Wells Fargo highlights potential targets as biotech M&A accelerates
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Noting a tough regulatory backdrop and a decline in equity financing, Wells Fargo reasons that investors should look for smaller targets as the pace of M&A activity increases.
In a research note on Thursday, the analysts led by Mohit Bansal point to attractive valuations of both small- and mid-cap biotech companies where average EV to cash ratios are approaching 1x compared to the three-year average of 2.9x.
âThis, coupled with reduced availability of capital, might make SMid management teams seek big pharma deals,â the analysts added, pointing out that biopharma IPOs have dropped ~80% YTD with over 90% decline in dollar terms.
The lack of preference for equity financing could mean short cash runways for some companies if there is no significant turnaround in 2H 2022, the team argues.
The analysts also point to large pharma companies with the biggest pipeline needs, Amgen (AMGN), Bristol Myers (BMY), Gilead (GILD), Merck (MRK), and Pfizer (NYSE:PFE) have over $70B of cash on hand with $340B incremental cashflows estimated though 2025.
However, an upcoming event that Federal Trade Commission and Justice Department have convened for next week will likely discourage big M&A deals, the analysts argue, citing the potential for smaller sub-$20B deals in the sector.
As biotechs run out of options, a trend of declining deal premiums amid rising rates could allow large caps to buy smaller targets and form dilutive financing deals, the analysts added.
Read more about a previous Wells Fargo note in which Bansal and the team highlighted the relationship between deal premiums and increase in treasury yields.