The annual gathering of life sciences executives and investors in San Francisco that many now call “JPM Week” recently concluded, marking the J.P. Morgan Healthcare Conference’s 38th year.
The Big Story of 2019 & 2020 Outlook: M&A
The one-week confab centered on the Westin St. Francis Hotel in Union Square is thought to set the stage for life sciences investing for the coming 12 months. Last year, that certainly proved to be the case when Bristol-Myers Squibb’s acquisition of Celgene—announced at the beginning of the J.P. Morgan Healthcare Conference—set the stage for a surge of M&A activity that exceeded $340 billion in value by the end of 2019.
It was the biggest year for M&A since analysts at Dealogic began tracking deals in 1995, and prompted biotech journalists to refer to 2019 as the year of the “mega-merger.”
While no transactions reaching the size of the $74 billion Celgene deal were unveiled during this year’s conference, Barron’s reported that some significant deals have been announced including Dermira’s $1.1 billion acquisition by Lilly.
EY expects M&A activity to maintain record, or near record levels in 2020 based on data from their Global Capital Confidence Barometer. They report that 52 percent of life sciences executives said their company plans to actively pursue M&A activity in the coming 12 months, and that 68 percent are expecting the M&A market to be even more lively in 2020.
In its year-end story on trends to watch in 2020, Genetic Engineering & Biotechnology News (GEN) notes that the M&A scene in 2019 was dominated by two big deals, the BMS acquisition of Celgene for $74 billion that closed in November and AbbVie’s acquisition of Allergan for $63 billion that is set to close in 2020.
GEN doesn’t see a drop in dealmaking on the horizon, noting that large biopharma companies aim to source half of their pipeline through acquisitions in coming years – preferably later-stage deals that involve assets that are near commercialization.
Investor’s Business Daily, in its year-end outlook for the biotech sector, says the biopharma acquisition spree has lifted the stock prices of publicly-traded biotech companies with leading biotech indexes significantly outpacing the Nasdaq and the S&P in the fourth quarter.
While uncertainty related to Brexit, U.S./China trade talks and other factors could give investors pause, Xconomy reports that a survey conducted by investment bank Jefferies showed that biotech executives remain bullish about the prospects for the sector in 2020.
Investors also expressed confidence in the Jefferies survey, with more than 90 percent indicating they will either increase or maintain their exposure to the healthcare sector in the coming year, with private equity investors a bit more bullish than institutional investors.
Barron’s reports that Credit Suisse analyst Evan Seigerman also expressed optimism for the sector in a year-end note, writing, “ … we believe that macro issues are unlikely to have material fundamental impact.”
“Heading into 2020 we remain positive on the sector with strong fundamentals and clear opportunities for outperformance,” he added.
Venture Capital Outlook
While most expect the public market to weather the macroeconomic headwinds, the outlook for venture investment is a bit murkier.
According to Pitchbook, 2019 deal activity matched 2018’s record levels. Notably, the year saw 237 megadeals, 11.8 percent more than in 2018—and Pitchbook expects this number to continue increasing, reaching record levels in 2020. However, Pitchbook also reported that Q4 2019 did show a slowing in the number of deals across all stages.
Silicon Valley Bank’s Katherine Andersen tells Pitchbook that in the last two and a half years more than $25 billion dollars has been raised by U.S. venture funds for life sciences investment – and even more was raised from non-U.S. funds and other sources.
While she cites an increase in the regulation of foreign investment, particularly involving China, Andersen maintains that “the fundamentals for life science remain strong around the globe.” She sees tech investors shifting their focus from conventional diagnostics and tool companies to AI-enabled biopharma companies and as well AI-oriented diagnostics and tools.
She also sees a continued focus on rare disease therapeutics that often can take advantage of accelerated approvals. Additionally, Andersen notes an increased interest in digital health, especially companies that can improve patient outcomes while taking costs out of the system.
As Rock Health managing director Bill Evans discussed at our October Digital Health Investor Summit, digital health investment was on track to hit $7.5 billion in 2019, just below 2018’s record high of $8.1 billion. Mega-rounds – those valued at $100 million or more – continue to drive the topline as they did in 2018, he said. The average deal size through Q3 was $20.9 million, not far below 2018’s average of $21.7 million.
This prediction proved accurate, with U.S. digital health startups raising $7.4 billion in 2019, making it the second largest funding year in the sector’s history, according to Rock Health’s year-end report. They attribute this decrease in total funding to slightly fewer large, late-stage deals in 2019 compared to 2018, noting that just two 2018 megadeals represent 80 percent of the difference in funding between 2018 and 2019. However, digital health companies still have “near-historic levels of funding” to tap into, Rock Health noted.
At the Summit, Goldman Sachs’ Peter van der Goes offered a prognosis for digital health investing in 2020 that was remarkably similar to Andersen’s: Digital health offers an attractive opportunity for investors who “want to find ways … to take costs out of the system in ways that biotech and medtech don’t.”
With a U.S. presidential election year ahead, the biotech industry is likely to be the subject of much discussion and scrutiny in 2020. But that won’t be enough to undermine the strong fundamentals and impressive track record of the industry over the past several years.
When the J.P. Morgan Healthcare Conference was still known as the Hambrecht & Quist conference, the life sciences sector was more promise than reality. Nearly 40 years later, the industry has substantially delivered on the promises made back then and has grown to where it can safely survive the occasional economic or political shift.