In the early weeks of 2017 biopharma investors were preoccupied with working out whether the year would head up or down. Put generously, 2016 had been flat, and hopes were high that the months ahead would see a recovery.
On most measures, 2017 delivered a resurgence. And the picture was similar for the medical technology industry, though life got tougher for the smaller groups.
Drug approvals in the US jumped, with plentiful evidence emerging over the year of the FDA’s industry-friendly stance. Stock market indices climbed, helped in no small part by US politicians, who eased back on the drug pricing rhetoric and finally pushed through tax reform. The rebound in investor optimism threw open the IPO window and helped venture funding soar – all of which helped forge a fertile environment for small drug developers working on innovative technologies.
These conditions caused valuations in certain areas of biopharma to surge ever higher last year – though this was not true across the sector. Concerns about the growth prospects of large drug developers, most notably in the biotech arena, led to a disappointing year for many in the big cap space. The ability of these companies to raise prices on some elderly franchises in the coming months will remain a worry.
Meanwhile, the widely wished for pick-up in M&A never materialised, and activity dimmed even further – uncertainty around tax reform and a refusal by buyers to accept sky-high valuations were widely blamed.
Over in the device sector, 2017 was a good year in many respects: most listed medtechs – and all the big-caps – saw their share prices head skywards, often to record-breaking heights. In contrast to biopharma M&A activity increased markedly, by value if not by number. And the FDA had a storming year, approving 50 new devices at the fastest rate for the past five years.
But the funding crunch still exists for small medtechs. This phenomenon has been manifest for several years now and it would be tempting to refer to it as a “new normal” if it were not for the fact that every year it gets worse. Last year so few venture deals were done, and so few IPOs got away, that there is a real possibility that the pool of start-ups could dry up completely if this trend is not reversed.
With two vast deals closing in 2017 at significant premiums, shareholders know that buying into big-cap medtech can still result in significant payoffs. Investors, however, are well aware that with every megamerger, a potential acquirer of venturebacked companies vanishes. The ebbing prospect of exits is one of the main factors behind the venture crunch.
Small players in both the medtech and biotech sectors will be hoping to see an increased appetite for deals in the coming year.
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