Numerous small biotechnology companies have been all but shut out of the capital markets, leaving many with no choice but to consider a sale to larger peers.
The Nasdaq Biotech Index is down nearly 30 percent since September, when Democratic presidential candidate Hillary Clinton criticized drug companies' "price gouging" on Twitter and sparked concerns about a government crackdown on rising drug costs.
No regulatory crackdown on pricing has materialized, but the sector's decline has run unabated, compounded by broader stock market volatility.
"Clearly this is a very challenging market for raising capital," said Mark Perrin, chief executive officer of InVivo Therapeutics (NVIV.O), a small biotech company focused on treating spinal cord injuries. He said he plans to wait for valuations to rebound before tapping the markets.
On the other hand, the market turmoil could help maintain dealmaking momentum in the life sciences sector this year after a record year for mergers and acquisitions in 2015.
Since the beginning of the year, a number of small publicly traded life sciences companies have been exploring a sale, including Sagent Pharmaceuticals SGNT.O, Alimera Sciences (ALIM.O), XenoPort XNPT.O, MannKind Corporation (MNKD.O) and Pernix Therapeutics (PTX.O), Reuters has previously reported.
These five companies have seen their equity values plunge by an average of nearly 40 percent since September, causing their price-to-2015-sales ratios to tumble from an average of 5.3 to only 2.1.
Best-positioned to take advantage of the sell-off are large life sciences companies with strong balance sheets. Specialty pharmaceutical companies Mallinckrodt MNK.O and Horizon Pharmaceuticals (HZNP.O), for example, have access to at least $2 billion each in funding for potential deals and have been exploring opportunities.
Mallinckrodt is assessing potential deals "across specialty brands and generics portfolios," Chief Executive Officer Mark Trudeau told Reuters at the JPMorgan Chase & Co (JPM.N) healthcare conference last month.
"For the next six months, your bank might be named Pfizer Inc (PFE.N)," said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.
Also likely to enter the fray are other small drug companies, which may find that increasing scale through stock-for-stock mergers is far less dilutive than trying to raise equity in today’s capital markets. Pozen Inc POZN.O and Egalet Corp (EGLT.O) could serve partners for struggling companies seeking a deal, industry sources said.
WATCHING THE IPOS
The present downturn is one of the most severe in the history of an industry known for its wild gyrations. The last pullback to match its severity was in 2000, when the Nasdaq biotech index was engulfed in the broader turmoil rattling tech stocks and lost more than a third of its value in less than three months.
If the trend persists, it could discourage venture capital firms and initial public offering investors from backing young life sciences companies. Shareholders of these companies typically fare much better when they are able to shepherd their drug pipeline to fruition prior to a sale.
Although more small companies are expected to go on the auction block in the coming weeks, the flurry of dealmaking could unravel were stock prices suddenly to return to last year’s highs, according to bankers and investors interviewed by Reuters.
Last week, two biotech companies – BeiGene (BGNE.O) and Editas Medicine TKTK – completed initial public offerings, marking the first successful IPOs of 2016. Both firms obtained valuations within their target price ranges.
This week, two more biotech firms successfully priced their IPOs, AveXis Inc AVXS.O and Proteostasis Therapeutics Inc (PTI.O). To be sure, all relied primarily on the companies’ existing base of investors, rather than attracting broader interest.
However, if more biotech IPOs launch successfully in the coming weeks, this could help restore confidence in capital markets, both for investors and companies.
"The bottom line is that [BioGene and Editas] got it done," one of the bankers said. "It shows that if you have got quality assets, investors will step up to the plate."
For cash-poor companies that cannot or will not sell, the other option in a down market is to license a drug to a larger competitor, giving up some future earnings in exchange for cash today, according to Ross' Gordon.
(Reporting by Carl O'Donnell in New York; Editing by Greg Roumeliotis and Dan Grebler)