This morning, I read the post below on my LinkedIn feed.
Several StrawPeople, including me, are very active in the healthcare space. This kind of industry context means that I will always consider M&A benchmark multiples as one lens to consider when valuing healthcare (or rather pharma, biotech and medical device companies) holdings.
This is very relevant to a number of holdings by Members here, including $BOT, $PNV, $TLX, $NEU, $CUV and others too. Importantly, the scale and mutliples on these firms are modest in the context of industry M&A.
While I don't hold stocks solely because I think they might be bought out, in my next round of valuations, in addition to DCFs (my default preference), and multiples and ratios on near term earnings, PBIT, EBITDA, FCF, and - yes - even peak sales, I will also consider these ratios in the context of M&A deal multiples.
One question implied by the post is, does big pharma increase the return of capital to shareholders via buyback and dividends, or will we see a step-up in M&A? History points to the latter, as the innovation engines are often more productive ($ for $) in those smaller and medium scale "survivors" that get their products into late stage clinical development or even to market. Companies with platforms or significant portfolios are especially attractive.
It's now almost 30 years since I was an industry insider. But even then, the role of M&A in augmenting organic R&D was a vital part of the industry. The treadmill of growth and the dynamics of innovation means that it is not unreasonable to assume this will continue - just at even greater scale.
M&A is much more a consideration for biotech than most other industries as you point out @mikebrisy , The Economist in May had an article on increased deals and interest in small drugmakers, figures of $800b of cash for the top 15 largest drugmakers as ready for M&A. It also sighted the increasing cost in RnD to get drugs to market and the increased preference of drug companies to buy drugs in development rather than invest in finding and developing:
The pressure driving these acquisitions is the patent cliff of many on market drugs as show below. Not really a new problem, more a perpetual issue for the industry which explains why M&A is such a big part of biotech.
The other key change is the massive ramp up of interest in platform technologies and drug discovery technologies (and AI of course). Looking at the top 20 partnership deals last year shows that big money is chasing early stage (including pre clinical discovery) companies which have a platform that can be leveraged to generate a broad range of potential therapies. Oncology continues to dominate:
I am currently working for a startup Biotech and I can tell you firsthand that raising funds over the last couple of year has been exceptionally hard. A lot of startups or early-stage biotech's that didn't have a lot of cash have been mothballed or just given up. The upshot is that the quality of survivors is higher than normal!
The cycle seems to be turning and deals for small biotech's are improving as more money is coming back into the market across the spectrum of deal sizes. I suspect that we are looking at the next few years being the start of a revival in the space and FOMO will return to VC's and Big Pharma in due course as they plug holes in their portfolios for the next decades revenue and returns.