Takeout premiums hold up, but that’s not the whole story

Research-stage buyouts are as expensive as ever, while commercial assets look to be getting dearer, a new analysis finds.

Pharma buyers are willing pay up for desirable assets whatever condition the market is in – that much is clear from Evaluate Vantage’s latest look at the sector’s M&A trends. This shows that both mean and median takeout premiums have shifted very little over the past three years, even as stock indices peaked and crashed.

Research-stage developers have been going for a premium of around 100% for some time now, with commercial-stage groups seeing 70% bumps. It is worth remembering that this sort of analysis does not tell the whole story, though – many of today’s takeouts are being struck at a much lower base than previously.

The graph below was constructed from data collected by Evaluate Pharma and concerns listed, pure-play drug developers only. The premium refers to the average share price recorded over the 30 days before the deal announcement, and the 2022 figures are correct up to the end of the third quarter.

Whether an investor considers a premium rich or not very much depends on when they bought shares in the target company. And biopharma is a highly volatile sector.

But buyout valuations are still benchmarked against peers, whatever the baseline, as the graph above shows. This analysis also suggests that the current bear market has not really hurt premiums for developers still at the R&D stage.

There are positives and negatives to take from this finding. On the upside, small developers with promising technologies are still extracting healthy valuation bumps, even as financing options run out.

Take, for example, Regeneron’s $250m move on Checkmate Pharmaceuticals. This was struck at a 216% premium to Checkmate’s 30-day average, the fifth-largest premium across this five-year analysis. But this example also highlights the downside: while the premium might sound punchy, the per-share price was actually a 33% discount to Checkmate’s 2020 IPO.

Most sellers right now are in no position to convince buyers that even larger premiums are justified, to compensate for the market downturn. Big price uplifts typically occur when there is fierce competition for an asset; bidding wars probably lie behind the peak in premiums seen in 2019, a busy period for M&A.

Long-term pain

A similar situation can be found when digging into the data on takeouts of developers that already have a product on the market. The five-year view above hints at rising premiums in this cohort, and there are reasons to believe that this is a real trend. The sector is heading towards a big patent cliff at the end of this decade, and many large groups will need to buy their way out of trouble.

But cases of selling out at a depressed valuation are also easy to find here. Acacia, for example, had to bow out at a discount or face bankruptcy.

Several others, like Radius, went for decent enough premiums, but again this company’s shares were so beaten down that measuring its share price 30 days prior fails to capture the pain that longer-term investors would have been feeling.

Ipsen’s move on Epizyme, which at 144% ranks as 2022’s second-largest premium, is another case in point. The $247m takeover valued the small biotech at 90% below its 2013 IPO price, and 95% below where it was trading in early 2020.

The bald reality right now is that many executive teams have no good options on the table. The silver lining of sorts is that there will always be demand for desirable assets, so buyers will emerge for those with a promising future. But there will be a lot of investors nursing heaving losses this year, even with 100% average buyout premiums.

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