 2020 report on the deal and financing environment during the COVID-19 pandemic. Today's report has a number of key headlines including:

Biotech stocks at all time high

The NASDAQ Biotech Index hit an all time high on May 20, 2020.

The last time the biotech market was at this month's level was in July 2015 when the Index briefly crossed 4000. It is fairly obvious that the COVID-19 pandemic has raised the awareness of many investors in our society of the importance of the life sciences. Collectively, there has been a reallocation of capital into the biotech and pharmaceutical sector in recent months. We at Torreya believe that this trend is likely to continue in the months ahead.

It's important to note that the overall rise in the biotech index this year (at least as measured using the NBI) has been driven by just a few stocks. Just like the tech sector where a few megacaps drive returns, the NBI rise this year would drop by more than half were just three of the more than 200 index constituents excluded. These are Regeneron, Moderna and Gilead.

Large Segments of the Broader Biopharma Market are Down

To this point, when we looked at the broader biopharma market, we found that there are important crosscurrents below the surface. For this analysis we excluded seven of 415 US public biopharma companies that have made important announcements regarding COVID-19 antivirals or vaccines. The reason is to get a sense of how the broader market is doing.

The table above shows the story. The median big pharma company is down a bit in the Jan 1 to May 26, 2020 period. The median biotech is up 3%. Generic pharma is down 10%, on average as is the innovative segment of commercial pharma. We defined specialty pharma as comprising companies like Neos Therapeutics who have generated reformulation of now generic molecules (so-called 505b2's). These companies are down 26% this year and support the view that there is an ever higher premium being placed on molecular innovation in the marketplace.

Private Equity Financing Market Sets an All Time Record in the Last 90 Days

Private venture financing activity has been robust, at close to record levels all year. We count more than 75 biopharma companies that were able to raise money this month. The number of private fund raises has been at or near a record level for most of 2020 (see chart below). Many have noted the strength of the private financing market and the commitment of investors to sustaining or even accelerating investment in innovation. See, for example, Bruce Booth's article https://lifescivc.com/2020/04/booming-vc-backed-biopharma-strong-market-despite-pandemic/.

Others such as Jacob Bell of Biopharma Dive have argued that the COVID-19 virus is seriously impairing the private venture market in biopharma (see https://www.biopharmadive.com/news/venture-capital-biotech-coronavirus/577644/). We just aren't seeing this. It isn't in the data and our clients at Torreya are, in general, having an easier time raising capital today than we recall from history. In recent weeks we have spoken to multiple VC's who are looking for quality financing deal flow. This is not a normal circumstance.

To put a fine point, we looked at our private financing data going back some time and can say with confidence that there has never been more private venture financing raised in the biopharma sector than in the last three months. Never before, have private biopharma raised the amount seen recently ($8.6 billion in the period from March to May 2020).

The chart above lists 31 "mega rounds" - deals for over $100 million - that have taken place so far in 2020.

Public Follow-on Equity Financing Market Robust

Public company follow-on equity activity has been at close to an all time record in May 2020.

The chart above shows that while March 2020 was indeed a very quiet month for follow-ons, this May has been exceptionally strong.

The picture above shows the largest months for US follow-on activity in biopharm going back to 1991. May 2020 has been the second strongest month in history, edged out by May of 2015.

IPO Market Activity Modest

In contrast, the IPO market has not been as strong thus far in 2020.

We count four IPOs in March, one in April and several proposed in May. IPO's, by nature, are more episodic and reflect the state of the small cap side of the market - which is not as strong today as before the COVID-19 pandemic. Recent IPO's have performed well which bodes well for future issuance. (See, for example, https://lifescivc.com/2020/04/value-creation-and-destruction-dispersion-of-performance-in-biotech-ipos/).

Royalty Pharma IPO an Important Bellwether

This week's filing of the Royalty Pharma IPO is an historic event for the life sciences IPO market - on the same scale of importance of the largest IPO in recent memory (Moderna). Royalty Pharma's S-1 shows trailing revenue of $1.8 billion and good continuity and growth in revenue over time. Because this revenue is largely profit (expenses of $103mm in 2019), the company will clearly trade for well over $10 billion. Big Pharma EBITDA multiples are in the low teens (averaging around 12x). A 12x multiple on $1.7bn in EBITDA would imply an enterprise value of a little over $20 billion. Royalty Pharma already enjoys a very low cost of debt capital. With a public listing its cost of equity capital is likely to fall substantially which should create a virtuous cycle of growth going forward.

Royalty Monetization Market Robust

Royalty Pharma's IPO echos a larger trend - the royalty monetization market remains quite strong.

The chart above shows deal volume in the royalty monetization market for the life sciences sector going back to 2011. Based on volume YTD, the pace of royalty monetizations is on track to hit a record in 2020. This market is open and remains well funded.

Private Debt Market Improving but Weakened

The private debt market is open with five issuances in the week of May 18th. Unlike the royalty market, the private debt market remains soft, reflecting abnormally high credit spreads in the broader high yield bond market.

This is visible in the chart above. Like the IPO market, the debt markets took a breather starting in November 2019 and have yet to really come back in strength.

Last year, the volume of private debt issuances in the life sciences was more or less on par with dollar volume of royalty monetization. We expect that 2020 will be the first year since 2014 when the dollar volume of royalty monetizations exceeds that of the private debt markets.

M&A Market Remains Restrained

On the biopharma M&A front, deal activity has been quiet, reflecting an industry that has been largely focused on the COVID-19 pandemic. Both deal count and dollar volume of M&A have been at the lowest point in recent memory. We are seeing a change in tenor of the market this month, with the announcement of a number of deals including the acquisitions of Portola and Stemline.

The table below shows M&A activity this year on a global basis.

The largest deal by a top 10 pharma was the Dermira buy of Lilly in January for $1.1bn. Otherwise, big pharma have been quiet, with only a few deals at all - such as Merck's acquisition this week of Themis to accelerate a COVID-19 vaccine. We are all hopeful that the COVID-19 pandemic subsides over time and we would expect to see big pharma M&A activity pick up at that at time.

Thank you for reading this and be safe.

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Torreya is a client-centric M&A advisory firm focused on life sciences transactions. More details about our practice are available at www.torreya.com.