Biogen’s Reata acquisition reflects biopharma’s inevitable M&A, IPO return to growth
A failed Alzheimer’s drug launch. A blockbuster drug sputtering under the weight of generic competition. A share price with more peaks and valleys than a mountain range. Biogen’s last few years have taken a toll.
And while the biotech giant has had some missteps and hurdles, one move in particular may foretell a brighter future, analysts say: July’s announced $7.3 billion acquisition of Reata Pharmaceuticals, a small Texas company with one approved drug — Skyclarys — for a rare nervous system disease called Friedreich ataxia.
The Reata purchase is a strong signal to shareholders that the company is trying something new but staying within its wheelhouse, said Jennifer O’Brien, an M&A partner at the consulting firm West Monroe.
Jennifer O’Brien, M&A partner, West Monroe
Permission granted by West Monroe
“By doing this, it really allowed them to pivot and take a positive step in the right direction, to continue establishing their focus on neurological disorders and add a more proven drug to their portfolio that’s aligned with their focus,” O’Brien said. “They can leverage their existing platform to easily market and distribute that drug globally.”
Biogen’s other saving grace is the approval of the second Alzheimer’s drug Leqembi, which it shares with partner Eisai, but the cost of that launch will “basically offset sales for the year,” O’Brien said.
These kinds of problems are nothing new to the pharma industry as a whole. Drug development programs falter or fail. Patents have a time limit. Launches take time and money. And with biotech valuations settling to a more attractive level than where they were a few years ago, Biogen’s M&A move comes right out of the playbook that analysts predicted.
The M&A inevitability
While M&A took a back seat during the COVID-19 pandemic and the uncertain times that followed, O’Brien said pharma companies ultimately need to return to their dealmaking ways to remain profitable.
A few years ago, many of the biggest pharma companies in the world began slimming down into R&D-focused organizations. Merck & Co. in 2020 announced the spinoff of what would eventually become the women’s health-focused Organon. Both J&J and GSK told the world in 2021 they were splitting their consumer health units into the respective companies Kenvue and Haleon. Back in 2019, Pfizer joined its “legacy” brand arm with generics maker Mylan to create Viatris. And Novartis followed suit in 2022, announcing the spinoff of its generics unit Sandoz.
Inevitably, those pharma giants would build back up by bringing new pipelines and products into the fold through M&A, O’Brien said. That has started to happen as they’ve all struck deals worth more than $1 billion in 2023, led by Pfizer’s $43 billion bid to buy Seagen.
“We’ve seen a lot of ‘divesting to invest’ — spinning off non-core business units to free up capital and really concentrate on areas where they have the highest growth potential,” O’Brien said. “What makes a good investment is going to depend on the focus area of a particular company, and that’s what makes a good acquisition.”
“Biotechs need to tell the markets or investors what they’re going to do and then do it consistently to breed trust.”
Daniel Chancellor
Director, thought leadership, Citeline
Like Biogen, which can fold Reata’s neurological pipeline into its own, pharmas need to find the deals that work best for them, O’Brien said.
And the turbulence felt by big biopharma companies has rocked smaller biotechs even harder, which has played out in a reduction in the number of IPOs in recent years, but also makes them ripe for M&A.
IPO pressure valve
Daniel Chancellor, director of thought leadership, Citeline
Permission granted by Citeline
Market highs in 2021 gave biotechs a false sense of security that soon succumbed to reality, said Daniel Chancellor, director of thought leadership at Citeline. And that’s played a role in a slow run of IPOs.
As M&A brings scientific innovation to Big Pharma, IPOs bring much-needed cash to biotechs developing early research. But only 22 companies went public last year and stock prices bottomed out.
During the pandemic, investors who weren’t previously considering biotechs decided to dive in as the industry boomed and returns looked attractive. But despite a few winners, many biotechs found themselves without the runway to continue as investors shied away. Now, there is a sort of pressure valve, Chancellor said — companies are waiting for the right time to go public to ensure they enter at optimal value.
“Everyone is looking for the first signs of green shoots of recovery,” Chancellor said. “We are still at the bottom of our cycle, but I’m slightly optimistic that with the degree of scientific translation that’s going on, market conditions will change such that these will be funded in public markets.”
And when it comes to the relationship between biotech IPOs and pharma M&A, they tend to feed one another, Chancellor said.
“What drives M&A fundamentally is the ability of smaller companies to deliver on milestones and produce clinical readouts with a low risk profile and high patient impact,” Chancellor said. “Biotechs need to tell the markets or investors what they’re going to do and then do it consistently to breed trust.”
As these markets heat up once again with the demand for successful drugs building on both sides, Chancellor expects an uptick down the line.
“It’s amazing how polarizing the heights were to the depths of where we are,” Chancellor said. “But seeing how quickly things can change, there’s no reason not to expect a similar reversal in the future — perhaps not to the heights of the pandemic, but certainly the public markets will be the best place to fund science.”
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