Dealmaking in the life sciences industry got off to a strong start in Q1 2019, despite a steep market decline in the last quarter of 2018 (and subsequent recovery) and a government shutdown. As a result, 2019 is on a path to be one of the strongest dealmaking years of the last decade. The private financing and IPO markets are both looking strong compared to the last 10 years, but are expected to be slightly lower than 2018. The average deal size with private financing has stepped up significantly in the last two years. Dealmaking options continue to expand for emerging companies and buyers are expressing healthy interest in early-stage assets and for the latest technologies in immuno-oncology and next-generation gene editing and stem cell therapies.
Regarding the hottest therapeutic area of them all—oncology—expectations for 2019 are that supply will continue to eclipse demand, but that prospects for dealmaking in the space remain robust. In fact, similar supply/demand dynamics for oncology were on display in 2018 and yet oncology accounted for more than 30 percent of all deals last year, exceeding buyers’ forward-looking sentiment by 11 percent. This suggests the degree to which oncology was (and appears to still be) an attractive, opportunistic market for buyers.
This year for the first time we assessed company interest in orphan drug opportunities, both in terms of the overall level of interest among dealmakers and by therapeutic area. Reflecting the market growth predicted for this category over the next five years, more than one-third of the dealmakers surveyed for this report view the orphan drug market as either an integral cornerstone of their dealmaking strategy or are actively seeking and assessing opportunities in the area, and another 41 percent are opportunistically assessing orphan drug opportunities.
To gain more insight into what the rest of 2019 holds, Syneos Health™ Consulting surveyed dealmakers across the industry to assess their intentions for the next 12 months and put these findings into context for the year ahead. We surveyed members of the biopharmaceutical community who participate on either or both sides of deals, and who are predominantly executive-level influencers on decision-making (Fig. 1). This report, the 11th in our series, captures their expectations for deal activity, supply and demand for specific assets and different development stages, and various other factors affecting dealmaking.
2018 Forward-Looking Sentiment vs. Actuals
This year we took a look at dealmakers’ forward-looking sentiment for 2018 regarding deal volume by both phase and indication, and compared them to the volume of deals in these areas that actually executed. Notable findings include:
Forward-looking sentiment for both buyers and sellers was within 3 percent of actual deal volume for preclinical, Phase II and registration deals (Fig. 2).
- Dealmakers (both buyers and sellers) greatly overestimated the percent of Phase I deals.
- Buyers were more accurate in their predictions of deal volume by development stage than were sellers.
- Buyers’ sentiment was closest with regard to preclinical, NDA, Phase II and marketed deals, while sellers’ sentiment was closest for NDA and Phase II deals only.
2018 Forward-Looking Sentiment vs. Actuals (cont.)
Dealmakers underestimated the dominance of oncology and neurology deals that actually executed (Fig. 3).
- Oncology accounted for more than 30 percent of all deals last year, exceeding buyers’ forward-looking sentiment by 11 percent.
- Neurology accounted for more than twice as many deals as expected.
Buyers overestimated the number of executed deals for specialty indications (e.g., dermatology, cardiology, hematology, ophthalmology and gastrointestinal).
Dealmakers’ expectations and actuals were closest for CNS/pain and infectious disease executed deals.
Dealmakers’ Intentions for 2019
Based on the deals already announced in the first quarter, 2019 is projected to be one of the strongest years for dealmaking in the past decade, paralleling what we saw with the mega-mergers of 2009 and the huge jumps in growth during 2014 and 2015. While the number of deals completed in Q1 was relatively low, value per deal is high and set to reach record-setting levels, with Bristol-Myers Squibb’s $74 billion acquisition of Celgene leading the way. We are predicting that M&A and partnering could reach $200-$250 billion in 2019 (Fig. 4).
While 2018 was a stellar year for both number of initial public offerings (IPOs) and total amount raised, keep in mind that 2018 numbers included Moderna Therapeutics’ record-setting $600 million IPO. (A similar situation occurred in 2010, when there were just seven deals but average deal value was high, reflecting Ironwood Pharmaceuticals’ $215 million IPO.) We project IPO growth to slow later in 2019 as market volatility continues throughout the year, with an expected aggregate value of just over $4 billion and average value per IPO retreating to levels similar to those seen in 2017 (Fig. 5).
In contrast to 2018, the total amount raised in venture financings is projected to decline slightly, but still remain strong relative to prior years. However, 2019 is potentially on path to record the highest venture financing amounts per deal value in this decade, continuing the bull market run that started in 2014 (Fig. 6). Based on Q1, which saw the average amount per deal value increase to approximately $42 million, total venture financing is on pace to reach above $12 billion in 2019. We are also seeing a large increase in 2019 Series B value due to strong seed money and Series A growth in prior years. Meanwhile we are seeing a decrease in later series deals, possibly due to earlier-stage IPOs. Although seed money decreased in the first quarter of 2019, we expect this trend to rebound later in the year.
The top factors expected to drive dealmaking in 2019 include easy access to capital for small companies for financings, the currently favorable US tax code, and the accelerated approval rate being seen for NDAs (although the latter might see some disruption following the departure of Scott Gottlieb as FDA head) (Fig. 7). Repatriation of overseas cash has declined as an influential factor compared to 2018, suggesting that companies are making other investments with those dollars (e.g., R&D, stock buy-backs).
Overall, sellers generally expect the current positive deal environment to remain at a level similar to 2018 (Fig. 8). Buyers, meanwhile, are expecting there to be more outright acquisitions than in 2018. In fact, buyers are more optimistic than sellers that there will be an acceleration in dealmaking across all deal types, suggesting a healthy number of transactions in 2019.
Dealmakers are anticipating a similar financing environment to 2018, which is still generally bullish (Fig. 9). Notably, IPOs are expected to cool as the public markets experience further volatility. Dealmakers expect opportunities for private and secondary financing to increase compared to last year.
Buyer demand is continuing to shift toward early-stage candidates (preclinical), while buyer interest in later-stage assets is remaining relatively steady. This suggests that many attractive late-stage targets have been partnered and buyers are looking to fill early pipeline (Fig. 10). This could also suggest that these later-stage assets are getting too expensive and buyers are willing to take on greater risk with less capital outlay, especially for opportunities in early development that will help them keep pace with scientific advances and stay ahead of the technological curve.
Similar to 2018, oncology remains the top therapeutic area of interest for buyers and sellers and it remains a buyer’s market, with supply exceeding demand. About 22 percent of sellers surveyed reported oncology asset supply, while about 16 percent of buyers expressed interest in oncology assets (Fig. 11). Buyers are also expressing strong interest in hepatic drugs where, despite key trial misses in NASH and similar diseases, buyers continue to see opportunities in the space. Buyers are also expressing interest in inflammation targets.
On the supply side, a surplus exists for CNS/psychiatry and dermatology-based assets (Fig. 12). This reflects trends we have been seeing since 2016, with relative demand in hepatic, inflammation and autoimmune assets increasing while CNS assets have fallen relatively out of favor (Fig. 13). Recent late-stage Alzheimer’s disease disappointments may be causing buyers to reevaluate their CNS strategies. On the other hand, overall neurology dealmaking exceeded expectations in 2018 so this is still an area to watch.
The Biopharmaceutical Asset Demand Index is a combined look at supply and demand by both therapeutic area and phase, making it possible to see areas of greatest mismatch in more detail (Fig. 14). Notable demand surpluses exist for CNS/neurology (excluding pain, preclinical), hepatic drugs (Phase I) and inflammation (marketed drugs). Notable supply surpluses exist in CNS/neurology (Phase II), dermatology (Phase II and III) and oncology (preclinical and Phase I).
This year for the first time we assessed company interest in orphan drug opportunities, a market that is expected to grow to $242 billion by 2024, according to EvaluatePharma’s Orphan Drug Report 2019. More than one-third of the dealmakers surveyed for this report either view the orphan drug market as an integral cornerstone of their dealmaking strategy or are actively seeking and assessing opportunities in the area, and another 41 percent are opportunistically assessing orphan drug opportunities (Fig. 15). Of particular interest to buyers are orphan drug opportunities in infectious disease (antibiotics), ophthalmology, hematology and autoimmune disorders (Fig. 16).
Survey respondents indicated that a focus on patients and addressing unmet medical needs was the top driver of strategic interest in the space, followed closely by the probability of receiving extended market and/or patent exclusivity and a quicker pathway to approval and commercialization (Fig. 16).
Immuno-oncology, CAR-T cell therapy and CRISPR/Cas9 continue to be among the hottest areas for licensing for another year running (Fig. 17). However, a few key technologies have started to gain in prominence, indicating the search is on for next-generation gene editing and stem cell therapies. Riding the tide of new FDA guidance, digital therapeutics are also starting to gain traction from a dealmaking perspective.
The top 10 hottest areas for licensing in 2019 (in order) are:
- CAR-T cell therapy
- Other genome editing/gene therapy (viral/non-viral)
- Antibody drug conjugates
- Stem cell therapy
- RNA-targeted therapies
- Personalized medicine/companion diagnostics
When evaluating assets, the top two things buyers are focusing their attention on are the probability of regulatory and technical success, and then on the potential for market exclusivity and patent runway (Fig. 18). Having robust in-house scientific expertise or the infrastructure to commercialize new products were cited as lesser concerns, indicating a willingness to build these or outsource as needed to support a promising asset.
Increases in the cost of capital since 2012 are likely due to high levels of funding, resulting in a higher proportion of early-stage companies (both buyers and sellers) that have higher expectations for returns (Fig. 19). The discount rate gap widened in 2019, driven by an increasing discount rate among clinical-stage sellers. This may predict an increase in deal activity as assets become more attractive to buyers. Discount rates have been rising over the years for buyers, likely driven by increasing buyer heterogeneity as companies that have launched their first successful commercial product look to fill their pipelines.
Buyers and sellers share common points of view when it comes to why deals fail (Fig. 20). Approximately 60 percent of respondents cited differing opinions of commercial potential and unreasonable term expectations as the primary causes of deal failures—financial disagreements that could be mitigated by creative deal structuring. Buyers cited these factors more frequently than sellers.
From the buyers’ perspective, the most important opportunities for improving the in-licensing/acquisition process (Fig. 21) include:
- Improving the bandwidth of their teams reviewing deals (highlighting that sellers are not the only ones who are resource-constrained), noted by 38 percent of respondents.
- Having better assets to review that fit their company’s specific strategic goals, as well as more effective asset screens and increased deal flow, noted by 31 percent of respondents.
- Improving partnership management, including building better rapport between their company and the target partner, conducting more effective negotiations and more effectively communicating their company’s value as a partner.
Based on the results of the 2019 Dealmakers’ Intentions Study, this year’s dealmaking in the life sciences is expected to be one of the strongest dealmaking years of the decade. Dealmaking options continue to expand for emerging companies, and buyers are expressing healthy interest in early-stage assets and next generation technologies.
The M&A and partnering landscape is expected to continue its bullish run, with the potential to reach $200-$250 billion in 2019.
- In contrast to 2018, the total amount raised in venture financings is projected to decline slightly; however, 2019 is potentially on path to record the highest venture financing amounts per deal value in this decade.
- IPO growth is expected to slow in 2019 as market volatility continues.
- Although sellers expect the pace of outright acquisitions to slow compared to last year, buyers are more optimistic than sellers that there will be an acceleration in dealmaking across all deal types, suggesting a healthy number of transactions in 2019.
The rapid pace of scientific advances and the market opportunities they are creating appear to be increasing the appetite of buyers for accepting more risk on opportunities in early development and in rare disease categories.
- Buyer demand is shifting toward early-stage (preclinical) candidates, while buyer interest in later-stage assets is remaining relatively stable.
- Oncology remains the top therapeutic area of interest for buyers and sellers, and remains an opportunistic buyers’ market, with supply exceeding demand.
- More than one-third of the dealmakers surveyed for this report either view the orphan drug market as an integral cornerstone of their dealmaking strategy or are actively seeking and assessing opportunities in the area, and another 41 percent are opportunistically assessing orphan drug opportunities.
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