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4 Reasons why M&A is an important source of return in biotech investing

Yuri Khodjamirian, CFA
By Yuri Khodjamirian, CFA
April 26, 2024

M&A is picking up in the biopharma space. Seven names owned across our life science funds, especially in oncology, have received takeover offers. In this report we take a look at the recent deals, both broadly and for our funds, and highlight several insights and learnings. We also discuss several reasons why we think M&A, though variable, is a source of inorganic return for life science portfolios.

Download the full report in PDF

One of the major sources of return for biotech investing is getting stocks acquired by strategic buyers. There are several drivers of this.

1. Innovation happens in smaller companies. Emerging biopharma (EBP) are responsible for a large majority of new drugs coming to market. 57% of the launches in the past five years originated from EBP up from 48% over previous five years.
chart-Apr-26-2024-01-26-11-2998-PMSource: IQVIA Pharma Deals, Dec 2023.

2. Patent cliffs for larger firms are looming. An estimated $350bn of revenue needs to be replaced in the next five years.chart-Apr-26-2024-09-44-58-5648-AM

Source: Bioworld June 2023. 1Timelines are estimates based on key patent expirations or patent settlement agreements, and the life of a brand can be lengthened or shortened unexpectedly due to various factors. Forecasts are inherently limited and should not be relied upon when making investment decisions. There is no guarantee projected growth will occur. In addition, there is no guarantee it will translate to positive fund performance.

3. Dry powder from pharma. On our estimates large pharma companies, based on a combination of existing balance sheets and future cash flows, have $838bn of funds available for deals. This is enough to buy 65% of the entire XBI index.

4. Liquidity for investors. M&A puts money back into the pocket of investors. Given the prevalence of specialist funds in biotech this money will get allocated back to further life science investors. Oppenheimer estimate that the recent M&A burst has put $90bn+ of cash back in the hands of investors to redeploy into new ideas.

One thing is clear from these drivers is that it is important to be selective and having a diversified portfolio of investments to gain returns from M&A. This can be best achieved using an active ETF. It is also important to be exposed to the therapeutic areas attracting interest. As we will see below oncology, obesity, and neuroscience are the major parts of the life science market attracting takeover bids. This combination of diversification, selective active management and therapeutic areas of interest is clear in our three biotech funds – Tema Oncology ETF (CANC), Tema GLP-1, Obesity & Cardiometabolic ETF (HRTS) and Tema Neuroscience and Mental Health ETF (MNTL).

What is the state of M&A?

After a long bear market, M&A has picked up steam in 2023, and the trend is carrying over into the beginning of 2024.Group 13

This uptick is largely thanks to a handful of big-money deals, although the average deal size has shrunk to about $175m, down by 42% from 2021's average of $301m. Noteworthy, though, is that there were 11 deals valued at over $5bn.


Read More: Investing in Biotech Stocks