At the J.P. Morgan Annual Healthcare Conference in San Francisco this week, bio/pharma industry executives outlined their key pipeline contenders and commercial products. How do mergers and acquisitions play in their strategies? 

Deal-making on the rise
Mergers and acquisitions are a key growth strategy for the large multinational bio/pharmaceutical companies, and in 2023, the global life sciences industry once again embraced big deal-making, M&A investment totaled $191 billion (as of December 10, 2023), compared to $142 billion in 2022, according to EY’s Annual M&A Firepower Report. Though deal volume fell, with the total M&A spend representing only 118 completed deals, compared with 126 in 2022, the average deal size increased significantly in 2023.

 The industry’s return to M&A is being driven by topline pressures, key products losing their patent protection in the next five years, and the need to do the right deals now to deliver new revenue growth and value into the future, according to the report. The industry also holds near-record levels of “firepower,” defined as a company’s capacity to do M&A based on the strength of its balance sheet.

The EY research found that one of the fundamental reasons behind the 2023 rebound in M&A was the increased involvement in M&A from the life-sciences sector’s largest players – the bio/pharma multinationals. These companies dominated industry deal-making, with more than two-thirds (69%) of M&A investment coming from Big Pharma, compared with just 38% in 2022. Eleven large bio/pharma companies all signed at least one deal of $1 billion or more in value in 2023 (as of December 10, 2023). Merck & Co. broke the $10-billion barrier in 2023 with its acquisition of immunology specialist Prometheus, but the largest deal in 2023 by a significant margin was Pfizer’s acquisition of Seagen for $43 billion.

These major investments meant that despite the dip in deal volume, the average bio/pharma acquisition size increased by 77% in 2023 ($1.23 billion in 2022 vs $2.18 billion in 2023 [through Decemeber 10, 2023]). EY projects that Big Pharma is set to keep signing these bigger deals in 2024, signaling a major return to M&A.

“In 2023, we witnessed the resurgence of significant deal-making within Big Pharma,” said Subin Baral, EY Global Deals Leader, Life Sciences, in commenting on the report. “Faced with the imminent patent expiration of several key products in the next five years, the biopharma industry recognizes M&A as a strategic avenue for securing growth. The challenge for companies across the sector is to ensure they make the right deals now to deliver lasting value into the future. Identifying the best partners, deal-making structures, innovations, therapeutic areas and strategic approaches is crucial as we navigate a period of upheaval in the global business and regulatory environment…Even with the unsettled operating environment, we expect to see continuing into 2024, the life-sciences companies that can recognize and deliver on these deal-making imperatives will be well placed to secure value far into the future.”

According to the EY report, there are three key reasons to expect the rising trend in M&A spending to continue and accelerate in 2024 and beyond: (1) the bio/pharma industry still holds near-record levels of M&A firepower; (2) the industry faces major revenue challenges in the next five years and needs to secure inorganic growth; and (3) economic conditions mean there is a buyer’s market favoring acquiring companies.

Despite its increased M&A investment, the industry still commands more than $1.37 trillion in deal-making capacity – higher than at any point in the history (past 12 years) of the EY Firepower report, apart from 2022.

“However, while there is money to invest in acquisitions, the challenge for companies across the life-sciences sector is ensuring they do the right deals to secure value in the future,” the EY analysis points out. “The uncertainties facing bio/pharma dealmakers go beyond the general volatility in the global operating environment, and include the regulatory risks posed by new legislation such as the US Inflation Reduction Act (IRA). This initiative will potentially constrain companies’ ability to set drug prices in the future, making it more difficult to accurately evaluate portfolio and pipeline assets of potential targets.”

On a product basis, key M&A targets company-wise are in oncology and rare diseases. The growth potential of the oncology market is reflected in companies’ M&A spending over the past five years, with oncology dominating industry acquisitions in both value and volume terms, according to the EY analysis. In 2023, M&A investment in oncology assets reached $65.2 billion. The intense competition for these assets has also resulted in companies paying higher multiples than for targets in other therapeutic areas with multiples for oncology acquisitions over the past decade averaging 11.9 times total target company revenues, according to the EY analysis.

In rare diseases, with legislation such as the IRA unlikely to affect the price point for orphan drugs, companies specializing in rare diseases have become significant M&A targets, commanding high multiples and driving some of the biggest deals of the past 12 months, according to the EY analysis.