Bristol Myers Squibb announced the acquisition of Karuna (KRTX) for $14B to add a first-in-class schizophrenia drug and neuroscience pipeline. You can read more about Karuna’s data here. Karuna’s lead asset is under FDA review with a Sept. 26, 2024 PDUFA date.
This latest deal confirms the M&A trends for 2023. A go big or go home strategy that pharma is applying, which we think could spill into the new year.
The majority of the M&A volume has been driven by the top dozen deals. All which are either late development stage companies or already commercial. Big pharma is willing to dish out big price tags for these. Small caps have been secondary and thus have underperformed.
Big Deals Move Needle for Big Pharma
Due to their sheet size, big pharma companies have focused on game changing drug candidates to acquire. Anything smaller just wouldn’t move the needle for them. As a result, acquisitions have targeted multi-indication drugs addressing a fundamental aspect of human physiology, or “pipeline in a pill” potential with numerous applications. Sub-$1B orphan indications have been neglected, mostly because they are not going to generate enough of a meaningful return for the bottom line of big pharma businesses.
As pharma companies grew, so did their M&A criteria. They’ve now evolved to focus on $1B+ blockbusters, as this is what is driving the value. Giant drugs are far and few between, only 36 total drugs generated at least $1B, out of a 168 that were approved. These “blockbusters”, however, accounted for 70% of big pharma revenue. The other 30% was from the remaining 132 drugs that were not “blockbusters”. Accordingly, pharma has focused on a quality over quantity tactic when considering M&A targets.
Multi-Billion Dollar Blockbusters Are Losing Exclusivity
Over the next 5 years, big pharma companies, combined, will lose nearly $200B of revenue from branded blockbusters that have driven their franchises in recent years. As generics enter and erode big pharma’s branded revenues, companies are left with three options: innovate, acquire, or become obsolete. Acquisitions happen to be the most convenient and lowest risk option. The drawback: they come at a high price.
Big Pharma Has >$500B of M&A Firepower
The top 18 pharma companies have plenty of cash and debt facilities to continue adding to their pipelines. They’re looking to offset upcoming revenue declines from patent expiries of top selling drugs and are seeking game changing technologies to do so. With ample dry powder, and a ticking countdown to drug exclusivity, big pharma is left with few options. So, they go on shopping sprees.
Big Pharma’s Recent Shopping Spree to Replace Upcoming Patent Expiries
What Does This Mean for 2024?
Big pharma has shared their M&A strategy and it’s not expected to be any different from 2023. They want big revenue potential, late stage names and are willing to pay a hefty price. That leaves a short list of targets in areas such as cardiovascular, immunology and neuro. These are big areas that have widespread indications, and thus big revenue potential.
Big Pharma M&A Targets:
Cytokinetics (CYTK) targets cardiac muscles with their candidate aficamten, which has shown potential in obstructive hypertrophic cardiomyopathy (oHCM). Obstructive HCM causes the heart muscle wall to thicken and stiffen, making it harder for the heart to fill with blood. This makes it difficult for the heart muscle to relax, so it must work harder and use more energy. CYTK is running a Phase 3 in oHCM and expects topline results from their SEQUOIA-HCM trial by year-end 2023. Positive results would validate the CYTK pipeline and make this a top M&A target for 2024.
Xenon (XENE) lead program XEN1101 is the most advanced and promising epilepsy play in development. The potassium channel modulator is undergoing a Phase 3 for onset seizures. Their Phase 3 trial X-TOLE2 will have patient enrollment completed in 2H 2024, with topline most likely the following year.
Companies developing FcRn inhibitors will be getting a lot of M&A interest. FcRn binds IgG antibodies, preventing them from destroying healthy tissue. In healthy people, IgG antibodies recognize and bind to foreign substances, marking them for destruction. In many autoimmune diseases, however, harmful IgG autoantibodies develop, triggering a harmful immune response where they recognize and bind to normal healthy tissue. FcRn helps reduce levels of harmful circulating IgG antibodies, which are the main factors in autoimmune diseases. This gives FcRn inhibitors potential in as many as 90 different diseases, which would surely create a blockbuster drug.
argenx (ARGX) Vyvgart (efgartigimod) is the current market leader and well on its way to a billion-dollar drug. For the first 9months of 2023, Vyvgart generated $816M. ARGX faced setbacks in 2023 when trying to expand use into other autoimmune diseases like pemphigus and immune thrombocytopenia. However, the revenue generation and pipeline expansion potential of argenx is compelling for all big pharmas.
Another company developing FcRn inhibitor is Immunovant (IMVT), which has Phase 3 topline readouts throughout 2024.
Where Does This Leave Small Caps?
The XBI is up 36% in the last two months, near 52-week highs, as the M&A activity has lifted the sector as a whole. Although we don’t anticipate M&A activity to pick-up in small cap land, we do think that small cap bios will benefit from the added investor interest in biotech. They will rise with the tide.
Additionally, it seems that the Fed is considering easing in the new year. As a result, small caps, along with biotech in general are positioned to take advantage of greater fund flows into the sector and interest rate easing.
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