Big Pharma Has Enough Cash to Buy All of Biotech. Why M&A Isn’t Happening.

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With biotech stocks off nearly 60% from their February 2021 peak, and big pharma firms flush with cash, why haven’t there been more acquisitions this year? It’s a healthcare market paradox.

A note Friday from Jefferies analyst Michael Yee highlights just how far biotech valuations have fallen, and how much cash the big pharma giants have on hand. The largest biopharma firms right now have almost enough cash to more or less buy every single small-to-mid-cap biotech company.

Yee calculates that the combined market capitalization of all the biotech stocks valued at under $5 billion is around $350 billion. The cash balance of the top 20 biopharma companies combined, meanwhile, is over $300 billion.

“We have reached a point where Big Pharma has so much cash they could basically buy the whole smid-cap universe,” Yee wrote. “We note M&A is tough when markets are falling fast …but eventually a few deals could catalyze things back up.”

Late in 2021, Barron’s predicted a wave of biotech M&A this year that would lift the sector. Citing the “tons of dry powder” in the vaults of

Pfizer

(ticker: PFE),

Novartis

(NVS), and others, we argued that a wave of M&A would “reawaken investor interest in biotech.”

That wave hasn’t even been a ripple. There have been some deals, to be sure:

GlaxoSmithKline
’s
(GSK) $1.9 billion takeover of

Sierra Oncology

(SRRA) last month, and

Pfizer
’s
deal, worth up to $525 million, to buy a private firm called ReViral.

There have been signs, too, that the big pharma firms are on the hunt, including Pfizer’s selection of a veteran of one of the biggest healthcare deals in history as its new CFO. Still, the steady flow of biotech acquisitions that Barron’s and others expected has not materialized.

At the same time, biotech valuations continue to slide. The

SPDR S&P Biotech ETF
(XBI), which tracks the biotech sector, is down 34% this year, and 41.2% over the past 12 months.

So if biotechs are cheap, and pharma firms have a lot of cash, why isn’t anyone making deals?

Merck

(MRK) CFO Caroline Litchfield offered a compelling explanation in an interview with Barron’s in late April: Biotech executives don’t yet believe what Mr. Market is telling them about how much their companies are worth.

“We’ve yet to see the seller change their mind-set on what the value of their company is,” Litchfield said. “I think the world lives in hope right? …And if you’re sitting in the biotech, you’re waiting to understand, is this permanent, or is it temporary? And that’s where I think they are.”

In his Friday note, Yee wrote that if and when large biopharma firms start buying small and mid-cap biotechs, it will signal that “sellers have adjusted their expectations and have accepted the new valuation.”

What’s more, Yee wrote, it would show that the pharma buyers don’t think that the price will be falling any farther. Taken together, that sense of stabilization could give investors the reassurance they need to come back into biotech, and keep buying.

That’s not happening yet. The XBI fell 17.9% in April. So far in May, it’s down another 3.2%.

In an email to investors Friday morning,

Oppenheimer

healthcare equity strategist Jared Holz summed up the mood. “So much self-fixing must be done here to improve the health of the broader Biotech space,” Holz wrote. “And we believe this will take time. Months. Perhaps years.”

Write to Josh Nathan-Kazis at [email protected]