Tanking Biotech Stocks Will Mean a Big Year for Deals. Who Could Benefit.

“We’re getting lots of calls from companies that literally we talked to six months ago,” says Geoff Martha, CEO of

Medtronic

(ticker: MDT), a medical device manufacturer. “We said, ‘Hey, look, we’ll buy you for X amount.’ And they’re like, ‘No way, we’re worth [two times that].’ And now they’re calling back and say, ‘Hey, can we restart those conversations?’”

The change to the medical device and biotech sector has come just in the past few months. As recently as April, when the

SPDR S&P Biotech exchange-traded fund

(XBI) was down around 40% from its early 2021 peak, Merck CFO Caroline Litchfield told Barron’s that biotech leaders still thought their firms were worth what they had been before the market fell.

That’s no longer the case, executives said on the sidelines of the J.P. Morgan conference. Nine months later, the XBI is trading around the same levels, but biotech boards are no longer counting on the prices ticking back up soon.

“It’s changed completely in terms of both the deal structures they’ll contemplate, the valuations that they’re thinking about,” says Andrew Dickinson, chief financial officer of

Gilead Sciences

(GILD), a large cap biotech.

“Things really shifted in the middle of last year,” adds Gilead’s CEO, Daniel O’Day.

This year’s J.P. Morgan conference, the first in-person version of the gathering since 2020, was subdued; the mood as grim as the gray skies that periodically unleashed rain and hail over the city’s downtown. There was a sense at the meeting that some small and midcap firms in attendance won’t be around this time next year.

“I think there will be several companies will go under, because their recent data wasn’t strong enough,” says Sandy Macrae, CEO of

Sangamo Therapeutics

(SGMO), which has partnerships with a number of pharmaceutical companies firms, including

Pfizer

(PFE).

The problem for smaller biotech and medical devices firms, which can spend years developing and testing drugs without any approved products on the market, is that depressed valuations have made it impossible to raise new money to fund their work without dramatically diluting current shareholders.

“People have to find non-equity ways of making money,” Macrae says. “That’s why you’re seeing people partner or even sell the company, because they don’t see a way forward.”

Big Pharma provides an alternative, non-dilutive source of funding, and war chests at a number of the sector’s major players are brimming. Companies, however, have been slow to cut big acquisition checks, and despite high expectations, 2022 saw only a handful of large deals, including

Amgen

‘s (AMGN) $30 billion acquisition of

Horizon Therapeutics
,
and

Johnson & Johnson

‘s $19 billion acquisition of the medical device firm Abiomed.

Instead, pharmaceutical firms appear to be favoring partnerships, where they make smaller payments to biotechs to collaborate with them on individual, early-stage programs.

“We can make a lot of investments, because it’s not high cost,” says Anat Ashkenazi, CFO of

Eli Lilly

(LLY). “And we know some of these will fail, some will succeed. That’s how we operate.”

Executives at smaller biotechs say that the early pandemic era, when biotech valuations soared—often despite little evidence that their medicines would work—are clearly over. But they maintain that positive data on a promising medicine can still bring interest from investors, and from pharmaceutical companies.

“Obviously, the funding environments have changed significantly,” says Sanjiv Patel, CEO of

Relay Therapeutics

(RLAY), a biotech. “Raising money with without data, I think is very difficult. And I think the investor base has become very discerning.”

Perhaps the clearest signal that companies will open their wallets wide for a promising asset came in mid-December, when

Takeda

(TAK) bought an experimental drug being tested as a psoriasis treatment for an eye-popping $4 billion up front, plus an additional $2 billion in potential milestone payments, from the privately held biotech Nimbus Therapeutics.

Takeda

‘s CEO, Christophe Weber, says that the deal was highly competitive. “We got it by a razor thin margin,” he told Barron’s.

Companies announced a handful of midsize biotech acquisitions during the conference. The French biopharma firm

Ipsen

(IPSEY) bought

Albireo

Pharma (ALBO) for $1 billion, while

AstraZeneca

(AZN) bought

CiniCor Pharma

(CINCOR) for $1.3 billion, and Chiesi Farmaceutici, an Italian company, bought

Amryt Pharma

(AMYT) for $1.5 billion.

It was enough to inject some life into the biotech market, but not much. The XBI rose 5.7% over the course of the conference, while the S&P 500 rose 2.3%.

At least one biotech shut down, as well. On the first day of the conference,

Calithera Biosciences

(CALA), which focused on developing cancer therapies, announced it would dissolve.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com