What does 2023 hold for the European biotech market?
The Covid-19 pandemic has already become a watershed in modern history. In all major fields of business, economy, public health and socio-economics, it has become impossible not to present issues in terms of a comparison between pre- and post-pandemic conditions. One of the unexpected results of this unprecedented period has been the degree to which many life sciences and biotech companies have become household names. The more strongly they have established themselves, the calmer the environment for fund-raising and venture capital investment has become. 2022 was a period of stability which saw market valuations fall and fairly modest activity in mergers and acquisitions.
However, it looks as if 2023 will tell a different story. For one thing, the low level of listed valuations increases the attractiveness of many businesses. The weakness of the Pound and the Euro relative to the US dollar makes many acquisition targets, not just early stage European biotech companies, even more appealing.
For another, the need to raise funding is returning to prominence as some life sciences and biotech companies are running low on cash. Negotiation with investors is inevitable. At the same time, private equity and venture capital funds are aggressively seeking new investment opportunities, shifting their focus from healthcare services further up the R&D chain to biotechs. This surfeit of idle cash is not restricted to professional investors; many large pharmaceutical companies are also sitting on substantial reserves, looking for places where they can put it to use.
This sits against today’s drastically different backdrop of higher-cost capital, the macro-economic ramifications of the Russian invasion of Ukraine, rising inflation and the growing possibilities of recession. There are also issues to contend with which are specific to the industry, including ongoing skills shortages, the politicisation of US drug pricing and the intensification of environmental, social and governance pressures. In addition, the industry is painfully aware that many companies are heading for the patent cliff when the expiry of lucrative patents will rob major revenue generators of their market exclusivity.
In the past, we’ve seen how the loss of that exclusivity has sparked an increase in mergers and acquisitions so there’s every reason to expect a similar response in 2023 and beyond. However, in 2022 many companies have preferred to make bolt-on acquisitions rather than full scale M&As. At the end of Q3 2022, the total value of M&As was a little over $50 billion, compared to $118 billion at the same point in 2021.
It’s a little early to predict with any certainty, but many commentators expect traditional M&As to make a comeback in 2023. This is not only for the reasons discussed above concerning the investment reserves looking for an outlet. The volatility of the market shows no signs of abating and in some sectors, such as cell and gene therapy, significant advances are on the cards. A startup or scaleup with the appetite and ability for innovation will be ideally placed to benefit from this upturn in investment and acquisition activity. Notwithstanding scepticism towards large mergers of the current US government, in particular, there remains plenty of scope for M&As which needn’t attract lengthy review periods that result in loss of value.
According to PwC, despite the highly unusual industry and economic conditions which obtain, 2023 will more closely resemble the pre-pandemic years. They expect the total deal value to be somewhere between $225 billion and $275 billion, as a result of the release of locked-up corporate cash, the imperative to address medium-term pipeline gaps and a general reboot of biotech valuations.
Economic stability will return with many countries avoiding the worst of a worldwide recession, particularly in continental Europe, even though the UK can expect to be hit fairly hard. Investment for transformation will be a major priority and although we shouldn’t expect to see massive deals until well into Q3, the first half of 2023 is likely to experience a lot of activity at the $5 billion to $15 billion level. Certain areas will undergo higher growth than many others. These will include oncology, immunology, vaccines and central nervous system and cardiovascular diseases.
Among the trends most likely to emerge into the limelight are personalised medicine addressed by advances in genetics, closer collaboration between life sciences companies, the spread of smart technology into drug research and diagnostics, the development of robotics in surgical interventions and the improved efficiency of data management and integration. One of the legacies of the pandemic will be a redoubling of research into immune cell function as a means of preventing the spread of harmful diseases that could devastate communities, especially in the developing world.
In 2020 we witnessed how rapidly a deadly virus could sweep around the world from China to the American Pacific coast. Of the many lessons to be learned from Covid-19, this could be one of the most valuable. The study of the natural immunity of cells to certain types of virus and bacteria could have profound implications for immunotherapy.
For years the nutraceutical sector has been growing but with a distinct lack of scientific evidence to support its claims. 2023 is likely to be the year when research resources are properly directed at investigating the efficacy of natural supplements so they can achieve the same evidence-based status as conventional pharmaceuticals. As part of this gradual move of nutraceuticals towards the mainstream, environmental issues too will increase in importance.
The holy grails of the life sciences will continue to command significant funds and resources – primarily in the areas of cancer, cardiovascular disease and dementia. Tentative progress in the past couple of years will be accelerated in the search for more effective, longer-term treatments. The industry may be only inching towards cures, but the pathways are set and in 2023, we can be optimistic about reaching new milestones.
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If you found this insight interesting, we recommend reading Key Venture Capitalists Active in the Life Sciences Sector (scalexconsulting.com)