A month ago Crunchbase published an article titled “Megadeals explode early in the year as U.S. startups gobble up more $100 million+ rounds.” Indeed, with 115 funding rounds surpassing the $100 million mark, the amount of megadeals is already above last year’s 73 deals. Among the startups raising these substantial amounts, biotech and healthcare companies stand out. While artificial intelligence (AI) and cybersecurity companies are doing well with 21 megadeals, biotech and healthcare startups are on another level cumulating 42 deals, well over other industries.
Biotech and healthcare startups have dominated this megadeal trend in the first half of the year. This includes notable rounds such as Xaira Therapeutics, which raised over $1 billion in April, leveraging AI for drug discovery and development. Another example is Mirador Therapeutics, securing $400 million in precision medicine.
We reached out to industry experts to find out why megadeals are ramping up in biotech and what to expect in the future.
What is driving the surge in biotech megadeals?
Natalie Dolphin, managing director of investor relations at HLTH Communications, attributes this surge in megadeals to a combination of factors. ”Investors’ increased focus on health and biotech startups is driven by technological advancements such as AI in drug discovery, the heightened awareness of healthcare innovation post-pandemic, and supportive regulatory environments. Additionally, the aging global population and the significant focus on longevity are fueling interest in these areas, as they promise long-term impact and resilience.”
Technological advancements
According to Sergey Jakimov, manging partner at LongeVC, biotech stocks are picking up momentum because there are more public proof points of their success, especially in the recent FDA approvals granted for earlier-stage biotech companies.
“Companies like Iovance Biotherapeutics or Madrigal Pharmaceuticals decided to list while they were still proceeding through clinical trials. When public biotech companies can push promising treatments through R&D, and regulatory hurdles, and make it through approvals, they validate the entire sector. Their results easily make the case for investors, who are then more willing to back promising private companies. Also worth noting is that pharmaceutical companies are driving a lot of activity through acquisitions, which also validates biotech investment on the private and public side,” said Jakimov.
More specifically, Meri Beckwith, co-founder of Lindus Health, highlights how AI has changed the paradigm for health and biotech startups: “With advances in AI, it is becoming increasingly feasible to build a full-stack pharma company from scratch, as companies like Xaira Therapeutics and Formation Bio are demonstrating.”
The integration of AI in drug discovery is revolutionizing the biotech and health sectors. AI algorithms can analyze vast amounts of biological data to identify potential drug targets quickly and accurately, significantly accelerating the drug discovery process. AI-guided screening techniques can rapidly scan large libraries of compounds, identifying those with the highest likelihood of binding to targets, which was previously a time-consuming and costly process.
Despite AI’s significant potential in drug discovery, there are challenges related to data complexity and the applicability of AI models. While some AI-discovered drugs are in early clinical trials, none have yet successfully made it to the market.
Tech giants like Google, NVIDIA, and Microsoft have also entered the AI-based drug discovery space. For example, NVIDIA’s BioNeMo platform provides computational methods for drug research and development, enabling companies to develop, customize, and deploy AI models to accelerate drug discovery.
The involvement of major tech companies is expected to disrupt traditional biopharma, bringing advanced AI capabilities and substantial financial resources to the sector. However, as it was highlighted in a Biospace article, this might come with its set of challenges. The article reflected on Isomorphic Labs’ recent deals with Eli Lilly and Novartis. Isomorphic Labs is a subsidiary of Alphabet, Google’s parent company. Beth Rogozinski, CEO of Oncoustics, said there might be a mismatch in business models between big tech companies and biopharma as the deals were revealing a traditional tech mentality and it was unclear whether the physics of the business will support the risk models.
Additionally, according to Beckwith, there is still a significant untapped potential for software companies in biotech which investors are recognizing as these megadeals indicate.
“As Marc Andreessen famously predicted in 2011, software has eaten the world… except in health and biotech! Software companies still have a vast amount of room for growth in these fields. Venture capitalists have recognized this potential and are pouring money into the relatively few companies that appear capable of achieving breakout scale in this space. I believe this trend will continue, given the numerous markets in health and pharma that remain relatively undisrupted. This is particularly evident in clinical research.”
Economic and market conditions
Marion Jeng, associate at DAI Magister, identified two main reasons why biotech companies are attracting most of the deals above $100 million at the moment. “Firstly, investors are sitting on significant amounts of capital that need to be deployed; secondly, there is a cliff looming ahead for pharmaceutical companies as several major patents are due to expire. As a result, for the most promising companies, the exit potential is significant.”
Jeng also notes that investors are focusing on companies with drugs further along in development. “There is a special attention to drugs which have already been tested on humans. One clear example of this is Latigo’s $135 million raise in February: not only was their pain relief drug post phase 1 but there was also a phase 3 validation of a similar drug by Vertex Pharmaceuticals.”
According to Jakimov, there are also opportunities for preclinical companies in the current market. ”Big pharma is in a state where mergers and acquisitions (M&A) budgets are sometimes at their highest, but pipelines are exhausted. This leads to big pharma becoming increasingly willing to acquire promising assets at earlier stages, sometimes even pre-clinical, particularly in hot areas like anticancer ADCs or obesity treatments. This trend validates the entire biotech sector and creates a lucrative exit strategy for venture capitalists, further fueling investment in innovative private companies.”
Didier Choukroun, chief executive officer (CEO) at SPHERE Investments, believes the megadeals trend is also due to the biotech and health sectors’ resilience to economic fluctuations. “Healthcare needs remain constant regardless of economic conditions, making investments in these areas relatively stable and less risky compared to other industries. This stability is particularly attractive to investors as it offers a safeguard against market volatility.”
Regulatory and demographic factors
Jonathan Scheinberg, life sciences real estate expert, mentions that the Inflation Reduction Act is setting up a favorable market for large molecule therapies driving megadeals in the biotech industry.
“The Inflation Reduction Act granted large molecule therapies (gene and protein-based therapies, immunotherapies, hormonal regulators, and antibody-drug conjugates), a much longer patent exclusivity right compared to small molecule drugs. As a result, large pharmaceutical companies have been infusing the market with billions of dollars to acquire smaller companies that focus on these large molecule therapies to keep their pipeline full as their small molecule drug patent exclusivity time runs out and they need to maintain their revenue streams.”
Both Dolphin and Choukroun highlight that the aging global population and the rising prevalence of chronic conditions are driving demand for new treatments and healthcare solutions.
“There is a high demand for new treatments and solutions fueled by an aging population, the rising prevalence of chronic conditions, and unmet medical needs. Significant opportunities exist in personalized medicine and pharmacogenomics, which offer tailored therapies to patients, as well as in digital health and telemedicine, which enhance access to care and improve health equity. Preventive health measures aim to reduce the incidence of chronic conditions making it another area of focus for investors,” said Choukroun.
Is the biotech megadeals trend here to stay?
Scheinberg predicts steady funding for biotech and healthcare startups into 2025 and beyond. “The industry rebounds following a tightening of market liquidity resulting from the FED’s (federal funds rate) increased interest rates. The increased rates forced venture funds to reduce funding and increased scrutiny of companies’ science. There has been a recent resurgence in funding in the past three quarters driven by venture capitalists’ recognition, successful vetting, and growing confidence for emerging therapies with real promise being developed by biotech companies. I anticipate that the trend of steady increased funding will continue into 2025 which will likely be a normalized year that reverts to the pre-covid average for biotech and healthcare funding.”
Victoria Rhodes, corporate partner at DLA Piper agrees the trend shows no signs of slowing down. “Larger deals have also featured in 2024, including Novo Holdings’ $16.5 billion acquisition of Catalent and Johnson & Johnson’s $13.1 billion acquisition of Shockwave Medical. However, bolt-on acquisitions of businesses that reflect future pipelines are likely to remain the major focus of 2024, with cancer, immunology, and rare diseases expected to be high on the M&A shopping list. Early stage and venture-based investments are also likely to remain important as part of M&A strategy as well as smaller strategic acquisitions.”
Panna Sharma, CEO of Lantern Pharma is a bit more cautious. While it is evident to him that 2024 is going to outstrip 2023 in terms of overall dealmaking in the biopharma community, he doesn’t expect it to reignite the investor interest in publicly listed biopharma companies.
“The deals that will be made will be in fairly late-stage assets and programs, with pharma companies potentially reaching into earlier programs around areas like GLP1 and obesity and perhaps in certain antibody-drug conjugates (ADC) technologies. While I see greater reward going to companies with later-stage clinical programs, it will have the dampening effect of fewer collaborations and co-developments for earlier-stage companies. This economic reality is being faced by many biopharma companies and will push them to find newer, faster, and less expensive ways to show meaningful progress in their programs – the most notable method of which is wide-scale adoption of AI technologies to hasten and sharpen earlier stage programs,” said Sharma.
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