(Reuters)—Numerous small biotechnology companies have been all but shut out of the capital markets, leaving many with no choice but to consider a sale to larger peers.
The Nasdaq Biotech Index is down nearly 30% since September, when Democratic presidential candidate Hillary Clinton criticized drug companies’ “price gouging” on Twitter and sparked concerns about a government crackdown on rising drug costs.
No regulatory crackdown on pricing has materialized, but the sector’s decline has run unabated, compounded by broader stock market volatility.
“Clearly this is a very challenging market for raising capital,” said Mark Perrin, chief executive officer of InVivo Therapeutics, a small biotech company focused on treating spinal cord injuries. He said he plans to wait for valuations to rebound before tapping the markets.
On the other hand, the market turmoil could help maintain deal-making momentum in the life sciences sector this year after a record year for mergers and acquisitions in 2015.
Since the beginning of the year, a number of small publicly traded life sciences companies have been exploring a sale, including Sagent Pharmaceuticals, Alimera Sciences, XenoPort, MannKind Corp. and Pernix Therapeutics, Reuters has previously reported.
These five companies have seen their equity values plunge by an average of nearly 40% since September, causing their price-to-2015-sales ratios to tumble from an average of 5.3 to only 2.1.
Best-positioned to take advantage of the sell-off are large life sciences companies with strong balance sheets. Specialty pharmaceutical companies Mallinckrodt and Horizon Pharmaceuticals, for example, have access to at least $2 billion each in funding for potential deals and have been exploring opportunities.
Mallinckrodt is assessing potential deals “across specialty brands and generics portfolios,” Chief Executive Officer Mark Trudeau told Reuters at the JPMorgan Chase & Co. healthcare conference last month.
“For the next six months, your bank might be named Pfizer Inc,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.
Also likely to enter the fray are other small drug companies, which may find that increasing scale through stock-for-stock mergers is far less dilutive than trying to raise equity in today’s capital markets. Pozen Inc and Egalet Corp could serve partners for struggling companies seeking a deal, industry sources said.
Watching the IPOS
The present downturn is one of the most severe in the history of an industry known for its wild gyrations. The last pullback to match its severity was in 2000, when the Nasdaq biotech index was engulfed in the broader turmoil rattling tech stocks and lost more than a third of its value in less than three months.