The US continues to lead in terms of biotech and pharma activity on the capital markets, raising USD 92.7 billion in 2019, accounting for 60% of total capital raised and 40% of issues.
However, China has been heavily investing in biotech R&D of late, with the most recent stats showing a hefty USD 291 billion invested by China’s government, suggesting the nation is set to experience a swell in biotech activity in coming years. This expectation is supported by the volume of patent applications made by Chinese companies in 2019, with Chinese authorities receiving twice as many patent applications than the US.
In 2019, Chinese issuers raised USD 16.5 billion across 90 equity and debt offerings, a 17% increase in volume and 13% increase in value from 2018.
This is all according to a new report from Baker McKenzie, The Future of Capital Raising in Biotech and Pharma, which explores the changing landscape of how biotech and pharma companies are financing their growth, trends in the market and the biggest changes in the sector over recent years.
Europe has traditionally been a strong breeding ground for biopharma activity, with some recent large valuations and mega deals, such as the USD 5.1 billion R&D collaboration deal between Galapagos NV and Gilead Sciences, Inc, on which Baker McKenzie acted as lead counsel to Galapagos. This was, in fact, the second largest biopharma licensing deal in 2019.
Adam Farlow, Head of EMEA Capital Markets, Baker McKenzie, said, "Our recent work on the 10-year global R&D collaboration between Galapagos and Gilead Sciences is a great example not only of how companies are working together on innovative R&D and licensing projects.”
In total, Europe raised USD 27.5 billion on the capital markets in 2019, an increase of 26% upon the USD 20 billion raised in 2017 - driven largely by pharma debt and biotech follow-on offerings and in line with global activity in this space.
Across the board, the market has seen explosive growth in the value of debt offerings by pharma companies over the past two years, according to the Firm
Companies are also staying private for longer as the abundance of private funding available means that fewer companies need to take on the regulatory hurdles associated with going public, allowing them to retain greater control of their operations.
Baker McKenzie’s report explains that innovation remains at the core of what is driving biopharma fundraising, with a strong pipeline of innovative technology and new drugs in advanced research and development stages, robust demand from investors who seek to leverage stronger returns on investment, and the need for pharma companies to replenish their pipeline to secure future revenue.
Koen Vanhaerents, Global Chair of Capital Markets, Baker McKenzie, said, “Despite a decline in overall global activity and a wariness from investors towards pre-profit companies in some industries, the biopharma sector continues to see significant levels of interest and investment. This is mostly driven by a strong pipeline of tech and drugs in advanced R&D stages, robust demand from investors seeking higher returns on investment associated with the industry, and a surge in fund raising activity from pharma companies seeking to replenish both their R&D and their revenue pipeline.
Although geopolitical factors are expected to impact the overall global market in 2020, the underlying strength of this sector will continue to promote dealmaking. With the rate of advancement in the AI space facilitating speedier drug and tech development, we expect to see a continued whet of appetite in the biotech and pharma space.”
Equity vs Debt vs Alternative Funding
According to the report, while equity activity was broadly flat, the biotech and pharma industry still managed to raise a total of USD 154 billion from 651 equity and debt offerings. Average deal value for 2019 showed an increase of almost 50% when compared to 2017*.
In contrast to the steady performance of the equity markets, debt capital markets have shown a significant increase in value. This was driven mainly by pharma companies issuing larger debt offerings to fund mega acquisitions, such as AbbVie’s proposed USD 63 billion acquisition of Allergan and the USD 74 billion acquisition of Celgene by Bristol-Myers Squibb.
Therefore, there was a clear divide in fundraising avenues - with equity and VC investments often favoured by fast-growth biotech companies, while debt offerings are helping to build pharma R&D pipeline by funding the acquisition of innovative technologies and drugs.
With patents on blockbuster drugs nearing expiration, pharma companies are under pressure to secure future revenue. Rather than focusing on building their R&D pipeline organically, many have sought to acquire the innovative tech and drugs already in the development stage – with debt offerings a popular choice to fund those acquisitions.
The value of acquisitions of biotechs by pharma companies has climbed strongly, with total deal value recorded at USD 20 billion in 2019, compared to USD 5 billion in 2017.
Licensing and collaboration deals between biotech and pharma continue to go from strength to strength, allowing big pharma to outsource some R&D.
Randy Sunberg, North America Chair of Healthcare & Life Sciences at Baker McKenzie said: "Licensing and collaboration has also become a route to capital raising or funding through upfront payments, milestones, royalties and profit splits. Often, licensing deals can morph into acquisitions. In many cases, when pharmaceutical companies acquire a biotech company, whether it's a privately-held or publicly-held biotech company, the M&A deal may have begun from initial licensing discussions."
There is now, however, a growing range of hybrid solutions that are becoming more commonplace as understanding and liquidity in these instruments grows.
Venture lending is one such area that is becoming more popular as it combines debt with a right to equity. This combination makes venture lending a viable alternative to smaller companies, who are unable to raise debt via more traditional methods.
Ben McLaughlin, Global Chair of Healthcare & Life Sciences at Baker McKenzie, notes the ongoing trend of venture lending in biotech. "VC firms or VC arms (corporate venture capital) of larger and more established pharmaceutical companies are lending money at incredibly low interest rates. Venture lending is unique, as it is quasi-equity and quasi-debt. It is something we might see instead of equity purchases, acquisitions or traditional VC deals. This gives smaller biotech companies the chance to develop a piece of technology or a drug, in order to reach a point where they can get FDI approval or other relevant governmental approvals."
With its deep investor pools, innovation hotspots, investors with specialized sector knowledge and its history of successful commercialization of drugs, the US is by far the most active jurisdiction in terms of funding, experience and development.
Rising valuations and follow-on activity have also been fuelled by the upward trend in drug approvals by the FDA. In 2019, the FDA's Center for Drug Evaluation and Research’s (CDER) approved 48 novel drugs, which follows the highest-record in 2018 at 59.
Alongside strong pharma activity in Europe, investment in biotech firms has grown significantly, more than doubling over the past few years, particularly in Belgium, Switzerland and the UK. The development of European VC funds has also seen VC investment increase three-fold. When it comes to raising growth capital via IPO, around a third of European biotechs opt to raise capital on US exchanges, as IPOs tend to bigger on the US market.
According to Hong Kong-based Ivy Wong, Asia Pacific Chair of Capital Markets at Baker McKenzie:
"Principally, the US has been the main location for biotech companies. Valuations are sophisticated there, and both investors and the market are familiar with the biotech industry, although it is interesting to see how Asian markets are also gradually growing and developing their knowledge and expertise in this area."
With the rise in China's patent application activity, the recent changes in legislation across Asia to encourage biotech offerings, AI developments, and the launch of Shanghai’s Science and Technology Innovation Board or ‘STAR Market’, biopharma activity in Asia looks set to grow as the region looks to build their profile as a strong alternative listing location for biotech companies in particular.