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The acquisition of biotechnology firms is one of the most common ways big pharma replenishes their pipeline of new drugs. However, despite massive cash balances among pharmaceutical giants and crashing biotech valuations, there’s been a temporary dearth of deals in 2022. 

Amidst rapidly falling share prices of publicly listed firms and weakening VC flows in private markets, many biotech businesses appear unwilling to drop their asking prices, pushing away potential acquisition partners who likely see continued market tumult and weakening IPO performance ahead and are willing to wait for better deals. Some believe Pfizer’s $11.6 billion deal with Biohaven Pharmaceutical could mark a potential turning point for M&A activity in healthcare.

Related ETFs: SPDR S&P Biotech ETF (XBI), VanEck Pharmaceutical ETF (PPH)

Shares of biotechnology firms have been hit particularly hard in 2022. Biotech stocks in the Russell 2000 just closed out their worst April since at least 1997, when Bloomberg started tracking returns, sinking 22%.

Since its peak in February of last year, the SPDR S&P Biotech ETF (XBI) has plummeted 64% versus the VanEck Pharmaceutical ETF (PPH), which has actually held onto a 7% gain over that same period.

How Far Will Pharma Let Biotech Fall Before Placing a Bid?

Big pharma typically spends a lot of cash on replenishing their drug pipelines with new and prospective products from rising biotech firms and startups. With the valuations of companies across the sector crashing through the floor, it is expected that a mergers and acquisition (M&A) bonanza will eventually rise out of these discounted prices. However, Fierce Pharma notes CEOs of many of the world’s pharma giants continue to express a standoffish disposition toward reviving M&A activity, believing biotech prices still have room to fall before they became appealing acquisitions.

As Bristol Myers Squibb CEO Giovanni Caforio stated in the company’s most recent earnings call at the end of April, “Our experience is that whenever there is some type of realignment in market values, it always takes a little bit of time for those values to really be the values that boards of biotech companies look at in terms of their valuation… Having said that, of course, values were extremely high.”

So, while share prices are certainly down, it appears that asking prices among sellers does not reflect such a big decline. To be sure, it is not due to a shortage of capital among pharma’s potential buyers.

Jefferies analyst Michael Yee estimates that the combined market capitalization of all the biotech stocks valued at under $5 billion is around $350 billion. That compares to a combined cash balance among the top 20 biopharma companies worth over…

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