Biotechnology is undeniably making new waves in the medicinal and therapeutic arena of healthcare. However, equally important is the commercial aspect of this re-emerging sector. Advances in technology has re-energized the medical application of biology but in many ways, it is capital that is facilitating this development. Here are three capital trends investors need to be aware of.
Merger-and-acquisition (m&a)
M&A activity remains a key driver for the sector. The market can expect to see more consolidation given the robust stream of innovation flowing from numerous small- and mid-cap biotechnology companies, coupled with weakening product pipelines and strong financial positions at the larger biopharmaceutical companies.
In 2019, top 10 biopharma deals amounted to US$207 billion but the pandemic curtailed 2020’s top 10 deals to about US$97 billion1. AstraZeneca’s takeover of Alexion Pharmaceuticals in December 2020 was the largest of the deals which saw AstraZeneca gain a rare disease portfolio that brought in sales of US$5 billion in 2019 after a year-over-year increase of 21%. Rounding out the top three deals were Gilead Sciences acquisition of Immunomedics for US$21 billion and shortly afterwards Bristol Myers Squibb’s US$13.1 billion takeover of cardiovascular drug developer Myokardia.
Deal activity is projected to accelerate into 2021 as firms emerge from the backlog causes by the pandemic shutdown. To that end, PricewaterhouseCoopers estimated as of December 2020, that the industry had US$1.47 trillion in capital that could be directed toward M&A.
Private Equity vehicles and hedge funds also increased their Biotechnology exposure in big way over 2020. When compared to the rest of the healthcare industries, Biotechnology saw the highest investments from Private Equity/Venture Capital and hedge funds in 2020 (Chart 1).
Chart 1: biotechnology is leading the health-care industry in investment activity
Source: Franklin Templeton Capital Market Insights Group, S&P Global Market Intelligence, data as of end July 2020.
Growth of the public market
The general public is also joining institutional investors and money managers in the ramping up of biotechnology investments. Investors now have a larger opportunity set to position themselves in biotechnology. In a recent report by S&P Dow Jones, small, mid and large cap biotech companies in the US grew from 170 in June 2009 to 349 in June 2019 with the total market cap expanding from US$212 billion to US$860 billion over the same time period (Chart 2).
Chart 2: more opportunities to invest in biotech
Source: S&P Dow Jones Indices LLC. Data from June 2009 to June 2019. Past performance is no guarantee of future results. Chart is provided for illustrative purpose only. Number of biotech companies in the US as measured by the S&P Total Market Index.
Perhaps investors are also enticed by the favorable fundamentals that biotechnology currently holds over the broader US market, as measured by the S&P 500 (Chart 3).
Chart 3: biotechnology stocks look compelling compared to the broader us market
Source: Bloomberg, ending 28 February 2021. STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor's Financial Services LLC. Standard & Poor's does not sponsor, endorse, sell or promote any S&P index-based product. Past performance is not necessarily indicative nor a guarantee of future performance. Biotech index refers to the S&P Biotechnology Select Index.
Increased biotech r&d spending
What does this all mean for Biotechnology? The increase in the influx of capital has enabled growth in research and development (R&D), which has more than tripled in the past 10 years from US$53 million to US$201 million in 2019. It is therefore no surprise that the World Intellectual Property Organization (WIPO) 2020 Innovation Index listed Pharmaceuticals and Biotechnology as the second largest sector in R&D spending in over 2018 to 2019 (Chart 4).
Chart 4: biotechnology remains at the forefront of r&d investment
Source: WIPO, as of 30 September 2020. Global Innovation Index 2020. 13th Edition.
The bottom line
The influx of capital and the continued commitment into R&D has been paying off as Biotech companies have seen sales outpace its sector peers over the last decade (Chart 5). In the business of Biotech, this sales growth superiority can only be good for the health of company financials and reassuring for current and potential investors into the sector.
Chart 5: biotech sales growth outpaced other sectors
Source: FactSet. As of 31 December 2019. Updated Annually. The compound annual growth rate (CAGR) is the rate at which revenue, savings, population grows over a period of years, taking into account the effect of annual compounding. Sectors shown are represented by the corresponding S&P 500 sector index, each which is comprised of those companies in the S&P 500 Index that are classified as members of the appropriate GICS® sector. S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. S&P does not sponsor, endorse, sell or promote any S&P index-based product. Indexes are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at www.franklintempletondatasources.com.
Endnotes
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Fierce Pharma, The top 10 largest biopharma M&A deals in 2020, 19 January 2021.
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