Life Sciences M&A Activity Looks to Be Trending Up

While merger and acquisition (M&A) activity in the life sciences industry has been a bit of a mixed bag the past few years, the first half of 2023 may indicate that deal making is picking up, say industry experts. Some headwinds may make it challenging at times, but the overall sentiment is a positive one.

“In life sciences, it’s a period of smart optimism as we head into the back half of the year” in terms of M&A activity, declares Kristin Pothier, healthcare & life sciences deal advisory & strategy leader at KPMG. “The overall biopharmaceutical deal market began to see a significant slowdown in the fourth quarter of 2022, and from a deal volume standpoint, this carried through into the first quarter of 2023. As we look at all the potential for megadeals of the past, we don’t expect to see that as we move to the end of” the 2023 fiscal year and into FY 2024.

She tells AIS Health, a division of MMIT, that even though the overall volume of deals is down, “there are some notable areas of improvement. Specifically, company acquisitions are on the rise in the first quarter of 2023 compared to the first quarters of the last two years, while the total capital deployed for these deals basically remained flat compared to last year’s first quarter.”

“After a relatively slow couple of years on the buyout front, biopharma is picking up the pace,” says Evaluate Vantage in its Biopharma and Medtech H1 2023 Round Up. If all of the deals unveiled during the first half of the year are completed, the industry will have spent $83 billion on M&A. This puts biopharma on pace to be one of the most active takeover years since 2019. In 2022, the industry had $96 billion in deals; in 2021, it had $91 billion.

Evaluate Vantage’s parent firm, Evaluate Ltd., and MMIT are both Norstella companies.

During the first half of 2023, there were 12 $1 billion-plus planned deals, eight of them in the second quarter. “The spending boost seen so far in 2023 is in part being driven by what many hope to be a short-lived phenomenon: an unwelcoming equity market, and a rebasing of valuations across the small end of the sector over the last 18 months,” says Evaluate Vantage.

The first quarter of 2023 was “dominated” by Pfizer Inc.’s $43 billion planned purchase of Seagen Inc., says Pothier. Merck & Co. Inc.’s acquisition of Prometheus Biosciences, Inc. for $10.9 billion — finalized in June — was the biggest life sciences deal in the second quarter, she observes.

According to Evaluate Vantage, the Pfizer purchase will likely be the biggest biopharma deal this year. If finalized, the purchase would be the largest in the industry since AbbVie Inc. completed its acquisition of Allergen plc in May 2020 for $63 billion.

Life sciences companies are also looking to emerging technologies such as artificial intelligence (AI) and machine learning, a “huge area of focus,” claims Pothier. “We are seeing AI fuel areas like drug discovery, research and development, clinical developments and the improvement of existing operation in a powerful way. Data is being utilized in new and unique ways. It’s also helping to develop new types of services that we have not seen before.”

Multiple Trends Are Playing Out

The life sciences industry is seeing myriad M&A trends in 2023, says Pothier, both positive and negative. For one, “access to financial institution capital has become more difficult,” an issue that will continue to impact deals throughout the year. “Highly leveraged deals or large deals requiring financing will become much more difficult to execute. Additionally, small to mid-sized biotech companies that need capital to progress key pipeline assets in development will likely find it harder to find funding throughout the rest of this year.”

A more difficult private funding market, however, could end up being good for deals later this year and early next year “as biotech companies with attractive clinical stage assets face funding issues,” she says. As companies’ appetite for funding grows, this “may finally drive historically high valuations down. This could lead to an active market for large biopharmaceutical companies to either acquire or have more appealing partnership terms later in 2023.”

According to Pothier, 2023 also is likely to see “the rise of more divestitures and out-licensing deals from large biopharmaceutical companies. After three years of very active dealmaking, several large biopharmaceutical companies now have very significant early-stage pipelines and are struggling to find the R&D capacity and capital to move those programs forward.”

What Could Dampen Industry Enthusiasm?

“We think 2023 will likely continue to be plagued by several headwinds that will slow overall deal activity through the second quarter of 2023 but may lead to a late run on smaller companies’ deals in late 2023 and 2024,” states Pothier.

The Federal Trade Commission (FTC) could dampen momentum, says Evaluate Vantage, pointing to the antitrust watchdog’s lawsuit (No. 23-CV-3053) seeking to block Amgen Inc.’s planned $28 billion acquisition of Horizon Therapeutics plc, which was revealed in May. Because of that recent move, “it is probably too soon to tell whether the action has prompted executives to push pause on business development.”

But that’s not the only deal in which the FTC is interested. In a Form 8-K filed with the U.S. Securities and Exchange Commission on July 14, Seagen revealed that the FTC had requested additional information and materials from both it and Pfizer in connection with the agency’s review of the deal — unveiled in March — pushing out the closing until late 2023 or early 2024.

Evaluate Vantage also points to the Inflation Reduction Act (IRA) as another potential headwind for M&A. That law, say some industry experts, could make biologics more attractive than small molecule drugs, as well as make agents with multiple indications less desirable. However, the IRA’s impact likely will be more long term, write the authors.

Because of that law, says Pothier, pharma companies are reconsidering “the assumptions they use to develop forecasts and valuations across a wide range of M&A targets they are considering.” The impact may be felt by those pipeline agents with “significant Medicare Part D and Medicare Part B involvement.” Such concerns haven’t put an end to M&A activity, but “for targets without a strong strategic rationale and investment case, the implications of the IRA have made it more difficult to justify certain types of deals until there is more clarity on the range of pricing discounts that will be negotiated under the IRA.”

KPMG, she says, anticipates a period in the deal market when large pharma firms interested in small biotech companies with a focus on “innovative small molecule technologies, such as” messenger RNA (mRNA) or next-generation Janus kinase (JAK) or spleen tyrosine kinase (SYK) inhibitors, “will offer lower valuations, while the small biotech companies try to maintain their pre-IRA valuations.”

Asked about M&A activity coming out of the COVID-19 pandemic, Pothier responds that the life sciences industry is starting to see a recovery. “During the pandemic, funding overflowed, which fueled rapid scientific advances and surges in dealmaking. As the pandemic eased, however, the flood of money receded, and macroeconomic challenges increased. Now, companies are asking how they can best serve their patients and consumers and focusing on innovation like the development of cell and gene therapies and biologic drugs. We expect to see a return in this space in fall 2023 and early 2024.”

Ultimately for M&A, “the cost of capital is rising globally and regulatory headwinds are strengthening, reasons to believe this momentum might stall,” conclude the Evaluate Vantage authors. “But on the flip side, drug developers will always need fresh blood. The need for pipeline replenishment is the ultimate dealmaking force in biopharma, and this pressure will always keep the deal wheels turning.”