Is pharma market on the rebound in 2023?

As the financial markets have been roiled by inflation and a minor banking crisis, the pharma industry experienced a period where M&A largely disappeared and investment into biotechs dropped off. Ben Hargreaves reviews a report that suggests the first half of 2023 saw signs of life for the overall market.

The pharmaceutical market has hit a bit of a slump in recent times. Despite the boom that occurred during the pandemic, this only applied to certain companies that developed successful treatments and vaccines, as well as service providers in the area. Overall, with inflation causing concern and a general risk-averse market, this has led to a slowdown in major M&A deals, a scarcity of capital for biotechs, and a movement away from initiating IPOs.

In Evaluate’s recent report regarding the first half of 2023, the authors contend that the malaise in the pharma market may be set to pass. Backing this up, the report cites the emergence of weight-loss treatments and several larger-scale acquisitions that are in the process of being completed. Overall, this has led to $141 billion being added to the valuation of companies compiled by Evaluate.

Rise of investor interest

Evaluate makes one broad claim for why the share price of companies across the pharma industry saw an increase in the first half of 2023: the expected returns from weight loss treatments. The two leaders in the area, Novo Nordisk and Eli Lilly, both saw an enormous spike to their share price as a result of the expectations of sales around the treatments. In total, this saw them add $149 billion to their valuations, which alone represents more than the total value added noted by Evaluate over the first half of the year. As a result of the positive results and sales expectations for its Mounjaro (tirzepatide), Lilly is now the most valuable pharma company across the industry. The company’s market capitalisation is now almost $500 billion, with Johnson & Johnson in second place at $450 billion, and Novo Nordisk coming in at third place, with a valuation of $427 billion.

Beyond the impact of these two companies, the report notes that Apellis, Roivant, and Immunogen also stood out from the rest of the industry, in terms of gains to their stock. Roivant’s share price was boosted because of its asset RVT-3101 being similar to Prometheus Bioscience’s main asset, at the heart of Merck’s decision to acquire the latter company for $11 billion. For its part, Immunogen saw investor interest after publishing strong data for Elahere (mirvetuximab soravtansine) – with companies focused on antibody-drug conjugates also being the centre of attention after Pfizer’s decision to acquire Seagen. However, Apellis is no longer part of this group, after the company’s share price fell over 50% year-to-date, due to safety concerns over its Syfovre (pegcetacoplan injection) treatment for geographic atrophy.

Not all good news

For a subset of biopharma companies, the first half of the 2023 was marked by significant drops in valuation. This was centred on the companies that had seen major boosts to their sales through the launch and sale of COVID-19-related treatments, vaccines, or services. The most obvious being those companies that had the highest selling vaccines, Pfizer and BioNtech, and Moderna. As could be expected, as the pandemic has waned, so have their respective share prices in the first half of 2023, with Pfizer’s falling by 28%, BioNTech’s by 28%, and Moderna’s by 32%.

The same difficulties were felt across most of the large cap pharma companies, which can again be linked to a decline in sales from COVID-19 treatments and other services. Overall, the large cap cohort of Evaluate’s research, which is made up of companies valued over $20 billion, suffered a collective loss of $50 billion. Although not as negative as the large-cap companies, the valuations of mid-cap businesses ($5 billion to $20 billion in market capitalisation) remained flat for the first half of 2023.

The study authors concluded: “Overall, however, this analysis suggests that any upwards movements are being driven by individual stories, rather than a rising tide. Less than half of the 500 stocks in the overall universe rose in the second quarter. While this is an improvement on the first quarter, when only a third registered gains, if this is a recovery, it is a very early one.”

Is funding returning?

The UK’s BioIndustry Association and Clarivate recently published a report regarding the environment for investment into the country’s biotech sector, which is the leading biotech hub in Europe. The analysis found that the public markets remain challenging, but that the amount of capital raised in the first quarter of 2023 represented a 29% increase from the previous quarter. The findings were suggested to be indicative of a return of investment interest, after a difficult period for low-cap companies, particularly in the biotech sector.

Similar insights were delivered by Evaluate’s report, which showed that small-cap businesses ($250 million to $5 billion in market capitalisation) showed the largest share price gains across the industry. This is partly driven by the difficult period that saw IPOs largely disappear for the industry, alongside similar trends across the wider markets.

However, Evaluate outlined that the number of IPOs that have occurred across Western exchanges in recent quarters provide signs that interest in launching on public markets may be returning. Four IPOs occurred in the second quarter of 2023 and, although this is the same as the first quarter, the amounts being raised ticked higher. Acelyrin was the notable IPO, as it raised $540 million, and this marks the third-largest raise since 2018. However, in Europe, despite the capital being raised increasing, there have been no IPOs since February 2022, signalling a lack of confidence in appetite for investment in the region.

On the smaller scale, venture capital provided to early-stage biopharma companies saw a resurgence, with capital provided being the highest since early 2021. In total, $5.3 billion was raised in Q2 2023, despite the number of venture capital rounds staying largely consistent during the preceding four quarters. The first half of 2023 saw more than $9 billion provided to early stage companies, which Evaluate found to be equivalent to the period prior to the pandemic.

The signs are there that investment is beginning to flow in all directions back into pharma and biotech industries. With the second half of 2023 to come, the completion of the year should provide answers as to whether this is a sustained recovery. The broader question will be whether this can be maintained should there be more uncertainty in the overall financial markets.