During the past few years, the biopharma and biotech markets have seen rapid growth. The global biotechnology market was worth $266 billion in 2019 is projected to reach $505 billion by 2026.1 In those strategic and important markets, what roles do private equity and Special Purpose Acquisition Companies (SPACs) play?
An overview of the biotech sector
On Euronext, the biotech sector has been resilient despite the impact of COVID-19. In 2020, the market capitalization of the 62 biotech firms listed reached a record of €29 billion, up €5.3627 billion compared to 2019. The share price of listed biotech companies increased by 66.8% in the first half of 2020. In the second half of the year, it grew by 29.7%.
In the U.S., major biotech stock indices were also high in 2020. In addition, biotech IPOs were very strong both in value and number, with $14 billion raised in 74 deals.
The U.S. continues to lead the biopharma IPO market. Next in line is the China IPO market, which displaced the European biopharma IPO market.
For Hugh MacArthur, head of Bain’s global private equity practice, the best word describing private equity in 2020 is “resilience.”
Private equity globally has shown an ability to absorb the impact of COVID-19. The value of global healthcare buyout deals was $66 billion from 380 deals, which is below 2019 ($79 billion) but above 2018 ($64 billion). In deal count, Asia-Pacific took the lead over North America with 156 versus 142 deals. In terms of deal value, however, North America retains the top spot with $34.7 billion, ahead of Asia-Pacific’s $16.9 billion. Europe remains the third player with $14 billion and 75 deals.
In 2020, despite the global context, biopharma remained a sector of strong interest, with the number of deals reaching 150, a 65-deal increase. However, the deal values decreased to $21.4 billion compared to $40.7 billion in 2019. Asia-Pacific appears to be leading with $9.3 billion, followed by North America with $7.9 billion and Europe at $4.1 billion. In those markets, private equity companies are targeting different types of companies, from earlier investments to biopharma services.
Blackstone had been a vital player in 2020 with two interesting large deals. The first one was the acquisition of $2.3 billion of a majority stake in the precision medicine group, which helps biopharmaceutical companies design and conduct complex biomarker-based clinical trials and bring innovative therapies to market.
Blackstone also paid $2.3 billion to acquire Takeda Consumer Healthcare, which manages a portfolio of over-the-counter medicines and health products. These products generated total revenues of more than $566 million in 2019.
The role of SPACS
2020 was also the year of SPACs. In the U.S., SPACs represented 53% of the IPOs completed in 2020 and 75% in Q1 2021, and the number of SPAC IPOs completed globally in Q1 2021 was 307.
Private equity firms have used SPACs to take companies public for years. In some cases, they served to take a company public while avoiding a costly IPO process, ease the burden of finding a buyer, and protect against market volatility, given that the valuation is negotiated upfront. Healthcare was not left out of this investment strategy. In 2020, 28 SPACs seeking acquisitions in the U.S. healthcare sector raised more than $4 billion.
For example, Valo Health merged with Khosla Ventures Acquisition Co., a SPAC backed by Khosla Ventures, a venture capital giant. The deal values the combined entity at $2.8 billion, and proceeds will help Valo develop its software platform and advance its preclinical and clinical drug pipeline.
Tango Therapeutics cancer biotech is planning to go public in the third quarter of 2021 through a SPAC deal with BCTG Acquisition Corp. that will provide the management team with $353 million to develop its pipeline of experimental cancer drugs.
Nuvation Bio, a biopharmaceutical company that focuses on unmet oncology needs, went public through a business combination with Panacea Acquisition Corp., a SPAC-sponsored from EcoR1 Capital.
In an interview with Noël Brown, managing director and head of U.S. Biotechnology Investment Banking, Dr. David Hung, founder and CEO of Nuvation, shares the benefits of SPACs, which are “market volatility, time and money” to put it simply “The highest priority is to develop the best drugs and bring them as fast as possible to patients.”
The biopharma and biotech sectors are exciting places to invest for private equity firms due to the industry resilience and the sound returns it has provided on average compared to other sectors. For Bain & Company, “the healthcare return is 2.5 times the invested capital compared to 2.0 times for other industries.” It is no wonder that healthcare SPACs momentum is strong. In January 2021 alone, 11 SPACs were created, raising more than $1.8 billion in the process.
The explosive growth of SPACs in 2020 has also led to fears if a “SPAC bubble,” as Allison Lee, acting chair of the SEC, said in March 2020. Given the uncertainty related to this financing method, it remains difficult to project how SPACS will transform the biopharma and private equity landscape in coming years. But given the broad interest in SPACs in healthcare and beyond, such shell corporations continue to be worthy of investigation for drug developers researching financing options.
I would like to express my gratitude to professor Denis Gromb for his time, help and contribution to this article. Denis Gromb is the Antin I.P. Chair Professor of Finance at HEC Paris. He graduated from École Polytechnique, where he also obtained a Ph.D. in economics while visiting the London School of Economics. His principal research interests include corporate finance, corporate governance, banking, the economics of organizations and the limits to arbitrage in financial markets. His articles have been published in leading academic journals in Economics and Finance.
Joseph Pategou is a consultant specializing in the pharmaceutical industry who has published more than 30 papers and articles in reputable journals, including Drug Discovery & Development, Biosimilar Development, The Indian Economist, Labotech.eu and others. You can connect with on LinkedIn, Instagram or Twitter.
- Pharmaceutical market worldwide – Evaluate; ID 309457 – Statista
Filed Under: Drug Discovery